Actualizado: 2 jul 2020
New VAT on Digital Services provided by Foreigners without Establishment in Mexico
In the midst of Covid-19 quarantine, a new regulation regarding digital services comes into play. This time the objective is to tax these services with a 16% VAT when they are being offered by Foreigners who do not have a Permanent Establishment in Mexico.
In order to fully understand the new guidelines, you must understand who is required to report, present, and pay the new tax. This article will serve as a guide to help those entities and individuals required to comply with this regulation.
Let's begin by understanding the basics.
What defines a Digital Service?
For the matter of this law, we can assume that a service is digital when it is provided through the internet, through technological platforms, computer applications and similar, for example:
- Download or access to images, movies, text, information, video, audio, music, games
- Multimedia content
- Multiplayer environments
- Mobile tones download service
- Online news
- Traffic information
- Weather forecasts and statistics
- Intermediation of supply and demand of goods or services
- Online clubs and dating sites
- Online education, tests and online workout services
Now that we know what a digital service is (according to the law), we need to know in which cases it is assumed that such service is being provided in the country.
When is it considered that a digital service is provided in Mexico?
It is assumed that the service is provided in national territory when the recipient of the service is in the country, as any of the following cases might indicate:
1. That the customer indicates an address located in Mexico
2. When the payment is made through a broker located in Mexico
3. That the customer's IP address belongs to Mexico
4. When the customer provides a Mexican phone number
What constitutes a Permanent Establishment in Mexico?
The Income Tax Law (LISR) in Mexico considers a permanent establishment the place where business activities or services are provided, for example:
- Branch offices
Likewise, foreigners are considered to have a permanent establishment in Mexico when they carry out activities in the country through another person or firm, even without having a physical place to do business, provided that said person does business on their behalf.
Effective from June 1st, 2020 all foreigners without a Permanent Establishment in Mexico who provide digital services in the country must comply with the new tax obligations observed in Chapter III Bis of the Added Value Tax Law.
What are the tax obligations for Foreigners without an Establishment in Mexico who provide Digital Services?
When a foreign person/company provides a digital service that falls under the previously discussed cases, they must comply with the following series of new requirements as of June 2020:
1. Get a Federal Taxpayer Registry (RFC)
2. Specify and separate the corresponding VAT on the price of digital services
3. Provide a quarterly report to the Internal Revenue Service with the following details:
• Number of operations/services sold in the month
• Classification of such operations by type of service
• Number of customers
4. Submit and pay the VAT declaration on a monthly basis
5. Issue and send an invoice with itemized VAT (only when requested by customer)
6. Name a Legal Representative and specify an address to receive notifications, both in Mexico
7. Get an e.Firma (electronic signature files)
It is very important that all foreigners falling within the previous assumptions comply with the requirements of this new regulation. Else, it will be the customer who pays for the service's tax, which would be then considered as an import.
At SWB we have expertise in foreign companies and we can provide advice on the subject.
Feel free to contact us to find out how we can help you.
You can trust us. SWB is a consulting firm with more than 15 years of experience in Mexico with international and local clients. We follow rigorous privacy and ethical standards.
ABOUT THE AUTHOR
MBA Guillermo Krebs
is Managing Director & Partner at SWB and Business Consultant.