Value-added tax (VAT)
VAT is payable at the general rate of 16% on sales of goods and services, as well as on lease payments and imports of goods and services. The principal VAT-exempt transactions are the sale of land, credit instruments (including equity shares), residential construction, interest paid by banks, medical services, education, salaries and wages, rentals of residential property, and the sale of non-amortisable participation certificates on real estate investment trusts (REITs), provided specific requirements are satisfied.
Temporary imports under IMMEX and similar programs are subject to the general 16% VAT rate. Such imports may qualify for VAT relief when obtaining special certification from the tax authorities related to the adequate control of such imports. The relief is applied in the form of an immediate VAT credit when clearing customs, which means that the temporary import is done on a cashless basis for VAT. Companies not covered by the certification may apply the same cashless treatment if they post a bond as payment guarantee.
The VAT law also taxes sales in Mexico of temporarily imported goods by non-residents to (i) other non-residents, (ii) Maquiladoras, or (iii) companies in the automotive industry.
The 0% VAT rate, which generally means that no VAT is payable, is applicable to a substantial number of transactions, including the sale of books, magazines, and newspapers published by the taxpayer, the exportation of goods and certain services (including some Maquiladora activities intended for exportation), the sale of certain basic foodstuffs, the sale of medicines, agricultural goods and services, sales and rentals of farm M&E, and other specified transactions.
VAT paid by business enterprises on their purchases and expenses related to VATable activities (including activities subject to the 0% VAT rate) may usually be credited against their liability for VAT they collect from customers on their own sales, services rendered, etc. The input VAT credit on goods or services of a general nature, or those not specially identified with either taxable, not subject to the tax, or exempt activities for VAT purposes, is computed based on a VAT ratio proportional to the VATable versus VAT activities (taxable, not taxed, and exempt) carried out by the taxpayer. Creditable VAT paid on purchases and expenses in excess of VAT collected from customers is recoverable via either a refund or a credit against subsequent VAT liabilities.
VAT is a ‘cash basis’ tax, with few exceptions (e.g. VAT on some types of interest must be paid on an accrued basis); consequently, only the receipt of payment for goods or services triggers the output VAT liability, and an input VAT credit may be claimed only when the taxpayer pays VAT to its providers of goods and services. VAT is calculated for each calendar month as a final tax. In addition, VAT overpayments may be used to offset the tax liabilities arising from other federal taxes.
VAT must generally be withheld by Mexican residents acquiring or leasing tangible goods from non-residents if such foreign residents do not have a PE in the country to which income is attributed. Mexican business entities are required to withhold VAT on payments to individuals or entities for services consisting of ground transportation of goods. Mexican corporations must also withhold VAT on commissions paid to individuals, as well as on independent services rendered by Mexican individuals, and on tangible goods leased from individuals.
An information return related to the VATable activities carried out by the taxpayer must be filed on a monthly basis. Definitive monthly VAT payments are required by the 17th day of the immediately following month.
VAT paid for subcontracted labour will be creditable to the extent the service is considered a specialised service for purposes of the outsourcing reform (please refer to Outsourcing reform in the Other issues section). The requirement for the payer to withhold 6% of the consideration and remit it to the Mexican tax authorities has been repealed as of 1 August 2021.
Under current VAT law, a VAT credit is granted in the pre-operating period (i.e. the period prior to the start of the taxable activities) based on an estimate of expected future activities subject to VAT. However, there is no adjustment mechanism if the actual activities subject to VAT differ from the estimated activities.
The provision provides that VAT credits from expenses and certain investments in the pre-operating period can be used on the first VAT return for the month in which the company actually carries out activities subject to VAT, or in the month in which the company incurs the expense or makes the disbursement (in which case it can request a refund), provided that, in the latter case, the taxpayer provides information related to the VATable activities to be performed. In both cases, there will be a mandatory adjustment to the VAT credited once a 12-month period has elapsed from the date on which the credit was applied.
In addition, if the taxpayer does not perform taxable activities once the pre-operating period has ended, a reimbursement of any refund should be remitted to the tax authorities. This rule will not apply to taxpayers engaged in extraction activities, such as mining and oil.
Based on the 2020 Tax Reform, as of June 2020, foreign residents, regardless of whether they have a PE, that are providers of digital services to recipients located in Mexico must register with the Mexican tax authorities to calculate and collect the VAT associated with those digital services from the Mexican users and remit it on a monthly basis to the Mexican tax authorities. A digital service is defined as any service provided through digital applications or format, over the Internet or other network, and which is fundamentally automated. It specifically includes the following:
- Downloading or access to images, film, text, information, audio, video, music, games, gambling, multimedia content, multi-player environments, mobile tones, online visualisations, traffic information, and weather forecasts. Excluded from this definition are access to electronic books, newspapers, or other periodicals.
- Mediation among third parties for the offer of goods or services.
- Online clubs, online dating, and online learning.
The recipient will be considered a 'Mexican user' in any of the following circumstances: (i) a Mexican has registered with the service provider, (ii) the payment was made through a Mexican financial intermediary, (iii) the IP address used by the electronic device is in Mexico, or (iv) when the recipient provides a Mexican telephone number.
In this regard, as of June 2020, such foreign residents must comply with certain specific requirements including, as earlier mentioned, obtaining a Mexican tax ID, registering a Mexican legal representative and a tax address, obtaining an electronic tax signature, and issuing invoices that meet the Mexican requirements to be established by the Mexican tax authorities, among others.
Non-residents providing digital services subject to VAT that do not comply with certain tax obligations will have their access to the Internet in Mexico temporarily blocked. The Internet blockage would be carried out by regulated telecommunication networks pursuant to a government request. Prior to disabling the non-resident's Internet access, the tax authorities would consider all of the case’s facts and circumstances and follow certain procedural requirements intended to ensure the affected entity has the proper information to comply with tax obligations. The process must be documented through specific administrative steps and written notifications. Once the tax authorities proceed with blocking Internet access, the block can continue until the non-compliance is cured.
Failure to comply with the following tax obligations, among others, can result in Internet blockage:
- Registration with the tax authorities.
- Designation of a legal representative for tax purposes.
- Designation of a tax domicile in Mexico
- Obtaining an electronic tax signature.
- Informing the tax authorities of the number of services or transactions performed in Mexico, as well as informing the recipients of said services.
Customs duties/import tariffs
Mexico’s commercial conditions provide an excellent business and investment opportunity. Mexico is a member of the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation Mechanism (APEC), and the Organisation for Economic Co-operation and Development (OECD).
Mexico lies in a strategic geographical location for international trade, sharing borders with the United States (US) and representing an easy entry to the rest of Latin America, while also facing Europe and Asia.
Mexico has signed multiple Free Trade Agreements (FTAs), which provide for preferential duty rates on foreign trade operations with many more countries. FTAs signed by Mexico include the new United States-Mexico-Canada Agreement (USMCA) in force as of 1 July 2020, and agreements with the European Union (EU), the European Free Trade Association (EFTA), and Japan, among many other countries. Most FTAs provide 0% duty rates for almost 90% of the goods to be imported into Mexico.
General Import Duty rates range from 0% to 35%, but most imports fall within the range of 3% to 20% (exceptionally, certain food products, shoes, and textiles pay higher duties).
In general, temporary imports are exempt from customs duties (except for fixed assets in certain transactions). For VAT payments on temporary imports, see above.
The excise tax law (Impuesto Especial Sobre Producción y Servicios or IEPS) levies substantial federal excise rates on the importation and/or sale of certain taxable items, such as gasoline (% variable), beer (26.5%), wine (26.5% to 53%), spirits (53%), and cigarettes and other tobacco products (160% plus an additional quota), and on certain services related to these activities, such as commission, mediation, and distribution of excise taxable items, as well as services for raffles and gambling (30%). Excise tax is also applicable to certain telecommunications services (3%).
The excise tax law applies to soft drinks at 1 Mexican peso (MXN) per litre and to ‘junk’ food at an 8% rate. In both cases, the excise tax is payable by the producer or importer.
In general terms, goods are exempt from IEPS when exported. The input IEPS paid by exporters on their purchases is not creditable, and that tax becomes an additional cost.
IEPS is payable (output tax) and creditable (input tax) on a cash basis. It is payable on the date that the charge invoiced is collected from the client and can be credited when the respective payment is made to the supplier. On imports, IEPS is creditable when paid at the customs offices.
Per the 2020 Tax Reform, input IEPS resulting from the activities of one month will be creditable only with the output IEPS of the following months and for the alienation of the same goods. In certain cases, the IEPS legislation allows taxpayers that are not subject to this tax to credit IEPS paid on the acquisition and/or the importation of certain goods.
There is a specific procedure to calculate the tax for beer producers, bottlers, and importers; however, the tax can never be lower than 26.5%.
Among other obligations, IEPS taxpayers must file information returns before the Mexican Tax Administration periodically.
The 2020 Tax Reform also provided an update of the concept of energizing brewages as it defined as those that mix caffeine and taurine, glucuronolactone, thiamine, or other substance producing similar effects, independently of the amounts of the compounds involved (focus is on the mix regardless of the weight of the elements).
Annual taxes on real property are levied by Mexico City and all the states at widely varying rates applied to values shown in the property tax records. Assessed values have increased substantially recently in Mexico City and some other areas.
Title transfer taxes
The transfer of real estate is, almost without exception, subject to a variable transfer tax at rates averaging 2% to 5% on the highest of the value of the transaction, fair market value, or registered municipality value. The tax is levied by most states and Mexico City.
There are no stamp taxes in Mexico.
Most Mexican states levy a relatively low tax on salaries and other income earned by employees, which is payable by the employer (e.g. Mexico City imposes a 3% payroll tax payable by the employer).
Social security contributions
Employers and employees are required to make contributions to the social security system. These contributions are based on the daily salary plus any other compensation paid to the employee. There are various different rates that the employers are compelled to pay to the Mexican Social Security Ministry and or Housing Ministry that may vary in proportion of the so-called base salary of their Mexican employees and the type of concepts for which the compensation is given to the employee. For example, 2% on the base salary of the employee is paid by the employer for the concept of retirement, 5% on the employee base housing contribution salary for the concept of housing must be paid by the employer, among others.
Compulsory profit sharing
Although not a tax, every business unit with employees (irrespective of the type of organisation) is required to distribute a portion of its annual profits among all employees, except general directors and managers. The amount distributable to the employees is 10% of an adjusted taxable income. The main difference between the taxable income and the profit-sharing base is that the tax losses cannot be applied against the profit-sharing base. As of 2021 (please refer to Outsourcing reform in the Other issues section), the profit distribution to each employee will be capped to the highest of either (i) three months of its regular salary or (ii) the average of profit sharing received by the employee in the past three fiscal years (i.e. should the profit allocated to an employee be below these thresholds, the employer will only pay the corresponding regular distribution based on 10%).
No profit sharing is paid during the first year of operations. Also, special rules apply for personal service entities and for entities deriving their income from rental activities, both of which can limit their profit-sharing payment to the equivalent of one month of regular salary.
The profit-sharing amount paid out is a deductible item for CIT purposes, provided certain requirements are met.
There is no federal tax on the ownership of vehicles; however, the states may impose a similar tax.
Tax is still levied on the acquisition of new vehicles. This tax is payable in addition to the VAT on the purchase. Note that some vehicles considered as ‘hybrid’ (e.g. battery assisted vehicles) are not subject to the new vehicle acquisition tax.