Economy

Mexico will start charging two taxes on foreign digital services from June

Netflix and Sony have already reacted and will raise prices. Uber is also going to pass along the cost, in the form of higher fees on drivers

VAT and ISR are already applied to local companies but the new law determines that these taxes must be taken also for international digital services providers. Photo: Shutterstock
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  • VAT and ISR are already applied to local companies, but now foreign service providers will also be charged;
  • Mexican Treasury Secretary said the new law is aimed at facilitating compliance with existing tax payments.

The Mexican government has officially announced the implementation of two new taxes on non-resident digital services providers to take effect on June 1st: a Value-Added Tax (“VAT”) on the services provided, and the Mexican Income Tax (ISR) over profits earned from the operation in the country. Big platforms such as Netflix, Uber, and PlayStation already said that it will affect their prices or operations in the country.

The changes to the VAT Law were approved and enacted last December. The law expands the scope of both VAT and ISR, which are already applied to local companies, for international digital services providers, and establishes charging conditions for foreign digital platforms such as Airbnb, Netflix, Spotify, Uber, DiDi, among others.

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What do the taxes establish?

The VAT is a levy that usually simplifies tax systems. In Latin America, the idea of VAT arose among Mercosur countries to harmonize tax rules in trade transactions between them. Currently, Argentina, Chile and Uruguay use the tax. Brazil is already discussing a unifying tax but didn’t implement it yet.

In Mexico, the VAT rate is 16% applied on the price of the service provided, in local currency. By law, digital service platforms must apply this rate on services provided each month and must detail the amount of tax collection in their payment order. As for the ISR, rates depend on the type of operation that generated taxable income for the non-resident entity:

  • 2% to 8% for digital platforms engaged in transportation/delivery services;
  • 2% to 10% for digital platforms engaged in hosting/accommodation services;
  • 0.4% to 5.4% for digital platforms engaged in selling goods and providing other services.

According to the new Mexican law, VAT will be collected from a variety of foreign digital services, including downloads or access to images, films, text, information, video, audio, music, games, in addition to other multimedia content, online news, traffic information, weather forecasts and statistics, marketplaces, online clubs and dating pages, distance learning, tests or exercises.

Impact on foreigner enterprises

Starting from June, Netflix will raise prices charged from consumers by 16%, as the streaming service announced on May 7th, according to Forbes Mexico. PlayStation, by Sony, will also increase prices in 16% due to the new VAT, reported Unocero.

On the other hand, Uber said that it will not pass the increasing costs to users, however, drivers will receive less from the firm. “Driving partners will be subject to the payment of VAT on the service fee, with a variable rate of 0.16% and up to 6.8% on the fare of each trip made through the Uber app,” the company told El Financiero. Amazon Prime Video also said it won’t change its prices to customers, according to LEVELUP.

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The e-commerce giant MercadoLibre, in its turn, expressed worries about the new taxes saying that they will put pressure on the solvency of entrepreneurs and sellers. “Many entrepreneurs started businesses the pandemic because they cannot sell at their physical points, and it is this segment that will be affected because in the midst of an economic crisis people are looking for alternatives to sell and we are going to see a certain barrier to entry on the platform,” said Alehira Orozco, director of public policy for MercadoLibre, reported El Financiero. However, the marketplace said it won’t increase prices to consumers due to the new VAT.

Mexican Treasury Secretary Arturo Herrera told Forbes last Friday that tax measures for the digital economy do not represent new taxes or fee increases. Such measures, he said, are aimed at facilitating compliance with existing tax payments, such as VAT, operationally.