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José Rodolfo Pérez Arguello

Sanchez Devanny Eseverri, Mexico City

jperez@sanchezdevanny.com

 

Background

In June 2020, the obligation to collect and pay Value Added Tax (VAT) on digital services provided by foreign digital platforms to users in Mexico entered into force. To comply with such obligations, digital platforms are obligated to register in the Federal Taxpayers’ Registry.[1] This burden was imposed due to the lack of compliance by final consumers[2](in the B2C context), and was designed based on the reports drafted by the Organisation for Economic Cooperation and Development (OECD).[3]

However, since these obligations entered into force, only 35 platforms have registered with the Mexican Taxpayers’ Registry. It is important to mention that, even though there are penalties for not complying with these obligations, the Mexican Tax Administration Service (SAT) has limited authority to impose them effectively.

In this regard, the executive branch issued the tax bill for 2021, which proposes granting the SAT the ability to block the access of Mexican users to non-compliant foreign digital platforms. For such purposes, foreign digital platforms will be considered non-compliant in the following scenarios:[4]

• When they fail to register with the Federal Taxpayers' Registry;

• When they do not collect and pay VAT for three months;

• When they do not withhold VAT for three months; or

• When they do not file quarterly informative tax returns for two periods.

Additionally, the burden to withhold and pay VAT on digital services shifts to intermediary digital platforms (digital distribution platforms) that act as distributors for other digital services.[5] This burden was imposed to facilitate the VAT collection of small and micro-businesses.[6]

Practical problems

From a practical standpoint, blocking access to Mexican users and the withholding obligation for digital distribution platforms could have adverse effects if both are imposed jointly. The latter is the case considering that if digital platforms that provide services directly and through digital distribution platforms fail to register with the Federal Taxpayers’ Registry for the services provided directly and such are blocked, final consumers that paid for such services through digital distribution platforms will not be able to access these platforms. This would be the case even if the VAT for such services was duly paid.

Additionally, it seems that blocking access to Mexican users would not solve the VAT collection of small and micro-businesses, which would have a very high compliance burden compared with the income that could be obtained from Mexican users. Rather, it would be a measure incompatible with the principle of VAT neutrality, and would lead to a disproportionate compliance cost for these businesses.[7] This is because the tax bill for 2021 only considers digital services through digital distribution platforms and is silent on other small and micro-businesses that provide their services directly.

Lastly, this tax bill could lead to disproportionate sanctions and undesired consequences. Regarding the latter, this is because if a digital distribution platform fails to withhold and pay VAT on digital services, the services provided by such digital distribution platforms could be blocked by the SAT. In addition, the SAT could find that withholding was omitted, and digital distribution platforms could be considered as fully liable for such VAT payment.

Suggestions

It was necessary to impose certain new obligations; however, such regulation must be amended to provide an effective collection mechanism that works for the SAT and for businesses. These regimes were drafted under the perspective of only some business models, as opposed to the recommendations in the reports drafted by the OECD. Instead of blocking access to Mexican users, implementing operational improvements might be a friendlier and easier approach.

It is important to mention that, even though the deferred entry into force rules provided a six-month period to comply with such regulation, some additional Treasury rules and guidelines were issued on 12 May 2020 and 15 July 2020 respectively, giving digital platforms a very short period to adjust their internal procedures to comply with these obligations.

To that end, the following measures could be considered by the SAT:

• provide technical assistance to businesses;

• involve businesses in the implementation processes;

• modify the registration process for a full electronic process;

• provide more timely information to businesses on technical specifications to adapt their IT systems;

• adopt a de minimis threshold for small and micro-businesses; and

• make available online all information in languages of Mexico's major trading partners (Chinese, English, German and Portuguese).[8]

A lesson learned from digital businesses is that tax administrations must know and understand their customers, in this case, the digital platforms. If the tax administrations refuse to involve businesses before imposing tax policies, this will definitely lead to a disproportionate or inappropriate compliance cost for business or an important loss in revenue for the governments. Therefore, it would be advisable to involve digital platforms to understand their needs and the scheme that would work for them to comply with VAT obligations.

Conclusions

The Mexican tax bill for 2021 is an opportunity to improve these new regimes, but failure to address these matters will only lead to less revenue for the Mexican government, either by having an ineffective VAT collection mechanism or by inhibiting cross-border trade.

For such purposes, it is important that tax administrations provide information in a timely manner and consider the different business models before imposing disproportionate sanctions. The latter allows such digital platforms to incorporate such regulation into their systems and to automate compliance procedures with sufficient advance notice.

From a Mexican standpoint, before imposing disproportionate sanctions, it would be advisable for the SAT to involve businesses in the implementation processes, include a de minimis rule, modify the registration process to enable a fully electronic process, and make available online all information in languages with major trading partners, among other measures.

Lastly, the digital economy has been essential in tackling the possible financial crisis from Covid-19. Therefore, it is strongly suggested that the tax policies are correctly imposed to prevent any inhibition of economic growth.

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