VAT initiative on digital services rendered by non-residents without a permanent establishment in Me
Dear customers and friends,
A bill was published yesterday in the House of Representatives Parliamentary Gazette with an initiative to reform and add certain provisions of the Value Added Tax Law and Federal Tax Code seeking to tax the rendering of services through digital platforms by non-residents without a permanent establishment in Mexico. This was introduced by Congressman Alfonso Ramirez Cuellar of the Morena Parliamentary Group in collaboration with the ombudsman, the Taxpayers’ Defense Office (PRODECON, for its Spanish acronym).
In general terms, the reforms and additions to these laws seek to cause non-residents without a permanent establishment that render services through digital platforms to Mexican users to be formal taxpayers for VAT purposes and that the rendering of such services is the activity subject to the tax. The initiative establishes a withholding by the Mexican users as the payment mechanism, although it subsequently indicates that the financial institutions, as well as the individuals or corporations through which the advance payment is made to receive the services will substitute the users in such withholding. As an alternative, it also establishes the option for the non-residents without a permanent establishment in the country to pay the tax directly.
The initiative also includes a reform to Article 26 of the Federal Tax Code to establish that not only withholding agents are jointly liable but also those that substitute them and specifically, mentions financial institutions as well as individuals or corporations through which an advance payment is made for the rendering of services through a digital interface, as well as those that substitute the direct liable party in the obligation to withhold at the moment in which the consideration is effectively paid when such withholding is not made at the moment the consideration is effectively paid.
According to the legislative intent, this is based on the problematic identified by the OECD, as well as all of the work related to Action 1 of its Base Erosion and Profit Shifting Plan (BEPS) and is justified on the fact that service providers through digital platforms are economic agents that grow at a speed unseen by more traditional business models and this is due to them greatly benefitting from the world-wide market, including Mexico; this way generating a particular case of unfair competition. It also states that this reform will help in the re-distribution of wealth.
In our opinion this is not entirely accurate since the VAT is an indirect tax on consumption that affects the price of the services and thus, ends up being paid by the final consumer, without representing an economical burden on the providers. The legislative intent even specifically mentions that with this reform, the intention is for non-residents that are currently not subject to tax in Mexico, pay the tax, without mentioning that said tax, due to its nature, will be shifted to the users and therefore, they will be the ones to really pay it.
Another issue that stands out is that the initiative does not mention that the economic effect of the VAT that is sought is already derived from the current provisions since they tax the enjoyment in Mexico of services provided outside Mexico by non-residents without a permanent establishment as the import of services and such users should already be paying such tax; however, the collection has not been possible due to how pulverized the tax is in all of the individual users. As a result, the only real effect resulting from the bill introduced would be the recharacterization of the import of services to a provision of services, modifying the formal object and subject of the tax, but in the end, coming back to the same effect: the increase in the prices for the end consumers.
Note that in our view, the modifications and additions proposed also have certain technical deficiencies since, on the one hand, they are very broad and their design seems to not contemplate all of the different variations that may exist in the digital market, while on the other, they remit to general rules for certain issues, leaving taxpayers in a situation of legal uncertainty. Some examples of this may be:
The services object of the tax are not described, rather a general reference is made to could reach any service rendered through a digital platform. Additionally, the definition of digital platform itself is very vague, which could create uncertainty as to its scope of application.
The enjoyment in Mexico of the services is not clearly defined.
It is established that, in lieu of the Mexican users, the withholding will be made by the financial institutions or the individuals or corporations through which the advance payment is made to receive the services, without specifying any mechanic to do so. Likewise, given the different models and situations that could exist, we consider that there may be uncertainty as to the indicated individuals or corporations by not clearly defining the subject, assumption or what would qualify as an advance payment. We believe that it also lacks clarity as to the release of the withholding obligation for the users and on the cases in which the joint liability will apply.
For purposes of the withholding obligation, it establishes that the base will be the total amount paid by the user, without distinguishing that those payments, depending on the variation of the model or service, may eventually also include the value of goods transferred already subject to VAT.
On the other hand, it is established that the tax will be stated by the non-resident provider in the case of opting to pay the VAT directly, but there are no rules that may provide legal certainty on the mechanic of the determination of said base and with regards to the procedure that they shall follow to make the payment directly (i.e. registration with a Tax ID and its implications or any other).
There is no distinction for the case at hand with regards to the general obligation to shift triggered VAT, that is, it does not establish any specific way in which the non-residents will shift the tax now that they trigger it.
There are no rules with regards to the right to credit taxes shifted to the non-resident, which would be relevant in cases where they have incurred expenses that are subject to VAT potentially resulting in an additional cost.
Notwithstanding the fact that there have already been several initiatives seeking to address the digital economy issue, we believe that the involvement of the PRODECON, as well as the local media attention, could be indicative that this initiative would be seriously considered in the legislative process, and thus, it will be important to be attentive to its progress or evolution.
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