VAT, GST and Sales Tax in Mexico

Summary

Name of the tax Value-added tax (VAT)
Local name Impuesto al Valor Agregado (IVA)
Date introduced 1-Jan-80
Trading bloc membership None
Administered by Mexican Administration Tax Service (Servicio de Administración Tributaria, or SAT), Ministry of Finance and Public Credit (http://www.sat.gob.mx)
VAT rates
Standard 16%
Other Zero-rated and exempt
VAT number format Not applicable
VAT return periods Monthly
Thresholds
Registration None
Recovery of VAT by non-established businesses No

Scope of the tax

VAT applies to the following transactions:

  • Supply of goods and independent services provided in Mexico
  • Importation of services (subject to the reverse charge, see Section C)
  • Grant of temporary use or exploitation of goods
  • Importations of goods, regardless of the status of the importer

Who is liable

Any business entity or individual that carries out, in Mexican territory, any of the taxable transactions described above, as pro­vided in the VAT law.

Group registration. VAT grouping is not allowed under the Mexican VAT law. Legal entities that are related to each other must register for VAT individually.

Non-established businesses. Just for taxable activities carried out in Mexican territory.

Non-established businesses (foreign businesses). A foreign legal entity with an establishment in Mexico must submit an applica­tion for all federal tax purposes such as Corporate income tax and VAT. For VAT purposes, it must file monthly VAT returns and issue electronic invoices and file electronic accounting like any other Mexican resident. In addition, when applicable, Income Tax obligations must be fulfilled.

Reverse charge. Taxpayers who import intangible goods or ser­vices are subject to VAT, which can be credited in the same monthly return pursuant to the VAT Law.

VAT withholding. A taxable person that receives a supply must withhold the VAT due from the supplier and must pay the corre­sponding VAT. It applies to a variety of transactions, including the following:

  • Fees paid by companies to individuals
  • Acquisitions of scrap material
  • Ground transportation (freights) of goods
  • Commissions paid by companies to individuals
  • Lease or acquisition of tangible goods from residents abroad

Registration procedures. The taxpayer has to request a tax identi­fication number (federal taxpayers registry) from the tax authori­ties (SAT). The registration is done electronically, through the SAT’s website (www.sat.gob.mx). In addition, the taxpayer goes to the SAT office to complete the registration with the following information:

  • Bylaws of the entity
  • Proof of the tax address in Mexico
  • Notarized power of attorney granted to the legal representative
  • Identification card of the legal representative

In addition, the entity is obligated to obtain the Mexican elec­tronic signature for tax purposes (known as e.firma) through its legal representative. This procedure takes place in the SAT’s office.

Late-registration penalties. Penalties and interest are assessed for several types of VAT errors, including late registration for VAT (see Section I).

Tax representatives. Powers of attorney can be granted by the taxpayer and they must be for general administrative purposes.

Digital economy. There are no specific rules relating to the taxa­tion of the digital economy.

Deregistration. Through a liquidation process, the taxpayers can cancel the tax identification provided by the tax authorities.

VAT rates

The VAT rates are:

  • Standard rate: 16%
  • 0%
  • Exempt

The standard rate of 16% applies to all taxable activities, unless a specific measure provides for a reduced rate, such as zero rate or exemption. Effective as of 1 January 2015, all temporary importations made by companies who operate under the IMMEX program are subject to VAT at the standard rate. However, a 100% credit of VAT is applicable over the temporary importa­tions for those entities that obtain a certification for VAT/excise tax purposes.

Examples of goods and services taxable at 0%

  • Exported goods
  • Certain exported services
  • Unprocessed food and milk
  • Patented medicines

The term “exempt supplies” refers to supplies of goods and ser­vices that are not liable to tax. Exempt supplies do not give rise to a right of input tax deduction (see Section F).

Examples of exempt supplies of goods and services

  • Books, newspapers and magazines
  • Constructions used for residential purposes
  • Transfer of copyright by authors
  • Education
  • Public transport of passengers by land
  • Transport of goods by sea for nonresidents
  • Local and foreign currency and credit instruments (including shares)

Option to tax for exempt supplies. Not applicable.

Time of supply

The time when VAT becomes due is called the “time of supply” or “tax point.” The basic tax point for supplies of goods and ser­vices is when the customer effectively pays the consideration. As a result, VAT is determined on a cash-flow basis.

Imported goods. The time of supply for imported goods is when the goods clear all customs procedures.

Recovery of VAT by taxable persons

A taxable person may recover input tax (also known as credit VAT), which is VAT charged on goods and services acquired for business purposes. A taxable person generally recovers input tax by deducting it from output tax (also known as debit VAT), which is VAT charged to customers. Input tax includes VAT charged on  goods and services supplied in Mexico, granting of temporary use of goods, VAT paid on imports of goods and VAT withheld on reverse-charge goods and services.

To be deductible, input tax must relate to the acquisition of goods and services that qualify as deductible expenses for income tax purposes. If an item of expenditure is only partly deductible for income tax purposes, input VAT may be credited only with respect to the deductible portion of the expense.

A valid electronic tax invoice or customs document must gener­ally support a claim for input tax.

Examples of items for which input tax is nondeductible

  • Business gifts
  • Entertainment of employees

Examples of items for which input tax is deductible (if fully related to a taxable business use)

  • Business entertainment
  • Accommodation
  • Purchase of a vehicle, up to MXN175,000
  • Lodging, up to MXN3,850 per day
  • Meals, disbursed in Mexico, up to MXN750 per day, and dis­bursed in foreign countries, up to MXN1,500 per day
  • Lease of a vehicle, up to MXN850 per day
  • Mobile phones
  • Travel expenses

Partial exemption. Input tax directly related to carrying out exempt or nontaxable activities is generally not recoverable. If a taxable person carries out exempt or nontaxable activities, as well as makes taxable supplies, it may not recover input tax in full.

A taxable person must calculate its input tax credit based on a “credit factor.” The credit factor is determined based on the per­centage of taxable turnover compared with total turnover (includ­ing taxable and exempt or nontaxable supplies) in the month of the payment.

Refunds. If the amount of input VAT (credit VAT) recoverable in a month exceeds the amount of output VAT (debit VAT) payable, the excess credit may be carried forward to offset output tax in the following tax periods, or it may be refunded on request. The tax authorities refund a VAT credit by depositing the refundable amount into the taxable person’s bank account. By law, refunds must be made within 40 business days after the date on which the refund request is filed. Likewise, favorable VAT may be offset against other federal taxes.

Preregistration costs. Not applicable.

Recovery of VAT by non-established businesses

Mexico does not refund VAT incurred by businesses that are neither established nor registered in Mexico. If a foreign business has an establishment in Mexico for tax purposes and makes tax­able supplies there, it may request a refund of any VAT credit balances through the general refund procedure for taxable per­sons.

Invoicing

VAT invoices and credit notes. A taxable person must provide an electronic VAT invoice for all taxable supplies made, including exports.

A valid VAT invoice is required to support a claim for input tax deduction.

A VAT credit note may be used to reduce VAT charged and reclaimed on the supply of goods and services. A credit note must contain the same information and fulfill the same requirements as a VAT invoice.

Exports. Mexican VAT is charged at the 0% rate on exported goods. However, to qualify, exports must be supported by evi­dence that proves that the goods have left Mexico. Suitable proof includes customs export documentation for the transaction.

Foreign-currency invoices. If a VAT invoice is issued in foreign currency, the values for VAT purposes must be converted into Mexican pesos (MXN) using the exchange rate that the Central Bank publishes in the Federal Register on the day before the contributions are incurred (date of payment).

VAT returns and payment

VAT returns. VAT returns are filed electronically and must be submitted on a monthly basis. VAT returns are due no later than the 17th day of the immediately following month. Returns must be paid in Mexican pesos.

In addition, monthly information of transactions with suppliers must be submitted electronically during the following month through an informative tax return known as DIOT.

Special schemes. The Mexican tax authorities issue special schemes for VAT recovery for certain sectors, such as taxpayers engaged in the production and distribution of food products, medicines and fixed asset investment projects. In these cases, taxpayers may obtain their refund claims within a maximum of 20 business days, pursuant to the fulfillment of certain require­ments.

Since February 2016, tax authorities have provided administra­tive facilities to automatically recover favorable VAT for a maxi­mum amount of MXN1 million. Some compliance requirements must be filled to access this benefit.

Electronic filing and archiving. VAT returns and all other tax returns must be filed electronically. VAT credits may be refunded on request through the SAT’s website (www.sat.gob.mx). The usual documentation necessary for filing with the tax authorities is a formal letter explaining the taxpayer’s motives for the return, along with the electronic format filed in the application FED “Formato Electrónico de Devoluciones” (including appendix 7 and 7-A, according to the type of VAT return), the corresponding paper work that shows the summary of the VAT transactions, the corresponding bank account of the person or entity (that does not exceed two months from the moment the return is requested) among others.

Since January 2015, taxpayers are obliged to file electronic accounting that includes a chart of accounts, trial balance and journal entries.

Annual returns. Appendix 2 of the Annual Informative Return must be filed regarding payments and VAT withholdings for pro­fessional services, leasing and transportation services, etc.

Penalties

Penalties are assessed for errors and omissions connected with VAT accounting. Under the Mexican Federal Tax Code, the fol­lowing are considered tax offenses:

  • Failure to comply with the obligations set out in tax provisions, including late compliance with those obligations
  • Underpayment and non-payment of taxes
  • Overestimated refunds, credits or offsets
  • Issuance of invoices that do not comply with tax requirements
  • Mathematical errors in filed returns
  • Failure to keep accounting books

Any amount of tax that is not paid by the due date must be adjusted for inflation. A monthly surcharge is also applied to the amount of tax owed at a rate of 1.13% per month. If the taxable person corrects the error voluntarily or if the late payment is due to factors beyond the taxable person’s control, no fines are imposed. However, the surcharge and inflation restatement apply.

Interest is assessed on late payments of tax at a monthly rate of 1.13%.

The Federal Tax Code also lists tax crimes, which are criminal offenses. Tax crimes include the following offenses:

  • Contraband
  • Tax fraud
  • Hiding, altering or destroying (in whole or in part) accounting books and records

Criminal offenses are punishable by fines, which may be a per­centage of the tax lost or a specified amount. Tax crimes may also be penalized with a term of imprisonment of three months to nine years, or longer, depending on the circumstances.