Foreign digital platforms providing services or selling goods into Mexico will be required to charge Mexican Value Added Tax (VAT) on their sales and remit such tax to the Mexican tax authorities (Servicio de Administración Tributaria or SAT) effective June 1, 2020. Likewise, foreign digital platforms intermediating between sellers and buyers of goods or services will be required to withhold VAT and Income Tax (IT) from the Mexican sellers, and remit such tax to the SAT. The foreign digital platforms will need to appoint a Mexican legal representative and register with the Mexican tax authorities for such purposes (among other obligations, as explained below).

The new obligations come as part of the Mexican tax reforms for 2020. Due to the importance of e-commerce in the economy and the loopholes existing for their taxation, the Mexican government has followed some of the recommendations issued by the Organization for Economic Co-operation and Development (OECD), which are focused on higher collection of taxes from this sector.

The new VAT obligations for foreign digital platforms will be triggered for certain types of services with Mexican source. Mexican source for these purposes will exist, even when there is no physical presence, when:

1. A domicile or telephone number is set on Mexico,
2. The recipient makes payments for the services through an intermediary (financial institution) located in Mexico, or
3. The recipient uses an IP address that is located in Mexico.

As to the digital services captured by the new rules, the following are included:

1. Direct providers of intangible goods (such as streaming services that include music, podcasts, movies, news, etc., download and online games and learning, online dating clubs, etc.).
2. Intermediaries for trading of goods (retail) or granting services (transportation, food and products delivery and lodging services).

Therefore, according to the above, VAT should be charged to the customers trading with direct digital providers at a 16% rate, while the SAT foresee the application of the following withholding rates for IT and VAT purposes that must be withheld from the owner by the Mexican legal entities or non-residents with or without permanent establishment that participate as digital intermediaries:

Further, foreign digital platforms will have the following compliance and reporting obligations as of June 1^st, 2020:

• Register the platform before the RFC¹ in order to obtain a Mexican tax ID² and electronic signature. For the specific case of new platforms, the due date will be 30 days after the beginning of providing digital services.
• For this purpose, a tax domicile and a legal representative must be appointed in Mexico (digital platforms may hire Mexican service providers for these purposes).
• As already mentioned, the platform must collect the applicable VAT (according to the applicable scheme), publish its prices including Mexican VAT, and pay the VAT to the SAT on a monthly basis³. According to the regulations, payment can be done in foreign currency in bank accounts of the Mexican treasury abroad. Note, however, that the Mexican government has not yet published details about which accounts may be used for this purpose.    
• For the specific case of direct providers (i.e., not for intermediaries), issue electronic receipts if requested⁴.
• Furthermore, for operations where the platforms function as an intermediary, such party must issue on the first 5 days of the month, the CFDI to individuals for whom VAT withholding was performed on the last month. The CFDI must be issued incorporating the “Technological Services Platform” complement published by the SAT. Based on transitory rules to the VAT Law, this obligation will enter into force on January 1, 2021. In the meanwhile, regular invoices should be issued containing certain specific information.
• File informative reports about the operations celebrated (i.e. user, description of service, price, tax, etc.) on a quarterly basis for direct providers and on a monthly basis for intermediaries.

In short, this is an additional process that the SAT is implementing for levying a higher amount of taxes since these activities are already considered as taxable, but until now it has been very difficult for the SAT to collect taxes from individual customers. As a penalty for noncompliance, the digital platforms will become jointly liable with their Mexican customers for payment of tax (plus surcharges, inflation adjustment and penalties, in case audited).

As a result of the above, digital platforms selling or intermediating goods or services into Mexico should review their new obligations and consider move fast to be compliant, mainly by registering to obtain a tax ID and the appointment of legal representative in Mexico by June 2020, as well as prepare their systems for purposes of determining the correspondent tax and issue the reports requested by the SAT. It should be noted that the SAT has not granted extensions for most compliance obligations due to the current sanitary emergency, therefore it is not expected that an extension will be granted.  

For more information on this tax alert, please contact: 

Santiago Chacón, Managing Director, schacon@alvarezandmarsal.com
Karla Covarrubias, Senior Associate, kcovarrubias@alvarezandmarsal.com

<sub>1. This register, according to the statute, will not in itself trigger a permanent establishment for the non-Mexican resident.
2. If digital platforms are already registered, they must submit a notice through SAT´s webpage to affirm or appoint a legal representative. For the case of intermediaries, they must file a notice before June 30, 2020, with certain details regarding their activities and obligations.
3. Due date: 17th day of the following month to which the obligation corresponds.
4. Even when these receipts are not considered as tax invoices (CFDI) for Mexican tax purposes, such must include the information established in the miscellaneous tax regulations rule 12.1.4.</sub>