Tequila, Tacos & Taxes: An Overview of Mexico’s Tax & E-Invoicing System - The Transcript
Our panellist was:
- Jesús Ramírez, Tax Consultant, Mexico
Jesús Ramírez: Hello everyone. My name is Jesús Ramírez, and I'm an accountant with a specialization in taxation in Mexico and with another specialization in corporate taxes. Basically, I have worked in some accounting and tax firms in Mexico. For some period, as well, I was working in a broadcasting media company and I had the opportunity to collaborate in Switzerland, Zurich, working for a Swiss company for a period, which allowed me to take a look at the perspectives of other countries on Mexican taxation and the Mexican taxpayer's on taxation in other countries. Currently, I am working for a Mexican company in the hospitality industry. They have hotels in America, Latin America and Mexico. And I think that's my introduction.
Question 1: Give us an introduction to the Mexican tax system. What does it comprise of?
Jesús Ramírez: I think the first thing that you need to know about the Mexican tax system is that it's a worldwide tax system. That's mean that all the income that you will receive from whatever part of the country, whatever part of the world, will be taken into account for paying taxes in Mexico. It doesn't matter if you are working for royalties, doesn't matter if you're receiving income from another country, you will pay taxes in Mexico. Except if you are taking advantage of a double taxation treaty entered into between Mexico and another country, there are some exceptions or reduced tax rates. But, in general, you will pay taxes on all your income in Mexico.
What does income means? Everything you do, everything that increases your bank accounts, your patrimony, everything will pay taxes in Mexico that is income. And, as in the model of the country, you can take advantage of the expenses. The expenses, you can reduce from your incomes in order to get a tax profit base that will be applied to the tax rate in Mexico. So you will have some limits to those deductions.
Mateo Jarrin: What are some of the limits, just to get a general idea?
Jesús Ramírez: Okay, I think the first limit here is about a salary. In general, the salary is a tax deduction. There is another concept that we call social provisions. For example, that you can give to your employee a grocery card in order to go to a supermarket, you know, so that can get a deduction of 100 per cent. So there's a 53 per cent, when exemptions. Okay, so that's the most important thing because the main expenses of the companies are the salaries of the employees. So, sometimes, your effective tax rate is not 30 per cent, it's more than that.
Question 2: Can you give us an overall perspective of corporate tax rates in Mexico and how they work?
Jesús Ramírez: Sure, the corporate tax in general in the country is 30 per cent for legal entities and 35 per cent for individuals. For individuals, it depends on how much you are receiving for income and that will be increasing the tax rate. But, starting in 2019, our new President decided to have a new tax rate in the north of the country, just on the border with the USA. So we have a special tax rate there of 20 per cent for income tax and 8 per cent for VAT. Generally, in the rest of the country it's 16 per cent, so half. So there are many requirements, it's no easy to get that benefit. But, if you're a new company and want to establish in Mexico, you need to consider that as a point, if you want.
Mateo Jarrin: When we're talking about the border with the United States, this means only the states that are along the border basically?
Jesús Ramírez: Not a whole state, it's separated by municipalities, specific zones next to the border. That works for some Mexican companies that have some subsidiaries there, and I know some companies that are taking advantage of this opportunity to pay less taxes.
Mateo Jarrin: Are these the maquiladoras that they call or is that a whole other concept?
Jesús Ramírez: The maquiladoras can use that but they have to be new companies, have new assets, new things, there are many requirements. And, actually, a huge requirement that everybody is saying, "No, no, I don't want to use is," and this is another matter, but there are blacklists of companies in Mexico that don't work in reality, they just issue invoices in order to get a tax deduction for another company, etc. So if you are in that blacklist, and you cooperate with huge companies on the blacklist, you cannot receive these benefits.
Mateo Jarrin: It's basically a fake company. It's a paper company.
Question 3: What is required to register a company in Mexico? Or what's the procedure?
Jesús Ramírez: As the main requirement for any company, a recommendation of the OECD, if you are working here, you will register a permanent establishment, that's the first thing that you need to register here because the Mexican tax authorities are strict with the permanent establishment. They review and are really picky with all the details and are more difficult than the OECD recommendations.
And actually, the Parliament is discussing the new tax reform about the digital permanent establishment, so it could be dangerous for some companies—you know, Netflix, Facebook that don't have a permanent establishment in Mexico. But the matter that I wanted to talk with you as well is regarding the Mexican company that's doing payments to foreign companies. Obviously, if the expenses are really important and necessary for your business, like a hospitality company like Expedia or booking companies, etc., if you want to get a tax deduction for that, you need to get an invoice. But another country doesn't have an electronic invoice, so what's happening? You can receive just a paper or any form of PDF but should have some requirements. For example, the name, the tax ID number and the address of the foreign company and the same for the Mexican company—the name, the tax ID, which we call RFC, and the address of the company and include the description of the service or the goods. That's the main requirement in order to get a tax deduction of a foreign expense. It's really difficult because, for example, in the USA, most of the people say, "Why do you need that, you are doing the expense?" But nobody understands that it's a rule in Mexico.
Mateo Jarrin: You also mentioned that it might require the certificate of tax residence issued by a tax authority of the other country. Do you want to elaborate on that?
Jesús Ramírez: Yes, it's really important, it's the second huge requirement in Mexico because if you want to take advantage of our double tax treaty, you need to ask the other company for their certificate of tax residence. For example, in the USA, it's the form 6166. In Spain, it's an electronic certificate that you can get really easily. But there are many countries that issue this by the tax authorities but they don't understand why you need that. If you want to take advantage of the benefits of the treaty, you need to get it. There's no other way.
Mateo Jarrin: Okay, this is information that is required by the Mexican government for you to benefit from this.
Question 4: Give us an overall summary of where Mexico stands with BEPS and what stages it is with many of the different action points. Transfer pricing, country-by-country reporting, the multilateral instrument, etc.
Jesús Ramírez: For sure, the Mexican tax authority has adopted some recommendations of the OECD taken from BEPS. The main are the rules for transfer pricing. We are really adopting in our domestic law the three declarations: country-by-country reporting; the master file, and; the local file.
Basically, the country-by-country reporting is a report of all the structures in the world of your group. If you have a maquiladora in Chihuahua, you have your brands in China, you need to show that in that declaration. In the second, in the Master file, it's literally a report in the Mexican market value, it's the same structure that needs to be shown in that file. For the Local file, you need to be specific of all the transactions that you have in the company. So that's one return per year and the last day you can submit it is the 31 of December to inform about the previous year. I mean, in 2019, we need to report on 2018. There are risks if you do not file that information—you can get a fine, you can have blocked your certificate to issue invoices so you cannot operate. You need to fulfil this perfectly and within time.
I think the worse is that they block or cancel your certificate that works to issue invoices electronically. So if you are sending 1000 invoices per day, as you get blocked, you cannot work.
Mateo Jarrin: What about the multilateral instrument? I know you have a note here that Mexican Parliament is discussing the MLI.
Jesús Ramírez: Currently, the Mexican Parliament is discussing the MLI and you know it's from the Action 15 of BEPS. We're hearing from advisors of the Big Four and the main things that they are discussing are three things. The first is the digital permanent establishment, the company doesn't pay taxes in Mexico but the source of the income is in Mexico. The second is about dividends. There are some treaties that you can get a lower tax rate for the dividends but, as you know, if you want to get that benefit of the tax rate, you need to be a shareholder of the stocks for one year at least, that's the OECD's recommendation. We do not have that in Mexican law or any treaty, so we are adopting that, and the same for capital gains. When you are selling some stocks for strategy, you need to have the stocks for one year at least if you want to get the benefits of the treaty at tax rate zero or less than the domestic law. That's what they are discussing right now, but we don't know what's happening in these months in order to start the regulation in 2020.
Mateo Jarrin: What are the arguments on each side? Are there arguments on each side or just basically the details that they're trying to determine, I guess?
Jesús Ramírez: There are many tax strategies that companies use to avoid taxation around the world. Many, many you cannot imagine. So they want to avoid those strategies.
Mateo Jarrin: Perfect. Anything else you want to add before we move on to e-invoicing, anything else that you'd like to add in terms of overall the Mexican tax system and where it stands right now?
Jesús Ramírez: I think that's the general perspective. We can talk hours and hours about the details. But, in general, the Mexican perspective is that it's a worldwide tax system, very similar to the recommendations of the OECD, we cannot avoid taxes, etc.
Question 5: Do you want to give us a background as to when Mexico's e-invoicing system came online? And then I know you have a chart behind you that you want to kind of walk us through, but just give us give us like a quick summary as to why it started and when it started.
Jesús Ramírez: This started many years ago. There was planning and tax reform but in 2012 there was progress with the application of that new digital rule in Mexico. So the first thing that I think when you come to Mexico and you want to open a company, you need to register before the Mexican tax authority. You need to get a tax ID but immediately after the tax ID, you need to get an electronic signature. What is an electronic signature? You need to get your iris scanned, fingerprints, photos of all your face for the file, and that's the way that they are sure who you are. And then when you get your electronic signature, you'll have access to your electronic tax mailbox.
You can do everything you want to do, talking about taxation, via this website. You will open with some password with your tax ID in the website of Mexican tax authority, SAT.
So here you can do many things. The first thing is you will be audited electronically; you will receive a notification there. So you need to send all the information that they are requesting in your mailbox, you need to attach that information, all the papers. But everything is digital now so you don't need to scan almost anything. The same thing, as I told you, their request for information here, if you have doubts about how to calculate your income tax, if they have any kind of doubts, they will ask for that. You'll receive an email in your ordinary email that you have a new mail in the inbox of the page of the Mexican tax authority account and you need to review it.
You will fill your tax return via this website, you don't need to go to the offices of the Mexican tax authority. Everything is for you electronically in the tax mailbox.
They receive, as well, administrative appeals for revocations. The lawyers need the password or the electronic signature of the company in order to send information for that mailbox. As well as you can do any kind of diligences there, if you want to clarify something or you have something wrong, you can clarify it there.
Electronic accounting, now some years ago you needed to do it with a software, write some codes of every accounts with a catalogue that they have in the kind of law, and you need to send your electronic accounting via the email inbox.
Then you want to request for some tax refunds, as well you'll ask for that via the electronic email inbox. There's an ombudsman that help the taxpayers to solve disagreements with the Mexican tax authorities, you can contact them via the mailbox.
Then actually you can consult all your invoices that you receive and that you issued many years ago since it started in 2012-2013, and you can consult them and see them listed them there. You can get an Excel spreadsheet and a detail of every invoice in 10 seconds, really fast.
Question 6: For a small company, who might not have the resources a large multinational or whatnot, how easy has it been to use the system and to navigate through the system? Does it require sort of technical expertise or is it something that is user friendly and can be easily used by the small company?
Jesús Ramírez: Sometimes some things are really difficult but I think they designed it perfectly, really user friendly the page, so you can go to your information really easy. They're designing the interface in a very friendly way. So you don't need to be technical. There are many videos in YouTube that show how to work it, actually the videos were made by the Mexican tax authority. So you can go to YouTube and search, "How can I get into my tax inbox?"
One of the most important things because when I talk with some accountants or tax advisors they are sometimes a bit surprised about how we are working with that. But the first thing that I want to say is that the electronic invoice is the unique and mandatory way to get an invoice in Mexico, you cannot get a paper or nothing else, only the electronic invoice. And if you want to do that, you need to go to the Mexican tax authorities and register and so forth.
Mateo Jarrin: This of course works for companies and individuals?
Jesús Ramírez: Yes, companies and individuals, everybody.
Mateo Jarrin: I'm assuming there's an app for the phone?
Jesús Ramírez: Yeah, there's an application for the phone. But the most important thing in the invoice is the QR code. You can use your phone, whatever phone, you don't have to have a specific application, just a QR reader. If you read that, you will get all the information of the invoice. I scanned the code and this is the page of the Mexican tax authority and you'll have all the information—who issued the invoice, who received it, the amount, the date, all the details of the invoice. So as you receive it, you can immediately check if it's a real invoice or it's fake.
In the beginning, we thought it would be really difficult to adapt to change. But now you have all in your computer and your cell phone. You can do whatever you want with that. Actually, the Mexican tax authority gives you reports in Excel about all your income—per period, per date, per client, etc. And there are other suppliers that can do it by themselves but you have to pay them if you want another administrator of your files.
Mateo Jarrin: It's all online, basically. You'll find all of your financial history online. So we're talking incomes, payrolls, dividends, etc. What are the fines like if you don't issue an invoice correctly?
Jesús Ramírez: There's a fine with money depends on what you didn't do. But I think the most important thing if you don't issue a correct electronic invoice is they will cancel your certificate that does these documents. So you cannot receive income if you don't issue your electronic invoice. That's happened, the authority has a criteria to cancel the certificate. Everybody in the company moves because they need to issue invoices because the client wants to get the tax deduction of the invoice, so it should be a dynamic, really fast process where everything is online.
Mateo Jarrin: What does it take to recover that certificate once you lose it? You have to correct your mistakes of course but I mean what's the process? Just to get an idea.
Jesús Ramírez: You need to pray. No, I'm kidding. But you need to go to the Mexican tax authority offices or go to your mailbox to clarify what's happening. They have a period of two or three days to answer or reply to your request. And say, "Ok, you're okay," or you need to arrange something.
Mateo Jarrin: So you can challenge it online too, it doesn't necessarily require you to go physically, you can challenge it online.
Jesús Ramírez: Exactly. If you're a company that issues 1000 invoices daily, you need to go there to talk to someone to tell them that something's wrong.
Question 7: How does the Mexican government finance this entire project?
Jesús Ramírez: If you do that correctly, they will cover more taxes and they will pay for all the technology they are using. It has been progressive, they started with huge companies, then they started with medium companies. They have their own program for the small companies and taxpayers.
Mateo Jarrin: So there's a separate program which I'm assuming is a lot simpler and a lot more basic.
Jesús Ramírez: Yes. If you're a small taxpayer, you can go to the website and do everything there. If you're a bigger company, you can still use that website but it's easier if you hire another supervisor to do that for you.
And that's happening with the invoices of the income and the same has been progressively adopted for the payrolls. The employer needs to issue for the employees, the electronic invoicing of the payroll, if you do not do that you cannot get the tax deduction of the payroll. That's mandatory as well. And the most important thing here is that they have been revolutionary about that because now everybody has the electronic invoices of the payroll. So the Mexican tax authority, currently, they make your annual tax return automatically with the entire payroll, so whenever people can go and put their tax ID, the password, generate with two or three clicks on your computer, and have your annual tax return done automatically. That's another benefit of the system.
Mateo Jarrin: I'm assuming the payment goes automatically to your bank account to via the system.
Jesús Ramírez: Yes. The first thing is they don't check the bank account, they're checking your invoices of the payroll. But they will be checking, reviewing all the bank accounts. Actually, they have some agreements with the banks that if you have some income from another country or more income frequently, the banks need to announce to the Mexican tax authority that you're receiving that income, and the Mexican tax authority will send you an email in the electronic tax mailbox that something is wrong and you need to clarify.
Mateo Jarrin: But what I meant, I think, is your annual tax return, the return that you're going to get back from the government from your taxes, that is being refunded to you automatically, I assume? If you have any other tax return, if you have a tax return, basically.
Jesús Ramírez: They will do that automatically. If you have to pay taxes in your annual tax return, they will give you the quotes to go to the bank and pay. But if you have some return, they will pay you immediately in five days.
Mateo Jarrin: They'll wire you to the bank account. So you cannot make payments online via the system?
Jesús Ramírez: Yes, absolutely. Yes.
Question 8: You're also adding VAT starting with September 2018. What are the some of those changes there?
Jesús Ramírez: In the end of the last year, September 2018, they were progressing with that tax system. Now, in the beginning with the tax invoices, they control the income tax. So they see all your income tax and they can calculate your taxes by themselves and show you, "Hey, you need to pay something, that's the amount." But that's for the income tax. Now, in September, they started with a new tool, that tool is like a payment instalments. You need to issue a second electronic invoice when you receive the payment of the invoice, for example. You go and buy something by credit. You don't pay in that moment, so you will have a quote here that you are not paying that, so that when you pay, they will issue another invoice, saying that you paid already. If you paid, you will have the quote that you paid. If you don't, you'll have another quote and receive another invoice.
So that means that they will control the value added tax VAT because it's calculated by cash flow. So when you receive, you need to pay the VAT to the Mexican tax authority. So that's the way that they are controlling that tax. Now they're controlling the two main taxes that is the income for the government: the income tax and the VAT.
Mateo Jarrin: What about cancellation rules? You mentioned something about cancellation rules in terms of e-invoicing. What do you mean by that?
Jesús Ramírez: That's a new rule as well that came at the end of the year. You cannot cancel an invoice because you decide and that's it. If you want to cancel you need to inform to the client that you are cancelling. But how do you inform? By the electronic mail inbox. The client will receive a notification and you have 62 hours to accept or cancel the request of cancellation. If you already got the tax deduction of the tax invoice, it doesn't make sense if your supplier cancels the invoice. So that's why you need to request a cancellation of every invoice and that's how they control both the income tax and the VAT. I mean we're now being audited every day. You are audited every day, you cannot say lies, you cannot avoid paying taxes. If you manage it correctly, you will handle it perfectly and you won't have problems.
Question 9: One of the questions that we have, looking towards the future, what's the next step for Mexico's invoicing system? What do you foresee for the system? What is something that is still required or what changes do you see that might come in the next five years?
Jesús Ramírez: Well, I think we are in the future already. We are controlled by the authority when it comes to all the taxes. I don't know, maybe they can improve their rules. Every period they issue new rules such as you cannot issue two invoices if you have some specific requirements, just one, etc. They are moving because the private sector is requesting that. They say, "Come on, it's too much, we can simplify that, we can improve on that." And they're studying, analysing and issuing new rules. That's what has been easier for us, as well.
Question 10: How has e-invoicing affected the country? How has it been received by people that might have been hesitant at first to embrace it?
Jesús Ramírez: I lived the migration of these rules because when I finished the university I started to work and so I lived the many scenarios. But in that transition, I think that people love it. I love it. So, it's easier, I have all my invoices here on my cell phone and my computer. If I have something to say to the Mexican tax authority, I will open my electronic tax mailbox. In most of the cases, I don't need to drive through traffic for 1 or 2 hours to the offices of the Mexican tax authorities, it's not necessary. You can administrate your business, your company better than before, because before you had a paper and you needed to write on Excel what you're doing, etc. So now it's easier to control it better.
Mateo Jarrin: And that seems to be the feeling among most people, it seems. I'm bringing this up because we had a webinar; it was maybe about a year ago, about six months ago with one of our members about e-invoicing in Italy. And he was telling me, "Mateo, it's a disaster." The requirements, the technology required for small companies, I mean, you need to download certain software, and then you have to get intermediary software. And I think it was only working for VAT or even for very basic transactions. And he told me, "No, it's a disaster because small companies, you know, who don't have the expertise. We now have to learn how to use all these complicated software and deal with it. And you know, it just wastes our time and it's expensive." So that's why I was asking, you know, how it has been received just to get an idea. But, of course, Mexico is far advanced in this situation.
Jesús Ramírez: I read about Italy's experiment, talking about the e-invoicing and he was talking about the VAT, they were controlling that. And he was saying that the Italian tax authority doesn't know what they are doing, I read something about that. But we thought the same in Mexico when we started. They need to improve, check what is happening in the country, issue new rules. It has been ten years now and we are on the way, now we can say it's good. At the beginning, we said the same, it's a disaster, it's really difficult, and we cannot handle it.
Question 11: How have tax revenues been impacted? Has e-invoicing positively influenced the government's accrual of tax revenue?
Jesús Ramírez: My explanation for that was very basic. But there are new ways on how they are getting income with the electronic invoicing. Just to give an example, they have a criterion that if you're a company that doesn't have employees, you don't have assets, and you don't have substance, you are a paper company. So they check it and in most of the cases, there are many cases, it's true. They're paper companies. So that's the way that they're getting more revenue for the government. So it's a new rule, really strict, and they don't want to make more audits. They just want to be focused on that and they're getting more things out of that.
Question 12: From what I've read about Mexico's experience with the invoicing is that it has served as a model for many different countries throughout the world. And that the government basically send consultants out to these different countries to actually help them establish or sell these programs. How does it work in terms of Mexico leading the way and helping these other countries establish themselves?
Jesús Ramírez: Currently, there are other countries that have e-invoicing. They're growing. For example, Argentina has an electronic invoice as well, but I read some articles about the Mexican tax authority helping some European countries with the electronic invoice. So this is a good idea, because in the future, in many years, all the countries will be sharing the data of the invoices worldwide, I think.
Mateo Jarrin: I mean, yeah, that seems to make sense to just basically make it one comprehensive system that, at least, you know, even for cross-border transactions, you could have electronic invoices that match and that you can exchange. I know here in Europe, they passed a directive, it was a couple years ago, I think, in terms of establishing an e-invoicing system in Europe, and Italy is one of the first countries to actually go ahead with it. So, yeah, it does make sense that it is the future, and I guess Mexico is well positioned to kind of lead the way in terms of that.
Do you have any other remarks that you'd like to make in terms of either Mexican tax or e-invoicing? Anything that we haven't covered? But we have about 10 more minutes. Is there anything else you'd like to cover or I think we've pretty much covered everything we wanted?
Jesús Ramírez: But, in general, I would like to share with you that it has been a revolutionary idea of the government. But today everything is controlled for the government and for the companies. All have really good control. Normally, the Mexican tax authority requests for information for a short period, it's really easy to get that information, doesn't matter if it was from four years ago. You can download that from the Mexican tax authority website. Now we're controlled by the government, if you are a good company, if you're not a paper company, you are doing good business, it's good for both sides.
Mateo Jarrin: So, yeah, it's a mutually beneficial relationship and system that helps everyone.
Bonus Question: What's your favourite taco?
Jesús Ramírez: [Laughter] The pastor taco.