Mexico VAT Guide

Mexico VAT Guide

Among many countries that may attract attention of entrepreneurs Mexico stands out with its special geographical advantages. Besides that, there are various tax related matters or options only available to the registered entity that may tempt prospective entrepreneurs to make an investment and develop there. Mexico is also one of the few countries in the world that went through the process of digitalization of the Indirect Tax related matters to such great extent, which may appeal to some and repel the others.

Mexican VAT introduction

Mexican VAT authorities have not established a VAT threshold, as such before performing an activity falling under Mexico VAT tax regulations registration for VAT purposes is required regardless of value of goods and services involved. However, it is important to remember that only entities with permanent establishments in Mexico may register – at the same time they are expected to fulfil all tax obligations resulting from Mexican tax law. Nevertheless, Mexico will not be recognized as your tax domicile, unless it is a centre of your professional activities or your income from Mexican sources exceeds 50% of the total in the calendar year. Likewise, foreign residents will be expected to fulfil their tax obligations should they establish home in Mexico regardless of nationality. Transactions in different currencies are subject to exchange rate, source of which is the Mexican Central Bank. For entrepreneurs interested in temporary imports in Mexico it is important to remember that tax ID is required to apply for temporary import permit, which lasts up to 6 months.

Special Indirect Tax Rules

This does not mean that taxes will be gone. In cases of goods or services rendered by entity without permanent establishment, reverse charge regulations come into effect and require Mexican taxpayer to settle VAT payments. In case of having vat paid by foreign entity for services purchased it is impossible to have VAT credited or recovered and as such it will become an expense.

The aforementioned reverse charge is not the only special rule, as Mexican tax point is based on cash basis system. This means that input VAT can be deducted once the payment of payable accounts is made to suppliers and output VAT accrual when payment is received from clients. Being able to have creditable VAT paid on purchases recovered is the only indirect tax incentive encouraging to register for the VAT purposes in Mexico with no tax holidays being scheduled for the time being. Another interesting option is the possibility of using pre operating expenses VAT credits on first VAT return for the month in which entity carries out activity subject to the Value Added Tax.

Digital Services

Another special rule concerns digital services. Foreign trade operations involving such categories of products or services in Mexico create obligation to register for VAT purposes. Digital services are subject to the standard 16% VAT tax rate.

Digital Invoices – CFDI

In Mexico use of digital invoices is obligatory. It uses system called CFDI and requires a separate legal entity approved by government to validate the invoices for the company. This entity is referred to as PAC and will also track, retrieve and store invoices. It is important remember that PAC requires independent services or to be precise it must be done by the third-party. This system of invoices follows strict guidelines and is constantly changing. Not complying with requirements for CFDI format invoices will result in not only fines and penalties but also delays in receiving payments. Electronic invoices are made according to the required format, either using the free service invoice offered by the Tax Administrative Services or from the government approved provider and are verified by the third party (PAC), which will also be responsible for cancelling CFDI on your behalf should you wish to do so.

VAT registration

In order to acquire tax ID in Mexico it is necessary to follow the instructions on the government site. Due to great emphasis on digitalization of the processes in Mexico it should not cause much trouble, as long as requirements to register for the VAT purposes are fulfilled. Keep in mind that according to Tax Authorities registered company requires a local legal representative in Mexico.

VAT rates and deadlines

In Mexico standard VAT rate stands at 16%, with reduced rate for the northern and southern border regions being 8%. Certain goods and services such as exports, medicine, agricultural services and basic food products belong to the 0% VAT rate, while into category of VAT exempt transactions fall sale of land, medical services, education, etc. Temporary use or enjoyment (leasing) falls under standard rate according to the tax authority.

VAT returns are to be submitted on a monthly basis during the year before the 17th day of the following month. It is required to file them electronically only.

VAT Compliance

There are many companies that are willing to lend a helping hand to the entrepreneur interested in starting their business or expanding their area of activity. They are certainly willing and able to drastically simplify the processes and offer advice as well as assist in fulfilling tax obligations that fall onto the companies resolved to get involved in Mexican market.