Value Added Tax (VAT) Guidelines: Mexico

According to Mexican Value Added Tax Law (MVATL), companies and individuals that perform the following activities in Mexican territory are obliged to pay Value Added Tax (VAT):

 

The VAT is determined on a cash flow basis, in other words, VAT payments to the tax authorities must be made when payments are actually received, rather than when the sale is invoiced or the service is rendered. 

 

The applicable VAT rates in Mexico could be of 16 percent and 0 percent depending on the goods sold, the services rendered, the goods granted for use or enjoyment or the goods imported, being the 16 percent rate the general one.

 

For taxpayers residing in the border regions (northern and southern), there is a benefit of applying the 8 perc­ent VAT rate instead of the 16 percent rate to the activities carried out in said borther regions.

 

Some activities related to some goods or services are exempt from VAT, i.e. the sale of land and residential buildings, books and newspapers.

 

In addition, as mentioned above, some activities are subject to a 0 percent rate, and within this group, sales of food and medicines are included as well as activities related to the primary sector (agriculture, cattle raising, etc.), among others. 

 

If a company or individual sells goods to a customer located abroad, such sales could be taxed at a 0 percent VAT rate provided that they comply with all the applicable requirements to perform the export, especially having the corresponding export form called “pedimento”. However, if the goods are sent abroad through a courier company the sale would be taxed at a 16 percent VAT rate because the seller would not have the export form with its name on it.

 

The export of services is also taxed at a 0 percent VAT rate. It is considered as an export of service when such service is utilized abroad. 

Part of the process of incorporating any company in Mexico is obtaining a Federal Taxpayer Number (“RFC”), which is also granted for individual entrepreneurs. During that registration process, the taxpayer indicates what sort of economic activity it will carry out. 

 

Non-Mexican entities that do not have a permanent establishment in Mexico can normally sign contracts and issue invoices from out of the country without having to register before Mexican tax authorities, i.e. if a foreign company renders services to a Mexican company and such services are performed in Mexican territory, it is considered that the Mexican company who hired the foreign resident imported the service. 

 

Therefore, the Mexican company is liable to pay the corresponding VAT for said import (in Mexico this is called “virtual VAT”, similar to the reverse charge-mechanism).

 

In case foreign entity sells goods located in Mexican territory, the Mexican resident who acquires the goods has the obligation of withhold and pay to the tax authorities the corresponding VAT for said sale.

 

Nevertheless, if a foreign entity pays Mexican VAT for a service or good acquired, it will be not possible to credit or recover said VAT, in which case, it becomes an expense.

 

Starting on 2020, MVATL was amended to tax digital services rendered by foreign residents when the recipients of said services are located in Mexican territory. 

 

If a foreign resident renders any of the aforementioned services to users located in Mexican territory, it would have to register and obtain a tax ID for VAT purposes only and, in addition, it would have to appoint a Mexican representative for these purposes. The services would be taxed at a 16 percent VAT rate and they would have to collect it from the customers and pay it to the tax authorities directly, among other obligations.

Entrepreneurs liable to Mexican VAT are required to submit VAT returns on a monthly basis during the year and should be filed not later than the 17th day of the following month to the one to which the returns correspond. There are no annual VAT returns in Mexico.

 

Monthly VAT returns must be filed electronically. In addition to the monthly VAT return, a monthly statistical return must be filed (“DIOT”) in which the taxpayer informs to the tax authorities the amount of the creditable VAT paid during the month and to which supplier, identified by the tax number of each supplier. Import VAT is also stated in this return. DIOTs must be filed not later than the last day of the following month to the one to which the return corresponds.

 

Federal Fiscal Code considers different penalties; the most relevant are the following:

 

If the amount of the due VAT tax is paid late, adjustment due to inflation and surcharges must be paid. The adjustment due to inflation is calculated using monthly indexes issued by Mexican Central Bank and the surcharges rate is 1.47 percent for each month that the tax was not paid.

 

If your business is registered for VAT purposes in Mexico it is possible to declare and deduct Mexican input VAT within the VAT return on the regular tax procedure under further preconditions. It must be pointed out that VAT could be credited in the same proportion that the corresponding expense is deductible for income tax purpo­ses.

 

When a favorable VAT balance is obtained, there are two ways to get it back: i) credit it against future payable VAT or ii) request a refund.

 

An entrepreneur that performs exempt activities cannot credit the paid VAT, the VAT becomes an expense. If an entrepreneur performs both taxable and exempt activities, the VAT of expenses related to taxable activities can be completely credited; VAT of expenses related to exempt activities cannot be credited and for VAT of expen­ses related to both activities, a ratio to credit the VAT has to be determined based on the proportion of taxable activities regarding the total of activities performed.

 

As above mentioned, when an entrepreneur has favorable VAT balances, such favorable balances can be requested in refund from Mexican tax authorities. 

 

Regarding the time to get the refunds, once the refund request is duly filed, the tax authorities have 40 busi­ness days to process the refund, starting from the day in which the refund request is filed; however, during those 40 business days, they could ask for additional information and, when that happens, the aforementioned period of 40 days is on hold until the company files the answer to such information request, at that moment, the 40 days period continues. 

 

It is common in Mexico that taxpayers request for VAT refunds; however, Mexican tax authorities will often find any reason to reject them. Besides a time consuming court procedure, there is an alternative to start again the VAT refund process that is much more advisable. 

There are formal invoicing requirements to be fulfilled according to the Mexican Federal Fiscal Code. In Mexico invoices should be issued electronically with the authorization of the tax authorities, these invoices are called “CFDIs”. In this sense, the company must obtain the “digital seals”, which are needed to issue these electronic invoices. The seals are obtained with the company’s FIEL (electronical fiscal signature) through the tax autho­rities’ website.

 

There are special rules for invoices, which get paid in more than one installment. In this case, a company has to issue a CFDI each time a payment is received. To correct an invoice, it cannot be amended once it is issued, therefore, it should be cancelled. 

 

Credit notes can also be issued; however, they would only be useful when a discount from the original invoice is granted or in case of returns. The credit note which amends the original invoice must refer to the original, for instance by stating the invoice number.