Mexico: VAT on digital services provided by foreign residents without permanent establishment
Mexico: VAT on digital services
The 2020 tax reform introduces new value added tax (VAT) rules for digital services provided through an online platform effective 1 June 2020.
The tax reform was part of the 2020 economic legislative package, presented to the Mexican Congress in September 2019. Read TaxNewsFlash
Scope of the new rules
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, does not qualify as digital services for these tax purposes.
Based on observations from the legislative process, the tax provision applies to both business-to-consumer (B2C) and business-to-business (B2B) services. Entities or individuals with business activities in Mexico, as recipients of the digital services, can claim a credit for the VAT.
Digital services provided by a nonresident having no permanent establishment (PE) in Mexico will be deemed to 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 services is located in Mexico; or the SIM card country code of the phone used to purchase the digital services is located in Mexico.
Foreign residents with no PE in Mexico that provide 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 requires those foreign residents with no PE in Mexico and that operate as intermediaries with regard to digital services, and connecting providers of goods or services with buyers in Mexico, the same requirements for digital services as noted above apply, plus these foreign residents must:
- Publish the VAT of the goods, services or the temporary use or enjoyment of goods via their website or platform
- Provide the tax authorities with information about their customers (whether individuals or legal entities) when they act as an intermediary, even if they do not process the corresponding payment or related VAT
- Determine that the intermediary collects the sales price plus the amount of VAT for the subject transactions and also:
- Withhold VAT and income tax from individuals
- Remit the withheld taxes in a monthly basis
- Issue electronic invoices
The withholding amount will be 50% of the VAT effectively collected or 100% if the individuals do not provide their Mexican tax number (RFC).
Likewise, pursuant to income tax law measures, intermediaries of digital services that collect the sales price and VAT on behalf of the seller, are to withhold income tax only when the seller is an individual taxpayer. The withholding tax rate depends on the type of service provided and the amount of gross income received by the individual during the subject month, with the withholding tax rates being:
- Ground transportation services of passengers and delivery of goods (2% - 8%)
- Accommodation services (2% - 10%)
- Sale of goods and services (0.4% - 5.4%)
If the individual does not provide an RFC, the intermediary of the digital services is to withhold tax at a rate of 20% of the gross income received by the individual in the month.
In late December 2019, the 2020 Miscellaneous Resolution was published and, for purposes of digital services, clarified that nonresidents who are already registered and have an RFC before 1 June 2020, must designate a legal representative that is domiciled in Mexico (this process may be completed online). The tax authority will publish a bimonthly list of nonresidents without a permanent establishment in Mexico and that are registered with an RFC.
The resolution further clarified that these nonresidents may issue invoices in accordance with the laws of their respective country. However, the invoices must at least include the following items: (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 clarified that nonresidents that do not register and have an RFC and that 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 amount using a foreign currency.
Intermediaries of digital services must register with the tax authority. Those that are already registered before 1 June 2020 must submit an updated notice of economic activities and obligations for platforms.
The intermediaries must issue electronic billing vouchers (CFDIs) that support the withholding and payment information. These vouchers must have a section dedicated for “technology platform services,” which will be published by the tax authorities. As a transitional measure, intermediaries will be allowed in 2020 to issue PDF-version invoices that include at a minimum 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 clarified that individuals that sell goods or services or that lease an accommodation through a platform must register with the RFC. If they are already registered, they must submit an activity update notice, indicating the economic activities conducted via the platform. The resolution further clarified that withholdings made by the intermediaries may be considered to be a 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 conducted via platforms and whose income does not exceed MXN 300,000 (approximately U.S. $12,000) 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 (approximately U.S. $80,000) 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.
Modifications to the rules
On 12 May 2020, the first modification to the miscellaneous rules was published. The main aspects of these changes concern the forms that providers of digital services are to use to file their returns, and among other items:
- Nonresidents providing digital services in Mexico, are to 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 and who receive their services will be considered as having been satisfied with the filing of the "VAT return for the provision of digital services.”
- Digital services intermediaries can opt to calculate the income tax withholdings of each taxpayer on a daily basis, applying to the total amount of daily income received by the taxpayer, the withholding rates as provided for in the rule.
- Intermediaries of digital services will conduct VAT withholding through the "VAT withholdings return for technological platforms" and for the income tax withholding for individuals through the “Income tax 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 the tax authorities with information about their customers who sell goods, service providers or grantors of the temporary use or enjoyment of goods, even if they have not collected the sales price and VAT, through the "Information 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 for the temporary use or enjoyment of goods, without expressing the VAT separately, as long as the price includes VAT and publish the amounts with the legend "VAT included.”
- Finally, additional rules are provided for individuals who sell goods, provide services, and grant accommodation for the temporary use or enjoyment of goods through technological platforms.
Considering the taxation on digital services will be effective on 1 June 2020 (no extensions are expected, such as because of the COVID-19 pandemic), foreign residents with no permanent establishment in Mexico providing digital services in the country need to consider the following:
- Feasibility—perform a detailed review of all revenue streams obtaining from Mexico of the foreign digital service provider in order to confirm those that are subject to VAT
- Preparation—prepare ERP system, accounting, control, and marketing modifications to comply with the rules for mandatory information
- Register and appoint a legal representative—before 30 June 2020
For more information, contact a tax professional with the KPMG member firm in Mexico:
Antonio Zuazua | +52 81 8122-1938 | email@example.com
Armando Lara | +52 55 5246-8374 | firstname.lastname@example.org
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