Basic information about VAT in Mexico
To begin with, it is worth knowing that the Mexican authorities have not established a VAT threshold. Consequently, registration for VAT purposes is required before performing an activity subject to Mexican tax regulations, regardless of the value of the goods and services. However, registration can only be done by entities with a permanent establishment in Mexico. For this to be possible, sales income from Mexican sources must exceed 50% in a given calendar year or Mexico must be the centre of the entrepreneur’s professional activity.
Tax obligations of foreign residents
Foreign residents must comply with all tax obligations established in Mexico, regardless of nationality. Transactions in different currencies are subject to the exchange rate, the source of which is the Mexican Central Bank. Entrepreneurs who wish to import goods temporarily in Mexico must have a tax ID, which allows them to obtain a temporary import licence for a standard period of up to six months.
Registration for VAT purposes and settlements
To obtain a tax ID in Mexico, follow the instructions on the government’s online website. The standard Mexico VAT rate is 16%. Northern and southern border regions can benefit from a reduced rate of 8%. Some goods and services are also subject to a 0% VAT rate. These include, among others, exports, medicine, agricultural services and basic food products. However, sales of land, medical services and education are exempt from VAT. The Mexico VAT returns must be submitted monthly throughout the year by the 17th of the following month. They are required to be submitted electronically only.
Regulations related to indirect taxes
For goods and services sold by an entity without a permanent establishment in Mexico, reverse-charge regulations apply, requiring the Mexican taxpayer to account for VAT. If this tax is paid by a foreign entity, it is not possible to account for or recover the VAT, which then becomes a business expense. The Mexican tax system is based on a cash system, which means that input VAT can be deducted after payment of liabilities to suppliers, and output VAT can be charged after receipt of payments from customers.
Advantages in VAT settlements
An incentive to register for Mexico VAT may be the possibility of deducting tax paid on recovered purchases. Another interesting procedure is the possibility of a VAT credit for pre-operating expenses. However, this option only works for the first VAT return for the month in which the entity is engaged in activities subject to value-added tax. The sale of digital services is also treated in a special way. Trade operations involving such product categories trigger registration for VAT purposes at the standard rate of 16%.
Given the need to familiarize yourself with Mexico’s detailed regulations, it is advisable to use the services of a company that specializes in tax matters. Through such cooperation, many processes can be simplified and accelerated when fulfilling tax obligations. As a result, the company can always operate in accordance with the law, as well as develop sales of goods and services more efficiently.
