To recap, last year the Mexican Congress approved a reform that amended and added several articles to the Mexican VAT and income tax laws related to the digital economy. In sum, such reform, effective June 1 2020, established the following obligations:
- Digital services (with a limited definition) rendered by non-resident digital platforms are now considered rendered in Mexico when the recipients are located within Mexican territory. This effectively changed the VAT treatment from import of services (triggered by the recipients) to a national service provision, obligating the non-resident digital platforms to register for VAT purposes, collect from the users and remit to the Mexican government.
- Platforms that act as intermediaries (essentially marketplaces and sharing economy platforms), where their platform is used to sell goods or services by Mexican resident individuals and collection is made through such a platform, shall withhold income tax and VAT triggered from the underlying sale from such individuals.
- Certain additional obligations, such as appointing a legal representative in Mexico, having a tax domicile, electronic signature, issuance of invoices, publishing the prices with VAT, among others.
Doubling up on provisions
With this, although no substantial changes are made to the recently enacted regime, ahead are the changes proposed in the Tax Reform Initiative Bill presented into Congress on September 8 2020.
VAT withholding on intermediation services with non-resident platformsAt present, intermediary platforms (Mexican or foreign) have the obligation to withhold VAT on transactions in which they act as intermediaries, where individuals (without clearly specifying Mexican or foreign, although it may be implied due to the nature of the tax and the transactions, that it should be Mexican) sell goods or services and collection is made through such platforms.
In this sense, the reform did not clearly cover situations where non-residents could be selling goods or services subject to VAT (e.g. digital services) and now, the bill includes an amendment whereby intermediary platforms would have to withhold also from foreign digital services providers. That is, now the law would impose an additional VAT withholding obligation to intermediary platforms when a non-resident provides digital services to recipients deemed located within Mexican territory, which, as previously mentioned, is already subject to VAT.
An example of this may be a marketplace through which video games or streaming services are offered, sold and payment is collected through the said marketplace. The legislative intent clearly refers specifically to non-resident developers subject to VAT, but the actual wording of the proposal seems broader than just developers and would cover all non-residents that provide digital services subject to VAT.
While the VAT withholding can be of only 50% of the tax triggered in the case of individuals that are registered and provide their tax information to the platform, since this is dealing with non-residents that are not registered, the withholding would have to be of 100% of the tax. This withholding obligation would release the non-resident from the original obligations related to the digital services (i.e. register, appoint a legal representative, collect and pay the tax, file the informative returns, etc.).
It seems only logical that even if the underlying transaction is carried out by a non-resident, the VAT withholding system should apply for the intermediary platform if it is triggered. However, if the intention were to capture VAT triggered by non-residents, it may have to be even broader. The bill also fails to pick up the income tax withholdings that could also be triggered on Mexican-sourced income for non-residents.
Intermediary platforms where used goods are sold
Article 18-B defines digital services and particularly, Section II mentions intermediation services between third parties that offer goods or services and acquire them. However, the second paragraph of such section establishes an exception for intermediation services which objective is the sale of used movable goods. This made some sense considering that the sale of movable goods or services in itself is exempt of VAT.
However, the legislative intent clarifies that the VAT treatment applicable to such underlying transaction (i.e. the sale of such used goods) is already defined in the VAT law as exempt and this has nothing to do with the fact that the intermediation services are separate and should be subject to VAT. Therefore, the reform would eliminate this paragraph, resulting in all intermediation services, even if the platform was used to sell used goods, and should be subject to VAT as a digital service.
Break down of VAT
One of the obligations established for the intermediaries is to publish on their websites or platforms the price of the goods or services offered separating the VAT. However, as a simplification measure, under Miscellaneous Rule 12.2.11, they were allowed to not break down the total amount or price (i.e. price plus VAT), to the extent that they expressly mention that the price includes VAT. The bill simply proposes to have this included in the VAT law.
This is probably the most significant amendment proposed in the bill related to this topic. The bill proposes to include a kill switch sanction for non-residents that do not comply with their tax obligations related to digital services. That is, if a non-resident provides digital services and does not fulfill its obligations (i.e. does not register, appoint a legal representative, have a tax domicile, obtain its electronic signature, pay the corresponding taxes or file the applicable informative returns), the bill proposes that their internet connection in Mexico is suspended.
A procedure is established (referred to in the legislative intent so as to allow an agile proceeding respecting the right to a hearing) based on the following:
- Mexican tax authorities will give notice to the non-resident of the lack of compliance, which in the case of no registration, will be published in the Official Gazette. This would mean that any non-resident that is not registered, would have to be continually consulting such Gazette in order to be timely informed;
- The non-resident would have 15 days (with a possible one-time five-day extension) to prove its compliance;
- If the tax authorities maintain the lack of compliance, they would order the temporary suspension of the internet connection to the telecommunication carriers;
- Following the official notification of the order, the carriers would have five days to suspend the connection, having the obligation to notify such suspension. It is established that the tax authorities may also request assistance from any other competent government agency for the temporary suspension. A MXN$500,000 to MXN1,000,000 (approximately USD$22,000 to USD$44,000) fine is proposed in the Federal Fiscal Code for the telecommunication carriers that do not comply with the order to block the access to the internet connection; and
- Following the compliance with the corresponding obligations by the non-resident digital platform, the tax authorities shall order the reactivation, which shall be carried out by the carriers within five days.
It is important to mention that this sanction was already proposed in the first initiative presented in 2019 and was eliminated in Congress by deeming it excessive and potentially in violation of other laws on the matter. It is clear that compliance with these new provisions has been extremely low- we just have to look at the list of companies registered that is issued by the Mexican government (only 35 to this date and only 13 were registered in June, which was the deadline; and that includes a couple that were already registered before the reform pursuant to administrative rules and different companies of the same groups). However, instead of toughening the sanctions, the Mexican government should probably look at the complexities of the system and the administrative burden to comply.
From experience, it can be said that the registration process is ambiguous, the tax authority officials are not well-instructed on the matter and provide little to no guidance on it and compliance remains very complex. Of course, the COVID-19 pandemic did not help with complications in the execution of documents abroad and other formalities needed, in addition to an already understaffed and an outdated system.
There are examples of companies that took months to be able to prepare everything and register, whereas in other countries, the registration is done online remotely in hours, if not minutes. Another example is the fact that the Mexican government issued rules stating that non-resident platforms will be able to pay the taxes due in their functional currency through the bank accounts that will be opened by the Mexican government abroad. However, to this day, there is still no clarity on such accounts or the procedure to pay the taxes outside Mexico.Rodrigo CovarrubiasT: + 52 55 1105 6500E: firstname.lastname@example.org
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