United States

Mexico's goods and services tax for electronically supplied services

The country's economy averages about two percent annual growth, and it serves as the second-largest export market and third-largest source of imports for the United States. Manufacturing has become increasingly important since the country entered the NAFTA in 1994. Despite reforms, growth is expected to be low due to a number of domestic and global factors.

The following content was reviewed and updated as of Feb. 9, 2018.

Legislative effective date

2002

Name of tax

Impuesto al Valor Agregado (IVA)

Statute of limitation

Five years

Standard rate of VAT

16 percent

Electronic supplies

There has to be a payment to define that a supply of services has taken place, but with that in mind, the following are the most common categories of electronic services:

  • Software as a service (SaaS)
  • Downloadable software and software updates
  • Digital market places
  • Electronically accessed music and videos
  • Online gaming
  • Subscriptions to access digital content
  • Live webcasts
  • Email services
  • Online discussion forums
  • Mobile phone applications

Excluded from the list is the following:

  • Online books

Registration

To date, there is a lack of clear guidance in Mexican VAT legislation as to how to register and pay the VAT in electronic supplies from a nonresident supplier, and therefore, the procedures below are based on administrative practice.

There are reverse charge rules applicable in Mexico that would apply to business to business (B2B) transactions, but this is at the discretion of the business customer and if the customer does not apply the reverse charge, then the foreign supplier would be obliged to register, charge VAT and remit the VAT to the Mexican taxing authority (servicio de administracion tributaria or SAT).

Whereas the reverse charge rule is optional for B2B customers (entirely at the discretion of the customer), it is mandatory for business to customer (B2C).

What this means is that a nonresident supplier of B2C services does not have an obligation to register for Mexican VAT. However it might have an obligation to register for B2B transactions

Under B2B transactions the customer has the option to apply the reverse charge. If it elects not to do this it has to remit the VAT to the nonresident supplier who will then have the obligation to be registered in Mexico to remit the VAT to the SAT. 

In order to register the non-resident supplier would need to appoint a fiscal representative in Mexico and apply for a tax identification number (registro federal de contribuyentes or RFC) from the tax authority.

There is no de minimis limit for registration.

Customer identification

A business customer is defined as any person (individual or entity) for which the service or product is a business expense (i.e. a person that is carrying on a taxable business). Any VAT incurred by a business customer is generally available as an input credit if the business is VAT registered and other requirements are met.

In contrast, a B2C consumer is typically an individual who is unable to treat the service or product acquired as a business expense. Consequently, and similar to VAT rules globally, a consumer cannot recover the VAT it accounts for under the reverse charge mechanism.

Currently, there are no exemptions from charging VAT in situations where the customer is a certain type of organization (e.g., charity or government body); however, certain exemptions do exist in respect of suppliers of services. See supplier identification below.

Customer location

Digital services are subject to VAT if the service is “taken advantage of” in Mexico, whether the recipient is a Mexican or foreign person. This is not defined in Mexican legislation, and so this would generally need to take its ordinary meaning. In particular, services supplied on board ships and aircraft are taxed in Mexico if that is the origin of departure, or if the ship or aircraft is registered in Mexico and flies the Mexican flag.

In reality individuals who are not taxpayers in Mexico  (e.g., temporary visitors and tourists) will not be charged VAT and will not be able to reverse charge VAT – therefore these services will be enjoyed without VAT being accounted for.

Supplier identification

In the main, a foreign supplier is any taxable person without a physical presence (whether office or permanent establishment) who makes taxable supplies that are used in Mexico, regardless of the value of those supplies. However, there are exemptions from VAT for service suppliers who are one of the following qualifying organizations:

  • Organizations with a license to operate as educational institutions
  • Research or scientific organizations
  • Welfare aid groups
  • Registered charitable organizations that receive charitable contributions
  • Publishers of books (only in respect of e-books)

Where a supplier provides services through an intermediary, it will be the intermediary who has the obligation to comply with Mexican VAT rules.

In B2B transactions, nonestablished foreign suppliers must appoint a fiscal representative in Mexico to manage VAT compliance obligations on the foreign supplier’s behalf.

Procedural matters

In B2B transactions, it is necessary to appoint a fiscal representative in situations where the foreign supplier has no establishment in Mexico. The fiscal representative will be tasked with completing all necessary compliance and registration, and responding to inquiries from the SAT.

Working through the fiscal representative, the foreign supplier must obtain a RFC tax identification number from the SAT on form R1.

The RFC process has to be completed in person by the fiscal representative, and generally requires the following to be submitted when applying for the RFC

  • Certificate of incorporation
  • Proof of address
  • Power of attorney of the authorized representatives
  • Online preregistration number, if applicable

With respect to invoicing, the requirement varies based on the recipient of the supply. With a foreign supplier, if the transaction is B2C in nature, an invoice is not required as it is not possible for nontaxable persons to reclaim VAT. However, if the transaction is B2B in nature, the foreign supplier will be required to issue an invoice. In addition, the B2B customer is required to self-generate an electronic document called a comprobante fiscal digital por internet (CFDI) which contains specific data as required by Mexican tax documentation rules. Specifically, the following is required:

  • Identity of the seller
  • Identity of the buyer
  • Amount of sale
  • Transaction date
  • Invoice number
  • VAT number

The B2B customer will have to electronically file the CFDI with the SAT.

Failure to self-generate and electronically file the CFDI with the SAT will mean that the B2B customer will not be able to claim the payment as a tax expense, and cannot recover the related VAT.

Upon registration, a foreign supplier is required to file monthly VAT returns through its fiscal representative.

Historic transactions

Late payment penalties of approximately 2 percent per month, from the date the VAT return should have been filed might be levied. This amount continues to accrue every month with no limitation as to the amount that can accrue. Additionally, penalties and fines up to 70 percent of the omitted tax if the omission is discovered by the SAT before the taxpayer voluntarily files the delinquent returns can accrue.

Similarly, an administrative penalty of approximately MXP$2,500 per delinquent return (i.e., monthly) will be charged. This penalty will apply even in circumstances where there was no VAT activity during the period.

A fine of approximately MXP$2,500 could be imposed on the B2B customer that fails to self-generate and file the CFDI.

How can we help you with international tax concerns?


Subscribe to Tax Insights