20 May Complying with new VAT requirements for foreign digital service providers in Mexico
New Mexican tax rules as of June 2020
By: Emeka John Eni, Esq.
The Mexican tax authority, the SAT or Servicio de Administracion Tributaria, has recently issued new rules that will take effect in Mexico after June 1, 2020, for foreign companies offering digital services in Mexico by way of the internet. Depending on the nature of the service, the company will be required to register with the local tax authorities and obtain a Mexican Tax ID number known as an RFC.
Our conclusions overall are that the new rules were put into place without a real understanding by the legislators of the practical impact on foreign companies operating in Mexico. Foreign companies that fall within the scope of the new rules will now be required to have a local representative, jump through the hoops of registering to operate and make VAT payments, maintain a registered address or virtual office of some kind, and potentially even have to open a bank account.
Does the new VAT requirement for digital services platforms apply to my company?
The new requirement was conceived primarily with a view toward services delivered habitually to Mexican customers on a regular basis, particularly with regard to services like UBER, Lyft and Netflix. However, the Mexican government’s definition of these services is broad enough to encompass almost any type of digital internet-based services provided by foreign entities in Mexico.
• Distribution of images, movies, multimedia, gambling services, news platforms, online databases
• Third-party “gig economy” services involving the intermediation of services between purchasers and providers of services. These services include platforms with activities similar to AirBnB and Uber, where the request is made via an application for a particular service, which is fulfilled by a local independent affiliate like a driver, delivery person, or potentially even professional services
• Online based organizations or dating apps, including those that require an online monthly or periodic membership fee
In practice, this means that almost any service delivered via internet of a habitual nature within Mexico, will require the foreign company to register.
How does my company obtain a Mexican RFC number or tax ID?
There are two ways to obtain a Mexican RFC or Tax ID. First, the foreign company may register before the Mexican tax authorities as a foreign legal entity in Mexico. Second, the foreign company may incorporate a subsidiary legal entity in Mexico, which will then obtain an RFC number. How should your company proceed?
The foreign company should employ the first method by registering as a foreign legal entity in Mexico and not as a subsidiary, if its activities are limited only and exclusively to the delivery of such services within Mexican territory. This will ensure the activities of the company are exempt from other tax obligations in Mexico such as income taxes. That is to say, that the new tax reforms for 2020 specifically contemplate an exception for income taxes for foreign companies engaged in the provision of digital services from outside of Mexico. On the contrary, if the company operates in Mexico by way of an established subsidiary, this could potentially expose the company to have to pay not only sales taxes in Mexico, but also income taxes.
What are the procedures for obtaining a Mexican RFC number?
Unfortunately, the procedures for obtaining a Mexican RFC number are just as tedious and burdensome as if the company were to incorporate a brand new subsidiary entity. This requires that foreign company provide certified copies with apostille or legalization of the following or similar documents:
• Articles of incorporation, certificate of formation, or document proving the legal creation of the company
• By-laws, operating agreement, or other similar document demonstrating signing authority of the person authorizing the registration of the foreign company in Mexico.
• Certificate of good-standing, certificate of continuing registration, or document demonstrating that the company continues to be in existence
• Power of attorney authorizing the local Mexican legal representative to handle the company’s affairs in Mexico.
Once the documents are obtained, the process continues locally and will require the retention of a local attorney and/or notary to complete.
• Obtain certified translations of all documents provided
• Submit documentation to a local notary for “protocolization” and notarization. Without getting too much into the details, this means that the notary will formalize the documents so that they have legal effect in Mexico
• Register the company before the Registro Publico de la Propiedad y del Comercio, which is essentially the Mexican company’s registry.
• Obtain the RFC number by in-person appointment at the local tax office
• Obtain the company’s e.Firma or electronic signature.
Most importantly, the Mexican government requires the foreign entity to obtain a registered address in Mexico and appoint a local representante legal, which is akin to an attorney of fact or legal representative. This could be a local employee, attorney or accountant in most instances. These requirements are unavoidable.
What are on-going tax and reporting obligations?
The reporting obligations of the newly registered foreign company are pretty much the same as any other domestically incorporated company with the exception of the requirement to pay income taxes. However, the monthly reporting obligations remain the same. A local Mexican accountant will need to file and record all monthly transactions of the company and calculate balance of VAT due to the Mexican tax authorities. This needs to be done by the 17th of each month and corresponds to services delivered during the previous month. Additionally, a trimestral informational report must be submitted.
Important – for digital services that act as an intermediary for third parties, the foreign entity has the option and at times the obligation, to pay local VAT tax and income taxes on behalf of the local deliverer of these services. Think AirBnB. In this case, AirBnB now must make tax payments to the Mexican government on behalf of the owner of the rented property. The same would be true for services such as Uber, UberEats or Lyft regarding drivers or delivery personnel.
As a practical matter, Mexican sales tax is paid electronically and requires the opening of a Mexican bank account. Therefore, it is likely that for purposes of complying with these new fiscal obligations, the foreign entity must not only undertake its registration, but also open a bank account, which can present an additional bureaucratic hurdle.