Late last year, Mexico made a few changes to its tax laws to combat profit shifting arrangements. It focuses on avoidance issues and digital purchases by individuals. There weren't any changes made to the rates but rather a shift in how the laws are implemented. 

It may sound complicated, but we've broken down the key points you should know as a business owner.

Tax Avoidance

In the past, this has been a serious issue, especially when it comes to business tax avoidance. If your company information isn't up to date, we suggest you get it sorted by consulting local taxation experts. They'll advise you of what your business should do to be compliant and not risk getting penalties for tax avoidance.  

The Mexican government has implemented the following measures to try to stop this illegal practice:

  • Authorities now have the power to reclassify any acts that a business performs that isn't beneficial to the company economically and is only used to provide a tax benefit. 

  • Any person in charge of a legal entity's management will be liable for any taxes levied or not withheld by the company during their time in charge. It includes shareholders or partners, limited to the amount of their interests in the business. 

  • A new obligation is placed on companies to disclose tax structures and planning schemes. It's to help authorities get information on identified risk areas so that they know who's advising on these schemes and who is on the receiving side of such advice. 

Digital Trade

There aren't any additional tax rates in the new legislation, but there are new measures to facilitate compliance. The definition of VAT has been expanded to include digital services performed in Mexico through a digital platform. Currently, these are subject to a 16% VAT rate. 

In addition, foreign digital providers now have to register in Mexico. They will fall under the category of withholding agents and need to comply with the government's digital invoicing laws. 

These new value-added tax rules apply to local and international entities and come into effect on 1st June 2020. There are no exceptions, even for small sellers. A single download to a Mexican client is now within the scope, regardless of the transaction amount.

Permanent Establishment Amendments

The definition of what is a permanent establishment (PE) has been expanded. The most notable changes are on activities carried out by non-residents and prevention of the fragmenting of a business into minor parts to avoid having PE status. Some of the details listed in the amendments are as follows:

  • Commissionaire arrangements - A non-Mexican resident, working through a person in Mexico, other than an independent agent will now be seen to have a PE in the country. 

  • Closely related party presumption - If a person is acting exclusively or almost exclusively on behalf of non-residents, it's presumed they aren't an independent agent.

  • Anti-fragmentation rule - To prevent avoidance by foreigners, the law is imposed on the fragmentation of activities that, on their own, could be seen as having an auxiliary nature. However, when considered in its entirety, they aren't preparatory and would hence be a PE and subject to tax.

Final Thoughts

Mexico is a country that's trying hard to boost an economy that has, for many years, been struggling. One of the key goals is to combat avoidance by businesses that would increase revenue. 

The government has given authorities more freedom to single out transactions for tax benefits and reclassify these to be taxable. It's enforcing the registration of digital service providers and taxing all sales regardless of the value. 

Finally, it expanded its definition of a PE to patch loopholes used by non-Mexican residents to avoid tax. Hopefully, this new legislation will clamp down on non-compliance and bring much-needed income to stimulate economic growth.