The proposals also address the interaction between VAT and digital services taxation.
The VAT proposals focus on modifying or adding certain provisions relating to digital services taxation that were effective 1 June 2020 as well as modifying an exemption provided for the provision of professional medical services.
Sale of used personal property through digital platforms
Currently, intermediation services provided to third parties allowing the supply and demand for goods or services are not subject to VAT when a sale of used personal property is involved. The proposal would expand the exemption for used personal property. Thus, the provision of used goods by means of digital services in Mexico, as well as the provision of services granted by third parties through digital platforms, would be subject to VAT.
Rules for digital services provided by foreign residents via intermediation platforms
Foreign residents that offer digital services through intermediation platforms (both local and foreign platforms) but having a minor presence in the Mexican market, experience high administrative costs to comply with certain tax obligations such as registration, appointing a legal representative, and paying VAT, among other obligations.
To allow for greater participation by foreign residents in the Mexican market (and greater tax collection), a proposal would allow for digital intermediation platforms to withhold 100% of the VAT collected when they provide services to residents abroad, whether entities or individuals, for whom the digital intermediation platforms process payments. Through this withholding mechanism, digital services providers would be released from having to comply with the cumbersome registration and compliance rules under the VAT law.
When required by the purchaser of the goods or services, the intermediation platforms would need to issue the tax invoice in the name of the purchaser or in the name of the third party for whom they made the VAT withholding. In addition, it is proposed to eliminate the requirement to provide the tax authorities a variety of information about the foreign residents. This treatment would also apply when the service is provided through digital intermediation platforms that are residents of Mexico.
This mechanism would be intended to facilitate compliance and generally follows the approach in other jurisdictions. This proposal, however, would not establish conditions or thresholds regarding the amounts or minimum values of transactions, and is understood would apply to any digital services provider that operates through intermediation platforms that collect payments.
Listing VAT by intermediation platforms
Under the current VAT law, with regard to goods or services sold through intermediation platforms, the VAT must be listed or published expressly and separately. The proposal would require platforms to display the price of the goods or services including the amount of tax with the legend “VAT included.”
Technically, this treatment is currently available through a miscellaneous rule, but the proposed modification seeks to incorporate this treatment in the VAT law.
Sanctions for foreign residents
In the tax reform initiative published last year, a series of sanctions or penalties were proposed for foreign digital services providers that, after 1 June 2020, failed to comply with certain formal obligations—such as not registering in the “federal taxpayer registry” (RFC), not designating a legal representative, not obtaining an advanced electronic signature, not remitting taxes and withholdings, and not filing monthly or quarterly information returns. Penalties for this noncompliance were not included in the final tax reform legislation.
Once again, a penalty regime similar to the one in last year’s tax reform is proposed. This would require the addition of five new articles to the VAT law for the year 2021 as well as further details regarding the procedure for the application of the penalties or sanctions against non-compliant taxpayers.
The proposal—when a foreign resident that provides digital services subject to VAT does not register with the RFC, does not appoint a legal representative in Mexico for purposes of receiving notifications, and does not obtain an electronic signature authorization—would temporarily block the access to the digital services of the foreign resident in Mexico.
In addition, it is proposed to temporarily block access to digital services in Mexico for those digital services providers that are already registered in Mexico but fail to remit payments of taxes or withholdings for three consecutive months or that fail to file the information returns for two consecutive quarterly periods. Regarding these circumstances, the designated legal representative in Mexico is to be notified.
The RFC registration of those digital services providers (those that are already registered but that fail to comply with the tax payment and return filing obligations) would be cancelled, and this cancellation would be published on the website of the tax administration (SAT) and in the official gazette.
In instances when the tax administration notifies the digital services provider about any of the sanction or penalty actions described above, the following process is to apply:
- The digital services provider would have 15 days to preserve its rights and to supply the required documentation (the 15-day period begins the day after the SAT publishes the notice in the official gazette or notifies the legal representative).
- For a single incident, an extension of five days (in addition to the 15 days) may be requested in order to provide the SAT with the documentation, provided that this five-day extension is requested within the 15-day period. The extension would be considered to be granted automatically. In relation to this, the digital services provider must provide the tax administration with an address or email address where to send notifications.
- Once the periods above are concluded, the SAT would have a period of no more than 15 days to review the documentation provided by the digital services provider. In instances when the tax administration requires additional information, this could be requested only within the first five days of the 15-day period.
- If the SAT requires additional information, the digital services provider would need to provide this additional information within a period of no more than five days from the date the notification of the request.
Once these steps are concluded, the SAT would evaluate what information has been provided and would, as appropriate, order the blocking of access to the digital services.
In the event that the digital services access is blocked, the order would need to be delivered to the concessionaires of the public telecommunications network in Mexico, in a manner following the rules and regulations. Additionally, the SAT would post on its website and release in the official gazette the name of the digital services provider; the date from which the corresponding block applies; and notification that recipients of digital services must refrain from contracting for services of the identified digital platforms.
The concessionaires of the public network would have five days to impose the temporary block. This five-day period would begin after the day when the notification for blocking access takes effect. In turn, the concessionaires would have to report their compliance with the access block within a period of no more than five days from the day following the access block.
Once the digital services provider (taxpayer) complies with the obligations that gave rise to the temporary block, the same official who issued the access block order would issue a resolution ordering the unblocking to the concessionaires within a period no longer than five days, and then block on access would be removed.
In the event that a public network concessionaire does not perform the access blocking or unblocking according to these time frames and in a manner as indicated by the authority, the concessionaire could be subject to penalties ranging between MXN $500,000 and MXN $1 million for each calendar month during which there was non-compliance with the blocking order.
Broadening of the scope for the VAT exemption on professional medical services
Another proposal would expand the scope of the VAT exemption to the professional medical services provided by private charitable institutions established in Mexico, whenever a professional medical degree is required.
Special excise tax (IEPS)
Quotas applicable for automotive fuels
In FY 2020, the Mexican government announced that collection of the IEPS decreased due to the reduction in the sales of gasoline and diesel fuel because of the low demand for such fuels (likely, a result of the fall in crude oil prices in international markets). Also, the impact of the coronavirus (COVID-19) pandemic has resulted in a reduced demand for fuels because of the lockdowns and decreases in mobility.
The proposal would impose quotas to the excise tax for automotive fuels, quotas that would be adjusted regarding variations of crude oil prices. However, this would not be an additional tax, but simply an adjustment to already established quotas.
This provision to the IEPS law would be effective the date after the decree is published in the official gazette. However, the quotas would apply beginning in 2021, and when the increase or decrease of the prices of fuels occurs or in years when such fluctuations happen.
Source – KPMG