At the end of last year, the Congress of the Union in Mexico made some modifications to the Value Added Tax Law (LIVA in Spanish) establishing that digital platforms would have to withhold any taxes incurred for the rendering of digital services carried out within the country.
And, just as seen in most other countries, the reasoning of the governing authorities, with Mexico being no exception, is to ensure an “even playing field” for national companies that have to pay 16% VAT and who feel that they are at a disadvantage in comparison to these digital service companies. This is the main argument behind a digital tax being established for VAT and Income Tax purposes.
The measures, which will affect tech companies such as Amazon, Uber, and Netflix, granted these service companies with a transition period in which they would be able to prepare to comply with the new legal provisions.
One of the obligations established by the tax authorities for digital service providers in the country that reside overseas – with no tax domicile in Mexico – is the issuing of receipts of the corresponding withholdings, which, while not being a CFDI (Digital Tax Receipt), may be used for tax purposes in any applicable circumstances.
In compliance with the Regulation 12.1.4. of the Annual Temporary Tax Regulations (RMF in Spanish), approved on 28th December last year for the tax year 2020, the effected companies must issue and send electronically, as a PDF, the receipt in accordance with the applicable regulations in the country in which they are domiciled, which separately and explicitly cover the payment of the applicable amounts due for VAT.
As indicated by the Mexican Tax Administration Service “this tax was already incurred, and as such, the obligation for its payment already existed under the VAT Law (Article 23, section V LIVA). It is also important to note that the any possible increase in the price of these digital services is not related to the new tax”.
In Mexico, just as in other countries, products and services that are taxable by VAT and which are related with any work activity of the taxpayer may be deducted. Therefore, 16% of the VAT charged by tech companies as of 1st June will be subject to deductions, in those cases in which the conditions mentioned above are met.
VAT is not the only one
In the case of those companies engaged in road transport, such as Uber, they will have to start to withhold Income Tax (ISR in Spanish) for their drivers, which will range from between 2% to 8% in the case of road transport and the sending of goods in accordance with the income earned.
- Income of up to 5,500 pesos: 2%
- Income of up to 15,000 pesos: 3%
- Income of up to 21,000 pesos: 4%
- Income of over 21,000 pesos: 8%
For accommodation services, such as AirBnB, the withholdings will fluctuate from between 2% and 10% in accordance with the income of the user advertising on the platform.
- Income of up to 5,000 pesos: 2%
- Income of up to 15,000 pesos: 3%
- Income of up to 35,000 pesos: 5%
- Income of over 35,000 pesos : 10%
E-commerce companies such as Amazon and Mercado Libre will also have to make withholdings on the total transaction amount and not on the income of the vendor selling on these kinds of e-commerce platforms, which range from 0.4% to 5.4% according to revenue.
- Income of up to 1,500 pesos: 0.4%
- Income of up to 5,000 pesos: 0.5%
- Income of up to 10,000 pesos: 0.9%
- Income of up to 25,000 pesos: 1.1%
- Income of up to 100,000 pesos: 2%
- Income of over 1000,000 pesos: 5.4%
Due to ISR being an income tax and not a transactional tax such as VAT and the withholding being made automatically, sellers will see a decrease in cash flow and will have to submit more ISR tax reimbursement requests to the Tax Administration Services.