On December 28, 2019, the Mexican Tax Administration Service (SAT) and Finance of Ministry published its first guidance addressing greatly expanded requirements for non-Mexican digital service providers to register, collect, and remit Mexican value-added tax (IVA) on income earned from digital platforms, websites, and similar electronic distribution methods (Digital IVA Regulations).
These regulations add to a lengthy list of impactful changes of the overall 2020 Mexico Tax Reform.
Key Regulation Changes
The Digital IVA Regulations would significantly broaden Mexico’s IVA regime and are guided by the recommendations of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan. To address tax challenges arising from the digitalization of the global economy, the Digital IVA Regulations expand the definition of services performed in Mexico to include services performed with assistance from digital platforms.
Ultimately, these regulations will impact sellers providing digital goods and services, such as Software as a Service (SaaS) in Mexico, and how businesses will need to plan for and address IVA compliance.
Digital Goods and Services
Mexican and foreign companies servicing Mexican customers through the online sales of goods and services must add IVA to the cost of purchases or treat current pricing as IVA inclusive, which will significantly reduce margins.
Additionally, for non-Mexican companies acting as intermediaries without a Mexican permanent establishment (PE), the SAT now requires the price of the digital goods be published with IVA separately stated on the invoice. IVA of 8% is applied to individuals, while 16% is applied to monthly electronic invoices and monthly payments to those without a Mexican tax ID.
Digital Services Definition
The definition of digital services has been expanded to include services through any online application of:
- Digital streaming, audio, video, and images
- Ring tones
- Provision of intermediation services, such as linking service providers with customers
- News, traffic, weather, and statistical analysis
- Online dating sites and clubs
- Teaching, testing, and exercise sites
- Data storage
Non-Mexican Digital Platform Providers
Beginning July 1, 2020, digital service providers without a PE in Mexico are required to register with SAT to be in compliance with Mexico’s Digital IVA Regulations. With regard to the expanded IVA regulations, Non-Mexican digital service providers will now be responsible for charging and collecting the tax from their Mexican customers and remitting the tax to the SAT.
The IVA expansion is important for digital sellers to consider when expanding or restructuring business models in Mexico. In addition, companies may need to assess their infrastructure and software to ensure they’re ready to prepare IVA invoicing, data, and compliance requirements. Digital platforms now have a host of disclosure and compliance requirements to operate in Mexico.
Impacts on Transactions
The Digital IVA Regulations will affect both Mexican inbound and outbound transactions. Inbound transactions, where, for example, a US company is providing digital services to Mexican clients, will be subject to standard Mexican IVA rates for those services, and the US company is required to remit the IVA to the SAT.
Similarly, on outbound or internal transactions involving digital services, Mexican businesses will also be required to itemize IVA on invoices and remit the standard amounts to the SAT. These new requirements will create additional compliance burdens for both Mexican and non-Mexican companies trying to do business locally.
We’re Here to Help
If you’d like help assessing your needs or determining practical solutions related to these topics, please contact your Moss Adams professional.
Special thanks to Hugo Ortega and Kali McGuire for their contributions to this article.