Are digital products taxable in Mexico?

Mexico has a value-added tax (VAT) system that applies to the sale of goods and services, including digital products sold by nonresident businesses. As an important source of tax revenue, Mexico's VAT rules contain requirements that nonresident companies must follow when selling to customers located in the country.

The standard VAT rate in Mexico is 16% and it applies to business-to-business (B2B) and business-to-consumer (B2C) transactions. There is no registration threshold, so nonresident companies must register for VAT as soon as they start selling digital products to customers in Mexico, regardless of sales volume. Upon registration, nonresident companies are required to collect and remit Mexican VAT on all taxable sales made to customers in the country. Failure to register for VAT or meet the compliance obligations can result in penalties and interest charges imposed by the Mexican tax authorities.

Determining if your product is taxable in Mexico

To determine whether VAT applies to the sale of your digital product or service, there are three main factors to consider:

1. Customer's location: You need to identify the location of your customer, as tax regulations vary by country. Common pieces of evidence for customer location determination include billing address, customer account address, and credit card country.
2. Taxability of your product: Your digital product or service needs to qualify as a digital good or service for VAT purposes. This typically means that it is delivered electronically over the Internet or an electronic network, is automated, relies on technology, and is not a physical good.
3. Customer’s tax registration status: If you sell to other businesses located in Mexico, you should collect and validate their tax registration numbers (tax IDs).

Getting VAT compliant in Mexico

To ensure compliance with VAT regulations, here are the general steps that a nonresident company selling software or other digital products should take:

1. Collect customer addresses and tax IDs: Even if you are not registered for VAT, collecting customer tax IDs can save you expenses in the future. This step can be taken right away for customers outside the US.
2. Understand your VAT obligations: Determine where you have VAT obligations by cross-checking customer locations and the product taxability and registration thresholds in each country. Each country has its own registration threshold, which triggers the requirement to register.
3. Monitor VAT exposure and register in exposed jurisdictions: If your sales reach the registration threshold in Mexico, you are required to register for tax purposes. Each country has its own processes for registration.
4. Apply VAT where necessary: Identify transactions that require tax collection and apply the correct rates to those invoices.
5. File VAT returns, make payments, and keep records: Periodically file tax returns with the jurisdictions in which you sell, reporting the tax collected and remitted. Be prepared for foreign exchange conversions and cross-border payments in various currencies. Many countries also have a legal requirement to keep tax records for a certain period of time.

Risks of delaying compliance

Delaying tax compliance can expose your business to various risks:

• Audits: As tax legislation for digital goods is relatively new, audits for international sellers are increasing. Facing an audit for which you are not prepared can result in fees and penalties that can significantly impact your business.
• Paying out of pocket: Regardless of whether your customers pay tax, you are responsible for the tax on the sales you make. If you are audited or register late, you may have to pay the tax out of pocket, along with penalties and fees.
• Reputational risk: When expanding internationally, your compliance with tax rules may be questioned by potential business partners or customers. Failure to comply with tax regulations can harm your reputation and even lead to blocked business opportunities.

To learn more about tax rules and regulations for nonresident businesses around the world, explore Anrok’s VAT index for digital products.