Mexico amends tax rules applying to digital service providers, online platforms

By Arturo Treviño Villarreal, Tax Partner, Fratelli Consultores, Monterrey, Mexico

New Mexican rules entered effect on January 1 that address the income tax and VAT treatment of digital services and transactions performed on technological platforms.

The amendments in Mexico will undoubtedly add compliance challenges to both resident and nonresident digital service providers. There is an array of items to analyze on a case-by-case basis, including new sanctions that block the services of digital service providers that do not comply with the new tax rules.

Mexico’s tax authorities published these new rules in the official federal gazette as a series of amendments and additions on December 8, 2020.

Income tax law

Generally, Mexican resident individuals performing business activities and individual nonresidents with a permanent establishment in Mexico are taxed on income derived from the transfer of goods or the provision of services through the internet, using technological platforms, computer applications, and intermediation services.

To collect this personal income tax, a withholding tax mechanism applies to Mexican resident legal entities, nonresident legal entities with or without a permanent establishment in Mexico, foreign entities or legal arrangements (all of them acting as withholding tax agents).

In the light of the new rules, withholding tax should be levied on the total amount of income without VAT that individuals receive or cash-in.

The withholding tax will be assessed as payments of estimated tax. The applicable tax rates are 2.1 percent for ground/land passenger transport services and the delivery of goods;4 percent for lodging/accommodation services; and 1 percent for the transfer of goods and the provision of services.

Additionally, monthly income included in previous provisions to determine tax rates (and therefore compute withholding tax) is now excluded.

Blocking digital services

Under the amendments, nonresident legal entities without a permanent establishment in Mexico, foreign entities, or legal arrangements will be subject to new sanctions for noncompliance, namely, the temporary blocking of their digital service in Mexico. The new rules of the income tax law mandates to follow relevant VAT provisions on the blocking and unblocking mechanisms.

The new penalties are triggered upon a failure to compute, withhold, and remit withholding tax payments to Mexico for three consecutive months. 

Such blocking will take place through relevant local telecommunication operators in Mexico (public networks).

VAT & intermediation

Under VAT rules, which entered into force and effect on June 1, 2020, Mexican resident individuals and legal entities who provide digital services of intermediation to recipients/receivers located in Mexico are subject to an array of compliance obligations.

Similarly, nonresidents without an establishment in Mexico providing digital services are subject to certain tax compliance obligations.

Generally, digital services covered by the VAT law are those that are automated and related to downloads or access to images, films, text, information, video, audio, music, games, etc. Intermediation by and between third parties; online clubs and dating websites; e-learning, or tests or exercises are also included. The download or access to books, newspapers as well as e-magazines is out of scope. 

 Mexico’s VAT law has recently been amended to expand the scope of VAT and now covers those intermediation services in the transfer of second-hand personal property.

Exception to tax compliance obligations

Nonresidents without an establishment in Mexico who provide digital services of downloads or access, online clubs and dating websites, and e-learning, or tests or exercises are no longer obliged to comply with or fulfill certain tax compliance obligations in Mexico if their services are delivered through intermediaries that withhold the relevant VAT.

These providers are no longer obligated to register with the local tax authorities, collect VAT, deliver sales information to the tax agency monthly, paying collected VAT to the State budget, issue and send e-invoices, appoint a legal representative, provide with a local domicile, and obtain an e-signature, etc.

Temporary blocking to access the digital service

As part of the new additions to the VAT law, nonresidents without an establishment in Mexico who provide digital services to recipients located in Mexico will now be facing sanctions if certain compliance obligations are not fulfilled.

Those new sanctions mainly consist of temporary blocking to access the digital service. The actual blocking will take place through local telecommunication operators. Access will be reactivated once compliance obligations are met.

Among others, sanctions of temporary blocking apply to the failure to register in due time before local tax authorities, appoint a legal representative as well as inform of a local domicile, and obtain an e-signature.

Additionally, there will also be a temporary blocking in cases in which nonresidents fail to pay VAT to the State budget, and tax returns (e.g., for payments, information returns, etc.) are not submitted in due time for three consecutive months or two consecutive quarters.

In these cases, the relevant local tax ID of the nonresident without an establishment in Mexico will also be canceled.

The amendments to Mexico’s VAT law include a series of new and detailed rules to regulate the temporary blocking to access the digital service and unblocking (e.g., new articles 18-H BIS, 18-H TER, 18-H QUÁTER, 18-H QUINTUS).

Depending on the actual circumstances in which the temporary blocking occurs, unblocking may take 45 to 50 business days.

Digital services of intermediation

Nonresidents without an establishment in Mexico providing intermediation services by and between third parties can now opt to publish on their website, app, platform, etc.,  the prices of offered goods or services with the caption/inscription “VAT included” (i.e., without segregation of actual price and VAT).

Currently, nonresidents acting as intermediaries may collect the price and VAT on behalf of the seller or supplier of goods or services.

Under these circumstances, nonresidents must also act as VAT withholding agents where the seller or supplier is an individual.

According to the new rules, in cases in which nonresidents without an establishment in Mexico (either individuals or legal entities) that provide digital services of downloads and access, online clubs as well as dating websites, and e-learning, or tests or exercises, are subject to full withholding tax (i.e., withholding tax of 100 percent of the cashed-in VAT).

In addition, e-invoices should be issued and duly sent taking into account the requirements of the new rules.

On a separate note, under certain specific conditions, those nonresidents acting as intermediaries will no longer be obliged to report to local tax authorities on a monthly basis certain information of their clients.

For example, reporting is not required where nonresidents without an establishment in Mexico provide digital services related to downloads and access, online clubs as well as dating websites, and e-learning, or tests or exercises, and the relevant withholding tax is levied following the new VAT rules.

Additional remarks

The amendments and additions to tax laws in Mexico will certainly add compliance challenges to both resident and nonresident digital service providers.

There is an array of items to further analyze on a case-by-case basis: from a defense file for a temporary blocking order, crediting VAT from incurred expenses to the distinction between regulated and non-regulated digital services.

Taxpayers should be aware of the current difficulties involved in applying for and obtaining a tax registration (i.e., tax ID) to be compliant with local laws.

Local telecommunication operators are now exposed to potential fines for noncompliance or delays in the process of blocking and unblocking.

Such fines may be in the range of US 25K – US 51K, and they can be individually imposed per each calendar month in which authorities’ orders are not executed.