Over the past few years, digital transactions have increased in Mexico and the rest of the world mainly due to the speed and ease with which the market moves through such media.
Currently in our country a wide variety of digital services are offered, mainly in the entertainment, transportation, food and other industries. This resulted in Mexican lawmakers amending tax laws because tax revenue was negatively impacted by the current widespread use of digital services.
The origin of these legislative reforms is Action 1 of the Action Plan against tax base erosion and profit shifting (BEPS). Action 1 deals precisely with the challenges that a digital economy poses to taxation and aims to “Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation.”
In this regard, the Value Added Tax Law (VAT Law) provides that individuals and legal entities in the country that import goods and services are subject to the payment of such tax.
Therefore, persons who import goods or services (including digital services) are required to pay value added tax. On June 1, 2020, more precise provisions governing the obligations of importers of goods or services related with digital services entered into force.
In this respect, article 18-B VAT Law provides that any of the digital services referred therein provided by foreign residents who do not have a permanent establishment (PE) in Mexico, are considered services provided in national territory when the recipient of the services is in the country.
A services recipient is considered to be in national territory in the following cases:
• The recipient must have an address located in national territory.
• The recipient makes payment through an intermediary located in national territory.
• The IP address used by the recipient’s devices corresponds to Mexico’s range.
• The recipient provides a telephone number in Mexico.
Article 18-B of the VAT Law provides that the following will be considered digital services if such are provided through applications or are contained in digital form online or through another network, in exchange for consideration:
- Downloading or access to images, movies, text, information, video, music, games, mobile ringtones, online news, traffic information, weather forecasts and statistics.
- Downloading or access to books, newspapers and electronic magazines are not considered digital services.
- Intermediation between third parties who supply goods or services and consumers. Intermediation for the purpose of selling used goods is not considered digital services.
- Online clubs and dating pages.
- Distance learning, testing or exercises.
Similarly, the VAT Law provides that foreign residents without a PE in Mexico who provide the services mentioned above and operate as intermediaries in activities carried out by third parties are subject to payment of value added tax, in addition to other obligations provided under such Law.
Considering this, foreign residents without a PE in Mexico that provide digital services in national territory and those operating as intermediaries are obligated to withhold and remit value added tax.
It is important to note that in addition to the main obligation to withhold value added tax, taxpayers subject to this tax must meet various “formal” obligations, including issuing digital tax certificates (CFDI) of the withholding tax, among many others that must be analyzed in detail and beyond the provisions of both the VAT Law and other tax regulations.
To sum up, as of June 1, 2020, the provisions under the VAT Law on withholding taxes applicable to foreign residents without a PE in Mexico that provide digital services are mandatory for both the providers of such services and those operating as intermediaries.
For further information, please don’t hesitate to contact us through our email or to contact our associate Mr. Carlos Jiménez directly.