While many Latin American countries have begun to implement taxation on digital services, Mexico is currently leading the charge and has established a strong track record that other countries are hoping to match. Chile and Ecuador have both recently passed similar legislation with hopes of finding similar success and attracting more global fintech brands.
The digitization of trading, financing and lending did not fit the mold set forth by the traditional financial systems in Mexico. Financial Technology companies and products (Fintech) saw this opportunity and filled the void, giving startups better access to financing.
With the enactment of the Integral Fintech Law (Ley Integral Fintech), Mexico’s legislature has specifically outlined the virtual trading activities they plan to regulate. When businesses have a clear regulatory environment, the assessment of risks, cost of compliance and perspective of growth can be better measured. By providing certainty to the players in the fintech field, Mexico is attracting new businesses.
Therefore, Mexico is quickly becoming a fintech hotspot. This could be traced back to Mexico being the second largest economy in Latin America and having the second largest population with access to the internet in the region.
The Integral Fintech Law of Mexico was put in place to regulate organizations who supply financial services related to electronic payments, crowdfunding, cryptocurrencies, virtual assets and crowdsourcing. Organizations such as these are now being treated similarly to traditional financial institutions. While foreign and national currency trades are seen as a more traditional equivalent to Fintechs, these actions are currently untaxed by indirect taxes such as VAT. That treatment is not extended to the trade of cryptocurrencies.
Should consumers of Fintech products be worried? They should definitely keep an eye on the VAT repercussions of their transactions. In spite of the major developments introduced by the Fintech law, transactions carried out by the sector are not treated the same as their traditional equivalents. For instance, trading cryptocurrencies can be seen as subject to VAT in Mexico, which may lead to an increase in the cost of financing. Eventually, this may result in a negative outcome for the consumers of these financial products. Major regulatory updates are expected before the end of 2021, so consumers should be paying close attention to all regulatory developments related to Ley Integral Fintech.
It is important to remember that Fintech law focuses on three aspects of the larger industry: cryptocurrencies, crowdfunding and payment markets. Income tax and VAT apply to all three areas of industry, but the application of the VAT for instance is triggered in different ways depending on the transactions carried out by the IFT or the currency traded.
The National Banking and Securities Commission approved the first license in February of this year. In the next few months, organizations that applied for authorization in 2019 will be receiving the government’s approval to operate as an FTI. We will continue to provide up-to-date information as it is made available.
Speak with a VAT expert today to see what you can be doing to keep up with the latest tax changes and remain compliant.