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Pedro A Palma Cruz
Sanchez Devanny Eseverri, Mexico City
ppalma@sanchezdevanny.com

Giovanni Morales Ramírez
Sanchez Devanny Eseverri, Mexico City
gmorales@sanchezdevanny.com

 

On 1 June 2020, new VAT rules entered into force in Mexico to regulate and tax the digital economy. These rules are based on the Organisation for Economic Cooperation and Development (OECD) conclusions to Action 1 of the Base Erosion and Profit Shifting (BEPS) Project^[1] and the work conducted by Working Party No 9 on Consumption Taxes ('WP9'). Unfortunately, the incorporation of those conclusions into domestic law seems to apply to a narrow scope of intermediation services, leaving others behind and, in some cases, generating double VAT taxation.

Introduction

In Mexico, VAT is levied on: (1) the sales of goods; (2) rendering of independent services; (3) granting of temporary use or enjoyment of goods; and (4) importation of goods and services, conducted either by individuals or corporations, within Mexican territory.^[2] For these activities, VAT is calculated at the general tax rate of 16 per cent.^[3]

On 9 December 2019, Mexico incorporated a new chapter into its VAT law aimed to set rules for the rendering of the considered 'digital services' by foreign residents. These rules list four digital services that are considered to be rendered by foreign residents when provided through digital applications, or digital content provided through the internet or another network that is automated that may or may not require minimal human intervention,^[4] as follows:

1. downloading or accessing images, movies, text, information, video, audio, music and games, including gaming, as well as other multimedia content, multiplayer environments, obtaining ringtones, viewing online news, traffic information, weather forecasts and statistics; downloading or accessing books, newspapers and electronic magazines is not comprised within these services;^[5]

2. intermediation services, rendered between third parties, that supply goods or provide services to Mexican end-users; accordingly, intermediation services with the purpose of selling movable used goods are not comprised within these services;^[6]

3. online clubs and dating sites;^[7] and

4. distance learning, testing or exercising.^[8]

Foreign residents falling within any of the services described under sections (1), (3) or (4) above, will be obliged to: (1) register within the Mexican taxpayer’s registry;^[9] (2) appoint a Mexican legal representative and a Mexican domicile;^[10] (3) collect the electronic signature;^[11] (4) offer their services, including the corresponding VAT;^[12] (5) calculate and pay 16 per cent VAT monthly;^[13] (6) file informative returns;^[14] and (7) issue simplified electronic invoices.^[15] Accordingly, it is essential to notice that there is no de minimis rule for these purposes. Therefore, the said obligations are triggered upon the occurrence of the first transaction in Mexico, regardless of the amount or number of transactions conducted therein.^[16]

On the other hand, foreign residents falling within the service described under section (2) above will be obliged, in addition to the obligations listed in the previous paragraph, to withhold the VAT due by individuals selling goods or rendering services. If the said individuals hold a tax identifier (ID) with the Mexican tax registry, then foreign residents will withhold 50 per cent of the VAT due, but if the individuals do not hold a tax ID, the withholding tax will be 100 per cent of the VAT due.^[17]

Issue

It is important to note that VAT law solely establishes a withholding VAT obligation to foreign residents providing digital intermediation services when the supplier of goods or renderer of services is an individual. Notwithstanding, the law is silent about the tax treatment applicable to corporate goods’ suppliers or service renderers’ corporations.

Therefore, the applicable VAT tax treatment of the following is unclear: (1) foreign companies providing digital services to Mexican end-users through a foreign intermediary; and (2) foreign intermediaries when intermediating between foreign companies providing digital services to Mexican end-users.

The aforementioned business model seems to go beyond the current VAT law’s scope to pose potential double VAT taxation: (1) on the foreign intermediary; and (2) on the foreign corporation rendering digital services to Mexican end-users through a foreign intermediary corporation.

Example

Suppose that a foreign educational institution ('foreign institution') renders distance learning courses through a foreign intermediary website ('foreign intermediary') that distributes online courses through Europe, Latin America (LATAM) and Mexico using its online platform. Suppose furthermore that the amounts paid by Mexican end-users ('students') are collected by the foreign intermediary, who discounts its commission and transfers the remaining amount to the foreign institution.

Under this scenario, both: (1) the foreign institution; and (2) foreign intermediary will be subject to the new Mexican VAT rules, which is most likely to lead to double VAT taxation due to the lack of coordination rules. This double tax result could leave us with different scenarios to alleviate it, and which are not currently clarified by the Mexican tax authority under existing treasury regulations.

First, it is clear that under the OECD literature, the new VAT rules could not lead to double VAT taxation, regardless of the actual reading of the law. We understand that this is undoubtedly an involuntary inefficiency created by the narrow wording used by the law in its attempt to regulate digital intermediation services. Second, since we have identified inefficiencies created by the current law and since no treasury regulation solving the problem exists, we describe possible solutions to the issue below.

Intermediary corporation liable for VAT

It is important to note that the intermediation model adopted by Mexican law derives in part from the OECD literature generated to implement the conclusions of BEPS Action 1 and WP9.^[18] One of the supporting documents considers the intermediation model as a voluntary option,^[19] at variance from the mandatory nature granted by the Mexican rules, and which ultimately leads to a double VAT taxation situation.

Under the OECD literature, the voluntary intermediary will register within the country’s taxpayer’s registry and conduct the VAT payment on behalf of the actual foreign seller or renderer of services,^[20] in our case, the foreign institution. Obviously, under this scenario, the voluntary intermediary is liable for all VAT obligations generated on the transaction, relieving the foreign institution from any VAT liability in our example.

Accordingly, to alleviate the double VAT taxation generated by Mexican law, foreign intermediaries could be subject to formal and substantive obligations (voluntarily, as suggested by the OECD) to relieve the foreign institution in our example from Mexican VAT. Under this solution, it is relevant to consider that current law provides for rules to identify foreign sellers or renderers of services.^[21]

Foreign sellers or service renderers liable for VAT

A second alternative to alleviate the double VAT taxation generated by these rules is to consider the foreign seller or renderer of services, in our case, the foreign institution, as liable for formal and substantive VAT obligations. Under this scenario, the intermediary for the services (in our example, the foreign intermediary) will be relieved from substantive VAT obligations (ie, VAT payment). Nevertheless, the said intermediary will still be subject to formal obligations, such as registration and the submission of informative returns, among others.^[22]

This scenario poses another unanswered question regarding 'the enjoyment of intermediary services' (the destination principle). The problem is whether Mexican end-users enjoy these services within Mexico or whether the services are enjoyed abroad by the foreign institution in our case.

If the conclusion is that Mexican end-users actually enjoy intermediary services within the country, then the portion of the consideration charged by the intermediary shall be subject to 16 per cent VAT in Mexico. If, on the other hand, it is concluded that the foreign institution enjoys the intermediation services abroad, no VAT should be triggered in Mexico.

Nevertheless, the discussion needs to include the existence of a reference under Mexican law, which appears to presume that intermediary companies are still subject to tax in Mexico,^[23] regardless of the possible enjoyment of the intermediary service abroad by foreign companies. We consider this situation should, at some point, also be clarified under treasury regulations.

Shared VAT liability

The last scenario relies on the assumption that intermediary services are enjoyed in Mexico and, therefore, taxable therein. As already pointed out, Mexican law considers both: (1) the foreign institution; and (2) foreign intermediaries as liable for VAT. Therefore, to alleviate double VAT taxation, an apportionment of the VAT due is suggested.

Suppose that the amount to be charged by the foreign institution for its digital services is $90 and the foreign intermediary’s commission is $10, leading to a final customer price of $100, plus 16 per cent VAT, resulting in an actual payment by Mexican students (end-users) of $116.

In this case, the foreign institution will collect 16 per cent of $90 (VAT of $14.40) and pay it to the Mexican tax authority (this scenario assumes that formal obligations are met). On the other hand, the foreign intermediary will collect and pay 16 per cent to the Mexican tax authority over its service consideration of $10 (VAT of $1.60). Accordingly, both parties comply with their proportion of the VAT initially charged to Mexican student end-users.

Please note that all scenarios could scale in complexity if we add an intermediary payment agent, such as PayPal or a foreign banking institution intermediary. This is because the Mexican intermediation regime does not provide for a carve-out applicable to payment intermediaries, or any others, regardless of the suggested carve-outs considered by the OECD.^[24]

Conclusion

New Mexican VAT rules appear only to regulate business models where individuals sell or render services to Mexican end-users through a foreign intermediary corporation. In cases in which foreign corporations provide digital services to Mexican end-users, through a foreign intermediary corporation, a possible double VAT liability could exist for which no coordination rules exist under current law or regulations to alleviate the double tax effect.

The business models described in this article should seek the contractual allocation of the liabilities between the parties to avoid the aforementioned double VAT taxation effect. This allocation always involves the risk that Mexican tax authorities will attempt to collect the VAT due either from the foreign intermediary or foreign digital services renderer. In any event, the recommendation is to keep a coherent file supporting the VAT allocation based on the company’s business model.

 

Notes

 

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