Value-added tax or simply VAT is a form of taxation levied on many products and services consumed in a country. The VAT is also called sales tax or products and services tax (GST).
This type of tax is not collected directly by the government. Instead, the tax collection occurs through retailers, and it involves the inclusion of an addition to the price of products and services purchased by the end-users, which makes the final users ultimately responsible for payment of VAT. The retailers periodically compile all VAT collections and remit to the government as a form of revenue, which the government uses to finance budgets and pay for official expenses and services.
The VAT, in most cases, is a form of compensation for government resources (taxpayers’ resources) used directly or indirectly for the production, processing, or transportation of products and services. In Mexico, value-added taxation began in 1980, and the tax rate has steadily increased.
Value Added Specifics
The Mexican VAT act regulates the VAT. The VAT in the country stands at 16% for general products and services. However, this tax may be waived off, depending on the type of products or services involved. The VAT Act mandates that certain products and services must be taxed, as stated below.
- Supply of general products,
- Importation of specific products and services,
- Delivery of general services,
- Rent and leasing of properties or equipment.
Certain products and services in Mexico do not attract any VAT. These include the following.
- Transactions of books,
- Sale of newspapers and magazines,
- Sale and exportation of gold with over 80% content,
- Sale of water and essential food materials such as milk and meat,
- Agricultural implements, products, and services,
- Real estate properties,
- Insurance and financial services,
- Salaries and remunerations.
Business VAT Registration
All businesses that sell or provide products and services, which are taxable, must register with the country’s VAT authority. This rule extends to foreign business even if they possess a temporary residence.
Visitors or tourists that travel to Mexico are eligible for a VAT refund on purchases of none value-added taxable products. However, the VAT refund is accessible to those products obtained from businesses, which partake in the VAT refund arrangement. Also, visitors must exit the country from specific seaports or airports to get a refund.
For a visitor to qualify for a VAT refund, they must spend a minimum of $62 (1,200 Pesos) on eligible goods (excluding services) at eligible businesses. Also, individual cash payments must not exceed $155 (3,000 Pesos).
All VAT return claims must be submitted electronically and monthly for proper processing and documentation to the Mexican VAT authority.
Foreign businesses which do not reside permanently in Mexico do not pay VAT but must register with the VAT authority even if they do not deal with taxable products and services. Therefore, all foreign nonresident businesses do not require a tax identification number as the law exempts them.
The VAT is a necessary form of tax which the Mexican government uses to finance some of its activities. VAT payment is mandatory from eligible taxpayers on eligible products and services. Visitors can be exempted from VAT if they purchase eligible products from businesses that participate in the VAT refund program.