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The Mexican Value Added Tax (IVA) System: A General Overview (Part I)

Ramón Frias
August 31, 2016

Overview

The main indirect tax of Mexico is the Value Added Tax (locally known as IVA), which generally applies to all imports, supplies of goods, and the provision of services by a taxable person unless specifically exempted by a particular law. The tax is imposed by the federal government of Mexico and ordinarily applies on each level of the commercialisation chain. This tax has been applied in Mexico since 1980.

Click here to read "Why the New Process for Cancelling E-Invoices in Mexico Matters"

Tax Rate

Mexico applies a single standard rate of 16% across the country. However, there is also a 0% rate applicable to exports and the local supply of certain goods and services. Sales of ice, fresh water, machinery and raw materials for manufacturers, books, newspapers, magazines by their editors, medicines, as well as the supply of services to eligible manufacturers, are subject to the 0% rate.

It is worth mentioning that until December 2013, Mexico applied a reduced rate of 11% in Mexican Border states of Baja California Norte, Baja California Sur, Quintana Roo, the municipalities of Caborca and Cananea, and in the bordering regions of the Colorado River in the state of Sonora. This was an effort largely to attract businesses to these areas and because the sales tax in the U.S. border states was half of the IVA in Mexico. These regions were commonly referred as the “maquiladora zones.”

That 11% reduced rate was revoked starting January 1, 2014, and substituted with a broader regime of incentives aimed at the manufacturing companies located in that region.

Taxable Base and Exemptions

As mentioned before, the Mexican IVA applies to all goods and services unless specifically exempted by the law. There is a wide variety of goods and services exempt from the tax, including:

  • Sales of houses except those to be used for commercial purposes
  • Retail sales of books, magazines and newspapers
  • Used goods sold by non-taxpayers
  • Currencies
  • Financial instruments
  • Gold at least 99% pure
  • Machinery and equipment used on agriculture
  • Certain goods between manufacturers subject to special export oriented regimes
  • Certain commissions related with mortgage loans and the administration of retirement funds
  • Free services provided to members of qualifying nonprofit organisations
  • Educational services provided by public and private chartered entities
  • Public transportation provided in urban or suburban zones
  • Maritime transportation of goods provided by entities not resident in Mexico
  • Insurance services
  • Qualifying financial services
  • Certain public shows
  • Professional medical services
  • Copyrights

Credit-Debit Mechanism

The Mexican IVA doesn’t differ much from IVA in other countries in that it allows the taxpayer to deduct the IVA that has been paid to the taxpayer’s suppliers or IVA that the taxpayer has paid himself at the time of importing goods that were subject to the tax. In addition to the IVA paid on imports and local purchases, the taxpayer also has the right to credit the IVA withheld by clients that are required to apply the reverse charge system that we are going to examine later.

In those instances where the taxpayer cannot use all the credit that has been accumulated on its purchases, the remaining amount can be carried over to later periods or eventually even to request a reimbursement from the government.

Taxable Event and Periodic Payment

One of the unique characteristics of the Mexican IVA is that when determining the taxable event, the law requires the taxpayer to use the cash accounting method rather than the accrual accounting method. What this basically means is that IVA on a sale is considered due when the seller is effectively paid, rather than when the invoice has been issued, the service provided or the good has been supplied. If the seller does not get paid, no tax liability exists either.

In general, the Mexican IVA should be paid on a monthly basis, no later than the 17th day of the month after the taxable event occurred.

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Author

Ramón Frias

Ramon is a Tax Counsel on the Regulatory Analysis team at Sovos. He is licensed to practice law in the Dominican Republic and is a member of the Dominican Bar Association. He has a Certificate Degree from Harvard University as well as a J.D. from the Universidad Autonoma de Santo Domingo. Ramon has written a number of essays about tax administration and has won the first prize in the international essays contest sponsored by the Inter American Center of Tax Administrations (CIAT). Prior to joining Sovos, Ramon worked for more than 10 years in the Department of Revenue of the Dominican Republic where he served as Deputy Director. He is proficient in French and Spanish.
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