IVA: VAT Tax Rules, Exceptions, and Refunds in Mexico
March 10, 2021
Manufacturers must be detail oriented to secure value added tax refunds in Mexico
Anyone visiting or doing business in Mexico will quickly run into the IVA tax. IVA is the Spanish acronym for value-added tax (or in Spanish, Impuesto al Valor Agregado). Value-added tax is levied on imported materials and distributed goods and at the point of sale. Services also carry this tax. In Mexico, the IVA is 16% through most of the country, but 8% in more than 40 local districts near the U.S. border, through the states of Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon, and Tamaulipas. That lower sales tax has also been extended to 22 districts along Mexico’s southern border with Guatemala and Belize.
However, one of the prime benefits of doing manufacturing in Mexico relates to the potential for tax incentives that support foreign investors.
Below you’ll find what you need to know about complying with IVA regulations and how to secure an IVA rebate in a timely manner.
IVA rules in Mexico
Most goods sold or services rendered in Mexico carry a sales tax within the total cost, regardless of whether business is done in person, online, or over the telephone. When it comes to imports and exports, however, the rules are somewhat different. There is no VAT tax levied on goods exported from Mexico to other countries. What's more, manufacturers can recover the IVA levied on certain imported materials through a rebate process.
On imports, the IVA is calculated based on the price the material had when it left the foreign plant from which it originated, in addition to any freight charges, insurance, or duties incurred along its journey. The tax is levied on a cash basis at the time of crossing the border.
The most notable exception to the standard IVA rules is in regard to temporary imports. Through VAT and IEPS certifications, manufacturers are not required to pay IVA on any materials imported into Mexico for processing, assembly, or finishing of goods that will subsequently be exported.
There are some stipulations, however, for getting the full benefit of this VAT tax incentive. A 2020 revision to Foreign Trade Rules reduced certain VAT benefits for all but Authorized Economic Operators (OEA). OEA-certified companies, which through their registration establish that they already meet specific Customs standards, are able to secure a broader range of tax incentives compared to VAT-certified companies.
This reform also impacts how quickly your value-added tax reimbursement is processed. Under recent changes, refund processing might take beyond 40 days, although tax reform has been proposed to speed up the turnaround time for these rebates.
The IVA rebate process in Mexico
To start the process of securing your rebate, companies must first secure a taxpayer identification number (TIN) through the Federal Taxpayer Registry (Registro Federal de Contribuyentes, or RFC). Individuals in Mexico often carry a small, plastic-card containing the number and the individual's or corporation's name and address. Before making a transaction for which you're planning to request a refund, be sure to present your TIN to the seller.
The vendor should then provide you with an official receipt, known as a "factura" or digital tax receipt (CFDI). This is not the same as a standard simple receipt, and the Mexican tax authorities will not accept a document beyond a factura. The factura features the vendor's official tax seal, which includes their RFC number and contact information, a description of what was purchased, and the taxes included in the sale, in addition to other requirements such as the form of payment and the specification when the purchase is made on credit or in cash.
In addition, taxation authorities will require the legal entity's name to be on all facturas. Do not use a nickname, DBA name, or other entity name when securing this document. Save these receipts to submit to the Finance Ministry (Secretaria de Hacienda) on a monthly basis for the processing of the rebate.
The vouchers must be issued electronically, as they are certified by a third-party authorized by the Ministry of Finance to authenticate their validity. These vouchers must be electronically safeguarded and recorded in the accounting books of the company requesting the balance in favor of VAT.
The process of securing this factura may mean taking a bit extra time during routine business activities to secure the necessary documentation, but it's worth it. However, it's important to pay attention to details as you work through this process. An error may not cost you the rebate, but it could significantly delay your receipt of this refund.
It is becoming increasingly complex to process a VAT refund balance, as the requirements to justify the refund to the financial authorities continue to increase. However, if your purchases are essential for the operation carried out by the company—such as ensuring compliance with regulatory requirements—then it is important you secure that digital tax receipt. You must support your claim by presenting it along with proof of operations, as well as contracts or documents from the suppliers themselves to validate their legality. Examples include the presentation of accounting records and proof of payment of the invoices in question or pediments for foreign trade operations.
A shelter provider can offer clients an added layer of vigilance in working with suppliers and ensuring they are in order with their tax obligations and in the issuance of CFDI. A shelter provider can also help you keep up to date on any relevant changes in the laws or management contacts with the authorities in Mexico. This support helps to ensure the timely presentation of all documentation, as well as the prompt recovery of requested refunds to prevent cash flow issues.
Simplify your IVA refund
Any manufacturer operating in Mexico should hold a basic understanding of the Mexican tax system. While this is more critical for manufacturers operating in Mexico as a wholly-owned foreign subsidiary, companies operating under the umbrella of a shelter service provider should also understand these requirements. Not only does this understanding ensure all corporate employees secure appropriate documentation during business-related transactions, but it also provides an excellent sense of the complete cost-saving benefits available through manufacturing in Mexico.
Fortunately, securing IVA rebates does not have to be complicated. Tetakawi helps clients navigate the paperwork necessary to secure these rebates on imports and other critical purchases. Working with an experienced partner in managing processes for Customs can save your company time and money in the long run. To learn how you can benefit from more efficient support of your IVA refund in Mexico, contact Tetakawi today.