Mexico proposes new rules to tax highly digitalized businesses


Fernando Juarez Hernandez, tax attorney in Mexico City explains how legislators have detected the need of taxing digital business.

A bill was introduced to the Mexican Congress on August 21 to tax digital platforms. The proposal introduces amendments to the Mexican income tax law, the value added tax (VAT) law, and the antitrust law.

Although the proposal considers some OECD comments as part of its legislative purpose, it does not consider the latest discussions held at the OECD.

Companies doing business in Mexico should remain vigilant and informed of any development around the bill.

The bill was sponsored by the current Mexican President’s party which had committed to not create or increase taxes. To understand how the bill works, it is essential to recall previous attempts of the government to tax highly digitalized businesses.

Background of the bill

As consequence of the OECD’s debate on the tax challenges of the digitalisation of the economy, the Mexican government has taken an approach to implement a unilateral measure to tax highly digitalized businesses. In 2018 there was an early proposal to impose a 3% tax on services provided digital platforms. This proposal was not approved by Congress.

In 2019, after the new administration was elected, there was a new attempt to tax some highly digitalized businesses. This time, however, the government focused on the collection of taxes from users of some digital platforms under the argument that is merely updating the current tax legislation.

As a result, in June, the Mexican government entered into an agreement with a limited number of ride-sharing and home-delivery companies (Uber, Uber Eats, Cabify, Bolt, Beat, Cornershop) to withhold income tax and VAT from its users.

On August 7,  the Tax Ombudsman (PRODECON) and the Committee on Budget and Public Account of the Mexican House of Representatives signed an agreement to work together in a proposal to address several tax topics, including:  a proposal to update the VAT with the purpose of collecting VAT on services provided by digital platforms in Mexico;  a proposal to withhold 10% for VAT purposes to prevent illegal invoicing; and to produce an anti-avoidance rule to tackle aggressive tax planning.

The agreement states that the amendment to the VAT is only to update the existing Mexican VAT framework, not to create a new tax. It also adds that the proposal will consider the OECD’s recommendations which include applying a withholding mechanism and providing a registry for platforms to calculate and pay their respective tax.

In a new effort to tax highly digitalized businesses, a bill was introduced in the Mexican Congress on August 21 . Such bill attempts to amend the income tax law, the VAT and the antitrust law.

Mexico’s tax on highly digitalized businesses

Introduced in the Mexican Congress, the bill intends to equalize competition between traditional and digital commerce. The bill’s report states some multinationals operate in Mexico without being subject to taxation because they have put in place tax structures that do not create taxable presence.

The report adds that the non-taxed amounts that would otherwise be paid as income tax and VAT not only create issues for tax revenue but also could lead to tax avoidance through failure to report income or falsified invoicing.

The report mentions companies like Uber, Airbnb, Netflix, and Amazon as examples of businesses that have this type of tax structures.

Additionally, the report states that its purpose is to not only tax such activities, but also to integrate such actors within the current Mexico’s legal framework.

Amendments to VAT

The bill incorporates as taxpayers for VAT, those “national and foreign” companies that “provide services as intermediaries through technological platforms for electronic commerce purposes”.

The bill defines technological platforms as “intermediaries that allow the exchange of goods and services to the final user, easing the selling process while using electronic payments mostly”.

The bill adds that such intermediaries are obliged to keep its accounting records.

Amendments to the income tax laws

Further, under the bill, companies, both “national and foreign” that “provide services through a technological platform to provide goods and services” must pay income tax. For this purpose, companies must register a tax domicile in Mexico and have a legal representative in Mexican territory.

The amendment considers that such businesses will create a permanent residence for income tax purposes.

Antitrust amendments

The bill proposes that the Federal Trade Commission will create a registry to evaluate compliance with the best commercial practices and antitrust practices for highly digitalised businesses.

Impact on highly digitalized businesses

The proposals would significantly change the Mexican tax framework.

It is clear that the purpose of Congress is to tax profits from those participants who do not have a taxable presence in Mexico.

The bill mandates foreign companies to register a tax address in Mexico which will clearly subject foreign companies to Mexican taxation, whether for income tax or VAT purposes.

It must be added that the consequences of such registration will create a permanent establishment in Mexico and consequently increase liability for the central office. If foreign companies register, it will also give rise to other legal obligations, like registering in the Mexican Public Registry of Commerce or filing notices in accordance to the Mexican foreign investment law.

The bill does not follow the OECD’s guidance. For example, for VAT purposes, the OECD has proposed a simplified mechanism under a “registration-based collection regimes” proposal.

In these cases where the supplier is not located in the jurisdiction of taxation, mostly for VAT purposes, the supplier registers in a specific jurisdiction (like Mexico) and then acts as withholding agent of the services provided. The bill does not consider such registry and only provides that foreign suppliers must register a tax domicile in Mexico, which as previously explained, increases compliance costs and tax liability of foreign companies.

Another aspect of the bill is that the definition of “technological platform” is mostly aimed at including businesses that act as a liaison between suppliers and consumers. This proposal does not take in consideration the different types of business models that exist, like social media platforms, search engines, or online marketplaces.

It is clear that the bill does not follow the OECD’s latest updates on the digital tax discussion. For income tax purposes, for example, it does not include how to allocate profits to Mexico for companies that do not have a taxable presence in Mexico, nor does it discuss how to allocate costs associated with such profits.

Moreover, under the proposed language of the bill, it seems that it is the digital platform that will subject to the tax; however, the language is not clear on this point, as it sometimes refers to the platform’s users, raising double taxation concerns.

Finally, it also appears that the bill is not aligned with the agreement that Mexico’s Tax Ombudsman signed with the Congress and it is probable that it will be subject to further discussion in Congress and the Senate.

Despite such bill, It is likely that the Executive will present its own proposal by the deadline to present the Budget for the next fiscal year (September 8).

It appears that the Mexican government has finally taken its first steps to tax highly digital businesses, and although it is not the best proposal, it is important to be vigilant on the process to avoid unexpected surprises in the coming weeks.

Article written by Fernando Juarez Hernandez, tax attorney in Mexico City.


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The Settlement Company