If you are a foreign company considering expanding your operations to Mexico, you will need to understand not just the Mexican business culture but also how Mexico's Value-Added Tax (VAT) may affect your operations.
Locally known as the impuesto al valor agregado tax (IVA tax), the VAT is typically applied to all imported commodities into Mexico, with notable exceptions.
The IVA or VAT may be seen as a single, uniform tax rate that is imposed virtually uniformly across the nation and at each stage of the supply chain. When a product is sold in Mexico, the VAT tax is included in the price. Thus, the VAT operates as the sales tax in Mexico.
Changes to VAT in 2020
Substantial modifications to the Mexican VAT were made via an adjustment to Mexico’s customs rules on July 24, 2020. These modifications affected the certification procedure and refund times and also established a new certification known as the Authorized Economic Operator certification (AEO). Importers must comprehend these modifications, especially if they have not yet submitted for AEO certification.
The July 24 amendments made the following modifications to the VAT treatment for temporary imports:
The modifications abolished the fast refund procedure for VAT certificate holders.
The amount of time temporary imports were permitted to stay in the country was reduced.
Only enterprises with an AEO certification will be able to issue pedimentos, or virtual declarations, to transfer imported goods to Mexican citizens in the future. If the inventory is moved to a different maquiladora in the nation, that maquiladora must also be AEO-certified in order to export the items.
These additional criteria complicate the picture of VAT exemptions.
As a result of these changes, in order to enjoy many of the advantages of the prior VAT certification exemption system, maquiladoras must now possess an "Authorized Economic Operator" certification in order to enjoy many of those advantages. Recent adjustments, for instance, have restricted the period of time temporarily imported items may remain in the nation from 36 months to 18 months for everyone. Importers that possess an AEO certification, however, may extend this period to the full 36 months that existed under the previous system.
It should also be highlighted that the elimination of the tiered return procedure would affect the cash flow of many maquiladoras. Under the proposed modifications, holders of VAT certifications will no longer be eligible for an expedited VAT refund. All businesses may now expect to get VAT returns via the normal refund procedure, which can take up to forty days.
Another noteworthy addition to the new tax laws may not necessarily have an effect on maquiladoras, but it will have a significant influence on the digital realm. Digital services are now subject to VAT regulations. This impacts a vast array of digital items, including movies, downloads, games, dating services, and a great deal more. Any business-to-business or business-to-consumer transaction involving the delivery of a digital service is now subject to VAT.
When Do You Register for VAT?
The VAT is a 16% tax that applies in the following general circumstances:
when merchandise is imported.
when merchandise is sold.
when separate services are given.
when items are used.
In addition to other costs involved with producing or shipping products inside the nation, this tax exists. The northern border area is a significant exception to the 16% tax rate since it enjoys a reduced 8% VAT tax rate.
Is There a Registration Threshold?
No, there is no sales registration threshold in Mexico. This implies that you must register your firm for Mexican VAT even if you just make one sale in the country.
What are the VAT Rates?
16 percent general rate
0% is applied to exports of goods and services and other transactions, including the sale of:
Food (with a few exclusions) and patent medicines
Books, newspapers, and magazines
Products for the growth of the primary sector
Gold contains 80 percent of its weight in gold.
Exemptions apply to the sale of specified products and services as well as the temporary use or enjoyment of products.
VAT Tax Exemptions
Certain exemptions from the IVA tax legislation exist. The most notable exception was for temporary imports, which exempted maquiladoras in Mexico and their import partners from paying VAT on materials transferred to Mexico for processing, assembly, or finishing. Despite the fact that items completed by a maquiladora are considered exports, the Mexico VAT on exports is 0%, therefore no VAT is due.
In the past, maquiladoras were immune from any VAT tax, but significant changes to the legislation in 2015 reversed this precedent. Revisions to the statute stipulated that maquiladoras must seek certification from the Mexico Revenue Service. This certification procedure, known as the Excise Tax Certification Program or more generally as the VAT Certification, exempted some corporate organizations from the necessity to pay the VAT.
Recent alterations to Mexico's VAT legislation in January 2020, as well as anticipated alterations in June 2020 in response to the COVID-19 outbreak, have ushered in significant changes that international enterprises must be aware of.
Importers must now get the Authorized Economic Operator (AEO) certification in order to enjoy many of the same advantages that were available to VAT-certified businesses under the 2015 system.
Procedure for Verifying Exemption from Value-Added Tax in Mexico
Changes to Mexico's customs laws in 2015 mandated that products brought into the nation temporarily must also pay the 16% VAT tax levied on all other commodities imported into Mexico.
The VAT was reduced but not completely removed due to the exemption. Instead, payment of the Mexican VAT tax was required upon importation. If an importer had a valid VAT registration, they may claim an instant refund of the VAT they paid. VAT taxes paid on temporarily imported items were later refunded, with repayment times depending on the certification level for VAT. AAA, AA, and A were the respective levels. Organizations with AAA status were given priority in processing VAT refunds and were given more time in which to store temporarily imported products in Mexico, among other advantages.
The Mexican Treasury Service handled all the certifications required by the new VAT law that went into effect in 2015. The criteria for attaining each category of accreditation, from AAA to A, varied. The applicant was able to prove that they followed regulations by fulfilling certain inventory needs and complying with regulations by completing these steps. In addition, the value of re-exported completed goods from maquiladoras had to equal at least 60% of the value of temporarily imported raw materials.
Importers who had obtained AAA VAT registration status had their VAT refunds processed in 10 days. A refund was granted in 20 days, whereas an AA refund was issued in 15 days.
On imports, the 16% VAT is determined based on the free-on-board (FOB) price, or the price the product had when it left the facility from whence it originated, plus any extra freight charges, insurance costs, or duties paid. This further emphasizes that the Mexico IVA is levied in addition to any import tax on Mexican goods.
Importantly, the Mexico VAT tax is an indirect tax that is passed along at each stage of a product's journey from manufacturer to final customer. The ultimate person liable for VAT payment is the final consumer. Each business entity that briefly takes ownership of the items along the road recovers its share of the IVA from the next customer. In this manner, the VAT is transmitted through the supply chain from entity to entity.
When Do You File VAT Returns?
Taxation and collection are merely the beginning of becoming compliant. The second and equally crucial part consists of submitting tax returns and paying any taxes owed.
Foreign companies are required to submit monthly tax returns in Mexico, or in some instances, biweekly or quarterly.
How to Register?
You need a tax ID to register for VAT in Mexico. As long as the standards for VAT registration are met, the high focus on digitization of procedures in Mexico should not present too many complications. Therefore it is very important that the required documents for registration are up to date
The documents required to obtain the registration for VAT include the following:
Directors Personal ID/Passport (Coloured Scan)
Company Registration Certificate and Articles of Association (Coloured Scan)
For Amazon sellers we require a Screenshots of the Amazon Online Shop showing your Company Information (Amazon Mexico site)
Remember that, according to the Tax Authorities, a registered corporation in Mexico needs local legal representation.
While the government attempts to simplify the tax system, it is prudent to collaborate with a reputable firm that can guarantee your company's tax compliance.
At Safari Star, we have a team of local accounting experts that can assist you with company creation and all tax and duty needs, allowing you to concentrate on expanding your business.