What new rules apply to digital services provided by foreign residents without PE?
When do the provisions come into effect and what services are subject to them?
The 2020 Tax Reform introduces new Value Added Tax (VAT) rules for digital service providers through an online platform effective June 1, 2020. The Tax Reform was part of the 2020 economic legislative package, presented to the Mexican Congress in September 2019.
Scope of the new rules
Pursuant to the explanatory memorandum of the tax initiative, digital services tax provision does not apply to all digital services, but only to those services that are generally for final consumption in households or used by individuals for their individual consumption.
In this sense, under the Tax Reform, digital services include downloads or access to images, movies, text, information, video, audio, music, games (including gambling), other multimedia content, multiplayer environments, mobile tones, online news, traffic information, weather forecasts and statistics, online clubs, dating websites, long-distance teaching or testing and intermediary services. However, downloading or accessing books, newspapers and electronic journals, as well as the sale of used goods do not qualify as digital service.
Based on the study of the legislative process, the tax provision applies to both services; Business-to-Consumer (B2C) and Business-to-Business (B2B). The entities or individuals with business activities in Mexico, as recipient of the digital services, can credit the VAT.
Digital services provided by a nonresident having no permanent establishment in Mexico will be sourced to Mexico if any of the following conditions are met: the customer is domiciled in Mexico, the payment intermediary through which the digital service is purchased is located in Mexico, the IP address of the device used to purchase the digital service is located in Mexico, or the SIM card country code of the phone used to purchase the digital service is Mexico.
Foreign residents with no PE in Mexico that provides digital services will be required to:
- Obtain a Mexican tax ID (“RFC”)
- Appoint a Mexican legal representative
- Request an electronic signature (“e-firma”)
- Charge and collect VAT on digital services
- File VAT returns and remit the VAT collected on a monthly basis
- Submit quarterly report information on the number of transactions performed with Mexican recipients, the type of services provided, and price charged
- Issue and send electronic receipts to their Mexican customers
Additionally, the Tax Reform obliges for those foreign residents with no PE in Mexico that operates as intermediaries of digital services that connect providers of goods or services with buyers in Mexico, to the same requirements of digital services, plus:
- Publish the VAT of the goods, services or the temporary use or enjoyment of goods in their website or platform
- Provide to tax authorities information of their customers (whether individuals or legal entities) when they performed as an intermediary, even if they do not process the corresponding payment or related VAT
- Provided that the intermediary collects the price and VAT of the transaction subject to intermediation:
· Withhold VAT and IT from individuals
· Remit the withheld taxes in a monthly basis
· Issue electronic invoices
The withholding amount will be 50 percent of the VAT effectively collected or 100 percent if the individuals do not provide their RFC.
Likewise, pursuant Income Tax Law, intermediaries of digital services that collects the price and VAT on behalf of the seller, are enforced to withhold Income Tax (IT) only when the seller is an individual taxpayer. Withholding rate relies on the kind of service provided and the amount of gross income received by the individual in the month.
- Ground transportation services of passengers and delivery of goods (2% to 8%)
- Accommodation services (2% to 10%)
- Sale of goods and services (0.4% to 5.4%)
If the individual does not provide RFC, the intermediary of digital service should withhold 20 percent tax on the gross income received by the individual in the month.
On December 28, 2019 the 2020 Miscellaneous Resolution was published and for purposes of digital services, it clarifies that nonresidents who are already registered with an RFC before June 1, 2020, must designate a legal representative and domicile in Mexico, this procedure may be completed online. The tax authority will publish bimonthly the list of nonresidents without permanent establishment in Mexico who are registered in the RFC.
The Resolution further clarifies that these nonresidents may issue invoices in accordance with the legislation of their respective country. However, the invoices must at least include the following: (1) the name or company name of the issuer; (2) the city and country in which the invoice is issued; (3) the tax registration number of the issuer; (4) the sales price excluding VAT; (5) the VAT amount applicable to the service; (6) a description of the service; (7) the invoice issue date and the period covered by the consideration, and (8) the RFC number of the recipient. Moreover, the Resolution clarifies that nonresidents that do not register with the RFC and who are only liable for VAT for the importation of digital services may pay their VAT liabilities through the "VAT on accidental acts" declaration. Nonresidents can pay the tax due in a foreign currency.
Intermediaries of digital services must register with the RFC. Those who are already registered before June 1, 2020 must submit an update notice of economic activities and obligations for platforms.
The intermediaries must issue CFDIs that support withholdings and payment information. These vouchers must have a complement called “technology platform services,” which will be published by the tax authorities. As a transitional measure, intermediaries will be allowed to issue in 2020 PDF invoices that include at least the following information: (1) the name or company name of the issuer; (2) the city and country in which it is issued; (3) the tax registration number of the issuer; (4) the sales price excluding VAT; (5) the VAT amount applicable to the service; (6) a description of the service; (7) the invoice issue date and the period covered by the consideration; (8) the bank account number in which the consideration was deposited; (9) the amount of the income tax withheld from the total income actually received by natural persons through technological platforms, and (10) the amount of VAT withheld on the amount collected.
Moreover, the Resolution clarifies that individuals that sell goods or services or lease an accommodation through a platform must register in the RFC. If they are already registered, they must submit an activity update notice, indicating the economic activities carried out through the platform. The Resolution further clarifies that the withholdings made by the intermediaries may be considered as final payment of both VAT and income tax provided that the corresponding notice is presented. This option is applicable to individuals who (1) only obtain income from activities carried out through platforms and whose income does not exceed MXN 300,000 (USD 16,000) in the year, or (2) are registered under the tax incorporation regime, carry out activities through the aforementioned platforms, and obtain income of less than MXN 2,000,000 (USD 107,000) per year. Individuals who use platforms must issue a CFDI corresponding to the sale of goods or services and send it by email to the purchasers of the goods and services.
On May 4, 2020 a draft of the 6th modification to the miscellaneous rules where published on the SAT website. The main aspects are related to the name of the forms that digital service providers should use to file the returns, among other aspects:
- Nonresidents providing digital services in Mexico, should pay the VAT collected through the "VAT Return for the provision of digital services", no later than the 17th day of the following month to which the payment corresponds
- During 2020 the quarterly obligation to provide information on the number of services or operations carried out in each calendar month with recipients located in Mexico who receive their services will be considered as fulfilled with the filing of the "VAT Return for the provision of digital services” referred above
- Intermediaries of digital services will carry out the VAT withholding through the "VAT withholdings return for technological platforms" and for the Income Tax withholding to individuals through the “IT withholding return for technological platforms” no later than the 17th day of the following month in which the withholding is made
- Intermediaries of digital services must provide to tax authorities the information of their customers who sell goods, service providers or grantors of the temporary use or enjoyment of goods, even if they have not collected the price and VAT, through the "Informative Return of digital intermediation services between third parties", no later than the 10th day of the following month to which the information corresponds
- Intermediaries of digital services may choose to publish the price at which the goods or services are offered by the sellers, service providers or grantors of the temporary use or enjoyment of goods, without expressing the VAT expressly and separately, as long as the price include VAT and publish them with the legend "VAT included"
- Finally, additional rules where published for individuals who sell goods, provide services and grant accommodation or the temporary use or enjoyment of goods through technological platforms
Considering registration should be done before June 1, 2020 (no extensions are expected as a result of COVID-19), foreign residents with no permanent establishment in Mexico providing digital services in the country should be taking into consideration the following:
- Feasibility: Perform a detailed review of all revenue streams obtaining from Mexico of the foreign digital service provider in order to confirm if those are subject to VAT
- Preparation: Companies need to prepare, as in some cases ERP, accounting, controls and marketing would need modifications to comply with the mandatory information
- Register: Before June 1, 2020, register for VAT and comply with all formalities