By Elsa Head
Director of Finance
The Offshore Group
A basic understanding of the Mexican tax system is important to any company manufacturing in Mexico under the auspices of a shelter program, such as that offered by The Offshore Group. However, a much more detailed understanding of the matter is critical to manufacturing companies establishing themselves in Mexico on their own as a wholly-owned foreign subsidiary.
A core element of the Mexican tax system is a value-added tax (VAT), known by its acronym in Spanish, IVA. This term means impuesto al valor agregado. Mexico imposes VAT on all purchases of goods and services throughout the country. It is a sixteen percent tax levied in the country's interior, and eleven percent in Mexico's border region. It is important to note that this tax is levied on a cash basis.
VAT is charged on virtually every transaction conducted in Mexico, regardless of whether business is done in person, on-line or over the telephone. Except for pharmaceuticals, every purchase of 100 pesos, for example, will be charged at one hundred and sixteen pesos, or one hundred and eleven pesos in the border region. For manufacturers that are exporting their product for consumption outside of Mexico, the tax is recoverable through a rebate process.
Manufacturers in Mexico, like most other concerns doing business there, are not enamored with the idea of paying an extra 16 percent up front on fixed assets purchases, a hotel night or a tank of gas, but the good news is that this money can find its way back into a business bank account in three to five months -- as long as care is taken in the execution of the process for receiving its rebate. If you don’t cross some T’s and dot some I’s, however, get ready for some delays. The Offshore Group does the legwork that is required to secure these rebates as a part of the service package that it offers to manufacturers in Mexico that operate under its Shelter Program.
When an individual, or a company, that seeks a VAT refund makes a purchase, it must present its tax code identification number to the Mexican seller. This is known throughout Mexico as an RFC. The acronym stands for Registro Federal de Contribuyentes. Generally, individuals and employees in Mexico will carry a small, plastic-card containing the number, and the individual’s (or corporation's) proper name and address. It is then up to the Mexican vendor to provide an official receipt, known as a factura, to the buyer. This factura must then be saved, or presented to the business office and, each month, it is then submitted to Hacienda (the Mexican federal taxation authorities) for the refund of VAT. That VAT, in turn, can be refunded in the next cycle of monthly submissions to Hacienda.
While US tax authorities will accept a variety of receipts, or even a businessman's word, Hacienda is not as flexible. If you do not have a factura on official Hacienda stock, complete with seal and the RFC, it is as if the business transaction had never taken place. This means that in order to be sure that you can recoup IVA taxes paid, you must sometimes take small actions such as waiting in line in restaurants, taking an extra 30 seconds at the hotel checkout to obtain the required information, spending additional time at the Pemex station to have the attendant print you out a receipt, or devoting an extra minute to document an online purchase to fly Aeroméxico or Interjet in order to get the necessary documentation to use as evidence of the purchase having been made. Take care to pay attention to details. An error may not cost you the deduction itself, but might delay your receipt of refund.
Another important item to remember is that the Mexican taxation authorities (Hacienda) have been lenient in years past about allowing a business name (dba) to be used in place of the corporate names on facturas. As of 2011, the dependency has said it will require the corporate name -- and not a nickname, or other entity -- to be on all facturas.
As in United States, much of tax reporting is headed in the direction of online filing and refunding. But it's not there yet. Under the most recent set of guidelines, all companies in Mexico with more than 4 million pesos in annual revenue (about US $280,000) are to be filing digitally by the end of 2012. This policy was supposed to take force last year. The implementation period, has been extended. In the meantime, most companies still file the old-fashioned way: paperwork.
Should any readers have questions on Mexico’s IVA, or value-tax, they can contact me at: 520-889-0022, ext. 1305