Regulations and obligations in Mexico's value-added tax

VAT in Mexico is governed by the Value-Added Tax Act (Ley del Impuesto al Valor Agregado). It is the country’s main indirect tax and is applied at a standard rate of 16%, however there is a 0% rate for exports and the supply of local goods and services. As with any other indirect tax, VAT is not paid directly, but is transferred or charged to a third party until it reaches the final consumer.

Levy

VAT in Mexico does not differ much from similar taxes in other parts of the world. Pursuant to the provisions of the act, VAT is levied for: (i) the sale of goods; (ii) the provision of independent services; (iii) the granting of use or enjoyment of goods; and (iv) the importation of goods and services.

For the purposes of this article we will discuss the applicable provisions and the problems relevant to the VAT payment obligations of legal entities or corporations (personas morales), emphasising their disadvantages, and solutions to these problems.

Under Mexican tax law a VAT withholding obligation is applied to corporations, provided that these receive: (i) independent personal services, or the temporary use or enjoyment of goods, rendered or provided by individuals; (ii) the acquiring of waste for use as inputs in their own industrial activity or to be subsequently sold; (iii) receive land transportation services related to goods, provided either by individuals or corporations; (v) receive services provided by brokers (comisionistas), in the event that these are individuals; and (v) when purchasing tangible goods, or obtaining their temporal use or enjoyment, sold or granted to foreign residents without a permanent establishment in Mexico, which causes an additional administrative burden on firms’ accounting.

The current provisions of the VAT Act are insufficient to cover some concerns arising from the relation of such tax to certain industries, such as the IT industry, among others. In the case of import for the use or enjoyment of tangible goods which are delivered physically abroad, there is uncertainty regarding interpretations of the “base value” in order to calculate the VAT. It is therefore necessary to clarify that VAT will not be levied in the case of temporary use in Mexico of goods or assets which are delivered abroad by persons who are not residents of Mexico, on the understanding that such goods and assets had previously paid the VAT when entering the country. It will be important to establish in the act that the VAT will be due at the time that the consideration is effectively paid; therefore achieving a congruence with the cash flow of companies.

Timing

It is clear that an important issue related to VAT and business is the time the tax is levied. It is essential that the act reflects the assumptions considered as an “import of goods or services rendered by non-residents in Mexico”. This involves stating that VAT will be levied at the time that the consideration is effectively paid; reflecting the possible case of VAT on imported services provided by non-residents of Mexico, but exploited in Mexico. Another important issue deals with the export of computer or IT services. Due to the uncertainty caused by the place in which they are provided, computer or IT services should be considered as an export when they are effectively used abroad. These services include the development and maintenance of computer systems, backups of information and database management. This is based on the understanding, however, that the IT services shall not be considered as exported when, with the purpose of providing such service, virtual private networks are used; nor when they are rendered, relapse or are applied to assets in Mexico. This is intended to provide certainty as to the time when VAT is due, the application of the 0% rate, and achieve the maximisation of cash flow in companies.