What is the VAT in Mexico? The Value Added Tax (VAT) is confusing to foreigners, and Mr. Rodrigo Islas, a Public Accountant based in Monterrey, aims to answer those frequently asked questions regarding the VAT in Mexico. For more information about taxes, do not hesitate to visit our tax guide.
Taxes in Mexo | Income and VAT
In overall there are two main taxes in Mexico: the Income or Revenue Tax (Impuesto sobre la Renta or ISR in Spanish) which affects a company’s revenue and, therefore, it is considered a direct tax.
On the other hand, Mexico has an indirect tax which is the Value Added Tax (Impuesto al Valor Agregado or IVA in Spanish). The VAT affects, for instance, the consumer of services, goods, or property leases.
What is SAT ?
These two taxes are federal taxes and, thus, they are paid directly to the federal government. The relevant agency is the SAT. In other words, the Income Tax and the VAT normally have the same rate throughout the country and regardless of the State where the company is located.
VAT applies to what goods and services in Mexico?
First and foremost, VAT affects any goods and services sold or imported into the country, including the temporal lease of any property regardless if it is an office, house with furniture, warehouse, machinery, vehicles, or any other good.
What is the VAT rate in Mexico?
The general VAT rate is 16%. Nevertheless, VAT may have a 0% rate or be tax-free in a few cases. So, as a general rule, when buying goods or renting a property remember that you normally have to pay an additional 16%. If you are a seller, then remember that you must collect an additional 16% more from your clients, or you will end up absorbing it.
Who pays the VAT and how often it is paid?
The consumer pays the VAT to the seller, who collects the VAT. Then, the seller must pay the VAT to the Tax Authority through a tax declaration or filing. This process is done on a monthly basis.
How do you calculate payable VAT?
First, you take all the collected VAT that your customers paid. Then, you subtract the VAT that you paid when acquiring any goods or services. Let me share an example:
During September, the company “Machinery Mexico” sold $1,000,000.00 + VAT at a 16% VAT rate in goods. In that sense, the collected tax is $160,000.00 ($1,000,000.00 x 16%). As a result, Machinery Mexico‘s bank account has reported an income of $1,160,000.00.
In September, Machinery Mexico also had the following expenses:
Value | VAT 16% | |
Imported Goods | $400,000 | $64,000 |
Office Lease | $50,000 | $8,000 |
Fees | $30,000 | $4,800 |
Electricity | $20,000 | $3,200 |
Total | $500,000 | $80,000 |
So, Machinery Mexico owes $160,000 in VAT, but the company already paid $80,000 in VAT with the expenses.
Machinery Mexico must now subtract $80,000 (paid VAT) from $160,000 (collected VAT). As a result, Machinery Mexico has a payable VAT that amounts to $80,000, which needs to be paid to the Tax Authority next month, i.e. October.
What are electronic invoices ?
Income and expenses need to be backed up by an official Electronic Invoice, among other documentation depending on the acquired goods. For instance, a paper receipt does not meet Mexican Tax requirements.
For example, imported goods require an Electronic Invoice as well as an Import Notice (called Pedimento). The lease of an office requires a lease contract as well as the Electronic Invoice, and so on.
What happens if my client has not paid ?
You did not collect the tax and, therefore, it should not be considered in the monthly VAT declaration. It also goes the other way around, if you bought something but have not paid, then you are not allowed to subtract the VAT until paying your supplier.
What is a Favorable VAT in Mexico?
A favorable VAT balance occurs when you have paid more VAT than the VAT you collected. This happens often with companies that mainly export goods or when a company is recently created.
Using the previous example, if your company exported $1,000,000.00 instead of selling in Mexico, then the VAT rate is 0%, which means you did not collect any VAT and, therefore, instead of paying $80,000 you have a favorable $80,000.
What can I do with a favorable VAT in Mexico?
You have two options: you can leave it as a favorable tax and pay future payable VAT taxes with it or you can ask for a tax refund, also known as a tax return. A tax refund is a long tedious and bureaucratic procedure and sometimes it is just not worth it because the Mexican Tax Authority is infamous for requiring exaggerated documentation that you might not possess, losing time and resources in the process. It is important that your tax consultant gives you constant advice regarding these documents so you can have them available when required.
When does the 0% VAT rate apply?
Mainly when the company exports goods. There are some other goods sold nationally that also have this advantage, for example:
- Non industrialized plants and animals (except pets). Wood is considered in here.
- Patented drugs and products destined for human and animal consumption. (Except soft drinks or any other drink, smoked salmon, caviar, chewing gum, and pet food).
- Ice and water.
- Fertilizers, pesticides, herbicides, and fungicides when they are destined for agriculture and cattle raising purposes.
- Greenhouses and their equipment.
- Books, newspapers, and magazines when they are edited by yourself.
- Products destined for feminine hygiene.
Tax-free services and goods.
Tax-free services and goods are more complex. These are basically products and services that do not generate VAT at all. Sounds good, right? It is not as good as a 0% tax. The main difference is that you are relieved of the burden of collecting VAT, but you cannot have a favorable VAT. In other words, paid VAT adds directly to your expense itself since the advantage goes directly to the consumer.
Examples of tax-free goods:
- Construction but when it is destined only for housing.
- Books, newspapers, and magazines that are not edited by yourself.
Examples of tax-free services
- Paid banking fees that are derived from mortgages or pensions.
- Professional medical services.
- Public transportation.
- Marine goods transportation by foreigners without a physical presence in Mexico.