Mexico VAT on Digital Services Provided by Non-Residents1
As of June 1, 2020, a new law allows Mexico to tax digital services from businesses resident in the U.S. and other countries. As a result, U.S. businesses (and other businesses non-resident in Mexico) are obligated to register for value-added tax (VAT) in Mexico and remit the tax.
Scope of New Obligation
Non-residents of Mexico (e.g., U.S. companies) that provide digital services, such as downloads or access to images, movies, audio, video, music, games and multiplayer environments, mobile tones, online news, traffic information, weather forecasts and statistics, dating websites, and online learning, tests and exercises, are subject to the rules and responsible for the collection, reporting and payment of VAT.
Providers of financial services, payment services, data storage and the use or sale of software would not be subject to the new obligations.
The 16% VAT will be tacked onto digital services, and will apply to all services, including business-to-consumer (B2C) and business-to-business (B2B) transactions. Entities or individuals with business activities in Mexico, as recipients of the digital services, can credit the VAT.
Non-resident businesses with no permanent establishment (PE) in Mexico that provide digital services will be required to:
- Obtain a Mexican tax ID (“RFC”)
- Appoint a Mexican legal representative
- Request an electronic signature (“e-firma”)
- Charge and collect VAT on digital services
- File VAT returns and remit the VAT collected on a monthly basis
- Submit quarterly report information on the number of transactions performed with Mexican recipients, the type of services provided, and price charged
- Issue and send electronic receipts to their Mexican customers
If non-resident digital service providers are subject to this tax, the deadline to register for VAT in Mexico, get a tax identification number and appoint a legal representative in Mexico for notification purposes is June 30, 2020.
Determining Application of the Mexican VAT
There are specific rules for what constitutes and is deemed to be sourced to a Mexican recipient to determine the application of the tax.
- the person is domiciled in Mexico;
- the payment intermediary through which the digital service is purchased is located in Mexico;
- the telephone number or SIM card country code of the phone used to purchase the digital services is located in Mexico; or
- the IP address used to access the digital service is located in Mexico.
Application to Intermediaries
Additionally, those non-residents with no PE in Mexico that operate as intermediaries of digital services and connect providers of goods or services with buyers in Mexico, are subject to the same requirements of digital services, plus they must:
- Publish the VAT of the goods, services or the temporary use or enjoyment of goods on their website or platform.
- Provide to tax authorities information on their customers (whether individuals or legal entities) when they acted as an intermediary, even if they do not process the corresponding payment or related VAT.
- Provided that the intermediary collects the price and VAT of the transaction subject to intermediation:
- Withhold VAT and income tax from individuals
- Remit the withheld taxes on a monthly basis
- Issue electronic invoices
The withholding amount will be 50% of the VAT effectively collected or 100% if the individuals do not provide their Mexican tax number (RFC).
Likewise, pursuant to income tax laws, intermediaries of digital services that collect the sales price and VAT on behalf of the seller are required to withhold income tax only when the seller is an individual taxpayer. The withholding rate depends on the particular service provided and the amount of gross income received by the individual during the month.
- Ground transportation services of passengers and delivery of goods (2% to 8%)
- Accommodation services (2% to 10%)
- Sale of goods and services (0.4% to 5.4%)
If the individual does not provide RFC, the intermediary of digital services should withhold 20% tax on the gross income received by the individual during the month.
Businesses that may be subject to new VAT should review revenues generated from Mexico to confirm application and the amount of the corresponding VAT liability, as well as make necessary preparations for accounting and otherwise to comply with the rules.
Other Latin American Countries with Digital Services Tax Regimes
At the end of 2019, Argentina created a new tax called ‘Impuesto País’ which has a significant impact on the consumption of digital services in Argentina. The general tax rate is 30% of the gross amount invoiced. However, a reduced rate of 8% may apply to services that also qualify as digital services for VAT (21%) purposes.
On May 4, 2020, a Brazilian law to create a digital tax, the so-called “CIDE-digital,” was submitted to Brazil’s House of Representatives. Brazil’s digital tax would be a revenue tax, not an income tax.
CIDE-Digital would be levied on revenue from:
- the display of advertising on a digital platform to users located in Brazil;
- the provision of a digital platform that allows users to contact and interact with each other, with the objective of selling goods or providing services directly between these users, provided that one of them is located in Brazil; and
- the transmission of data from users located in Brazil collected during the use of a digital platform or generated by these users;
Taxpayers for the purpose of CIDE-Digital would include legal entities, domiciled in Brazil or abroad, that receive gross revenue from taxable supplies and exceeds the following gross revenue thresholds (at the group level) in the previous year:
- global gross revenue exceeding BRL 3 billion (approximately US$ 600 million); and
- gross revenue in Brazil exceeding BRL 100 million (approximately US$ 20 million);
The CIDE-Digital would apply progressively on gross revenue from taxable supplies at the following rates:
- up to BRL 150 million - 1.0%
- over BRL 150 million up to 300 million - 3.0%
- over BRL 300 million - 5.0%
Foreign digital service suppliers with sales in Chile have to apply, collect and remit 19% VAT on certain digital services as of June 1, 2020.
In July 2018 Colombia published a law confirming the liability for foreign suppliers to register, collect, and remit VAT at 19% for sales to individuals in Colombia. The law came into effect on January 1, 2019.
An important point to note is that if a foreign supplier does not register, collect, and remit VAT to the Colombian tax authority (DIAN), the government could instruct the Colombian bank card issuers to withhold the tax that is due.
As of August 1, 2020, VAT at 13% must be applied to digital sales from foreign digital service providers and intermediaries — that are included on a government list — to consumers in Costa Rica. The registration will have two components. One, a voluntary compliance approach for foreign digital service providers and intermediaries responsible for digital sales to consumers based in Costa Rica. Two, for those to which the law applies that do not register, the resolution allows for a withholding of 13% VAT by the payment card issuers (e.g., Visa, MasterCard, etc).
One of the main measures in the Dominican Republic draft budget for 2020 was the introduction of a digital services tax (DST) for the 2020 fiscal year. The DST is to be levied at a rate of 10% on online services provided to Dominican Republic residents, with intermediaries involved in the payment to act as a withholding agent.
Ecuador’s Internal Revenue Service - Servicio de Rentas Internas (SRI) - revealed plans in October 2019 to tax digital services supplied by non-resident businesses to customers based in Ecuador.
If these draft rules are passed into law, the responsibility for the collection of the 12% VAT on these digital sales will be on certain financial institutions that will act as withholding agents. The SRI is expected to issue an official list of the services that the tax may apply to.
Paraguay's tax authority, la Subsecretaría de Estado de Tributación (SET), has postponed plans to tax the supply of digital services by non-residents to consumers based in Paraguay until January 1, 2021.
In common with other South American rules, the burden of the settlement and collection of the VAT due (Paraguay’s standard VAT rate is 10%) will be on the local bank, the issuer of the payment card used in the purchase.
Peru levies a 30% withholding tax on digital services provided by non-residents to Peruvian residents and used in Peru. In general, this refers to services that are provided or accessed via the internet.
Rules governing the supply of cross-border digital services came into force in July 2018.
Typically, residency within Uruguay is determined on the IP or billing address of the consumer. Failing this, if the settlement of the fee is made in Uruguay, this triggers the VAT liability. The current VAT rate in Uruguay is 22%.
Any non-resident providing to a local consumer will have to VAT register, including appointing a local representative, to settle the VAT due. Settlement is due on a quarterly basis. There is no VAT registration threshold.
For B2B transactions, the local taxpayer must act as a tax withholding agent and settle the VAT liabilities directly.
For more information, please contact BPM’s Latin America Tax Services practice.
1 This Tax Insight focuses on the developments in Mexico, but note that Central and South American countries have also passed laws on the taxation of digital services that should be considered in your international operations. Following this summary on the Mexican rules is a list of other Latin American countries that have implemented tax regimes on digital services.