Mexico: New criteria to withhold VAT to foreign residents

David Cuellar		Marco Nava

On May 31 2013 the Mexican tax authorities issued non-binding criteria on the application of the value added tax (VAT) law regarding VAT withholding to foreign residents, when certain transactions are carried out with Mexican taxpayers.

According to the Mexican VAT Law, Mexican taxpayers are obliged to withhold and remit 16% VAT on the acquisition or leasing of tangible goods that are sold or granted by a foreign resident without a permanent establishment (PE) in Mexico. With this mechanism, Mexican taxpayers withhold the corresponding VAT and, if certain conditions are met, they can credit such VAT.

Additionally, the Mexican VAT law establishes that a foreign resident would be deemed as resident in Mexican territory for VAT purposes when it has one or more establishments (which may be intrepreted as not necessarily permanent, but just an establishment) for all the activities carried out therein. Consequently, there was an interpretation which suggested that some foreigners may be tax residents in Mexico for VAT purposes but not for income tax purposes and therefore the 16% withholding VAT resulted not applicable, without taking into consideration whether they have a PE in Mexico, or not.

In this regard, the Mexican tax authorities issued new criteria establishing that when a foreign resident without a PE in Mexico carries out activities regarding the acquisition or leasing of tangible goods in Mexico, the PE definition in the income tax law or in the tax treaties concluded by Mexico should be applicable; and it should be deemed as a non-binding criteria when a foreign resident with no PE in Mexico carries out these types of activities and the Mexican taxpayer does not withhold VAT, considering that the foreign resident is resident in Mexico for VAT purposes.

If an annual statutory tax report needs to be filed to the Mexican tax authorities by the auditor of a Mexican taxpayer, the auditor should disclose whether non-binding criteria were applied by the taxpayer, so these transactions should be reviewed in detail during the audit process.

It is recommended that foreign residents carefully structure their operations when leasing or selling tangible goods to Mexican residents on a case-by-case basis, and determine the corresponding tax consequences that may arise in Mexico both for income tax and VAT purposes.

David Cuellar (david.cuellar@mx.pwc.com) and Marco Nava (marco.a.nava@us.pwc.com)
PwC
Tel: +52 55 5263 5816
Fax: +52 55 5263 6010
Website: www.pwc.com

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