• Publication

6% VAT withholding on rendering of services

Date: 2020/02/11

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General Background

On December 9, 2019 the Tax Reform for 2020 was published in the Federal Official Gazette (DOF for its acronym in Spanish). The modifications included changes to the Mexican Income Tax Law (MITL), the Value Added Tax Law (VATL), the Excise Tax Law (ETL) and the Federal Tax Code (FTC). All those changes are effective as of January 1st, 2020, unless otherwise provided.

In specific, Article 1-A(IV) of the VATL is modified to provide for an obligation to withhold 6% of the value of services received through which personnel is made available (put at the disposal).

The legislative intent provided that the withholding obligation would apply only to outsourcing transactions. However, the final version of Article 1-A(IV), of the VATL was modified to include any services through which personnel is put at the disposal of the receiving party.


In addition, on December 28, 2019 the set of Administrative Rules applicable as 2020 was published in the DOF, which provide that the withholding obligation above applies only upon payments made as of 2020. However, where the related invoices were issued during 2019 but paid no later than January 10 ,2020, no withholding applied.

Scope the provision

The final text of Article 1-A(IV) has created uncertainty as to when the withholding obligation arises.

On January 31, 2020, the Mexican Tax Authorities (MTA) issued the draft of the administrative criterion 46/VAT/N “6% VAT Withholding provided by Article 1-A(IV) of the VATL”, whereby it is concluded that the withholding obligation applies to Mexican-resident entities and individual performing business activities, when they receive services through which personnel is put at their disposal and the functions performed by that personnel are utilized directly by the receiving party or its related parties.

Conversely, there shall not be any withholding obligation where the functions performed by the personnel are utilized directly by the service provider.

In addition, the MTA published FAQs regarding the withholding obligation where it is concluded that cleaning services, maintenance services and passenger transportation services, are subject to the 6% withholding, regardless of the contractual obligation put in place.

However, the 6% VAT withholding obligation is not applicable on professional services, since such services are not deemed utilized directly by the recipient but by the provider.

Based on the above, the Mexican Taxpayers' Ombudsman (PRODECON for its acronym in Spanish) issued a bulletin to inform on the following:

a) The withholding obligation is not limited to outsourcing services under Mexican Labor Law.

b) The withholding obligation covers services through which personnel is put at the disposal of the receiving party or its related parties, regardless of the fact that personnel is subject to direction, supervision, coordination or subordination of the recipient, and/or the contractual obligation put in place.

c) There should be a withholding obligation when the functions performed by that personnel are utilized directly by the receiving party or its related parties.

d) There should not be a withholding obligation where the functions performed by the personnel are utilized directly by the service provider.

Non-compliance exposure

Where taxpayers do comply with the VAT withholding obligation being obliged to do so, the deductibility of the payments for the services received would be at risk for Income Tax purposes, as well as the right to take VAT input, together with the potential penalties upon an audit.

Last but not least, the omission on withholding and payment of taxes to the MTA is deemed a criminal offense according to Article 108 of the FTC.

Recommendations

Considering the above, an analysis of the service agreements in force to define whether the functions to be performed by the personnel are utilized directly by the receiving party or its related parties, or by the service provider, should be performed.

It is important to mention that, for any cases necessary, JA Del Río, together with your labor advisors, offers its services to analyze the applicability of that withholding obligation.