Mexico: Latin America’s pioneer in tax regulation of digital services

RIO DE JANEIRO, BRAZIL – Digital transformation has had a significant impact on traditional business models globally, and in its evolution, has conceived new forms of demand for products and services in order to continue to meet the needs of each of its stakeholders.

The economy has escaped this digital transformation, managing to adapt quickly, not only because companies have adjusted and incorporated these changes into their product and service offerings, but also because consumers themselves have redirected their interaction to companies to obtain the services and products they require.

Due to ongoing innovations, these disruptive business models have grown significantly in recent years, which has led many countries to show interest in the need to regulate them and to pay greater attention to issues related to the taxes that must be paid by income generators.

In that respect, one may ask how has the country progressed in this area? In the case of Mexico, since 2019 progress began to be made in regulating and overseeing these business models through digital media such as the provision of land passenger transportation services and the delivery of food prepared through digital platforms, in such a way that these platforms, be they in Mexico or abroad, were required to retain and pay tax.

Since then, digital services have been taxed under the following 3 categories of players involved in this type of services:

Service providers that share assets, resources, time and/or skills. This item refers to individuals offering services on a timely basis or service providers acting in a professional capacity.

Users of such services. Individuals who make use of the services offered through digital apps or platforms.

Intermediaries that through an online platform connect providers with users and enable transactions between them. Businesses have an intermediary role between the company offering the service and the person acquiring it.

This disruptive model involves mainly the novel intervention of intermediation, particularly with foreign stakeholders operating in Mexico through digital tools, which create a new value to the services or goods that are being offered and for which income is being generated.

These tax reforms seek to incorporate foreign companies that provide digital services in Mexico into the federal tax system, in order for them to pay taxes for the services used in Mexico. Likewise, it plays a very important role in the control of these business models, as it will have the power to withhold taxes (ISR and VAT) from individuals with business activities that sell goods or provide services through the Internet, by means of technological platforms, computer apps and the like.

With these changes, tax legislation in Mexico has taken a big step towards establishing equal conditions for both residents in the country and foreigners who provide services through the various platforms in the market.

This step towards the regulation of digital services places Mexico among the pioneer countries in the implementation of this type of tax regulation, based on OECD studies and recommendations, so the results that this tax reform will generate in the short and medium term, not only in terms of revenue for the public treasury, but also in the response and reaction of companies providing digital services, whether domestic or foreign, will have to be closely monitored.