Mexico VAT: What Businesses Need to Know About Compliance

Mexico’s Value Added Tax (VAT) system is a key part of the country’s tax framework, affecting both domestic and foreign businesses. Companies operating in Mexico must understand how VAT applies to their transactions to avoid compliance issues and penalties.

Registration Requirements

Businesses engaged in VAT-liable activities must register with the Servicio de Administración Tributaria (SAT), Mexico’s tax authority. This applies to both domestic companies and foreign entities with a taxable presence in Mexico. Registration is mandatory before conducting taxable transactions, and noncompliance can result in fines or operational restrictions.

The process begins with obtaining a Registro Federal de Contribuyentes (RFC), Mexico’s tax identification number. Domestic companies receive this during incorporation, while foreign businesses without a local entity may need to appoint a representative. Registration is completed through the SAT’s online portal and requires documentation such as proof of legal existence, tax domicile, and identification of legal representatives.

Once registered, businesses must maintain accurate records and submit periodic VAT returns. The SAT may conduct audits to ensure compliance, and discrepancies can lead to penalties or additional tax assessments. Companies must also update their registration details if there are changes in business structure, address, or tax obligations.

Taxable Transactions

Mexico’s VAT applies to the sale of goods, provision of services, leasing of property, and importation of goods. The tax is generally levied at the point of sale or when a service is rendered.

For goods, VAT is triggered upon transfer of ownership, whether through sale, exchange, or other legal means. This includes both physical and digital goods, such as software licenses and streaming services.

Service-based transactions are taxable when performed in Mexico, even if the provider is located abroad. This is particularly relevant for digital platforms and consulting firms serving Mexican customers without a physical presence in the country.

Leasing arrangements, including rentals of office spaces, vehicles, and equipment, are also subject to VAT. The tax is calculated based on the rental amount and must be collected by the lessor. If a lease includes an option to purchase, VAT may apply to the final sale price.

Imports are taxed at customs, with payment required before goods are released. The tax is calculated based on the customs value, which includes the cost of goods, insurance, and freight. Some temporary importation schemes allow businesses to defer VAT, but strict compliance requirements must be met.

Rates and Exemptions

The standard VAT rate in Mexico is 16%. A reduced rate of 8% applies in designated northern and southern border regions, including cities near the U.S. border such as Tijuana and Ciudad Juárez, as well as municipalities bordering Guatemala and Belize. Businesses in these areas must meet eligibility criteria, as improper application of the reduced rate can lead to tax reassessments and penalties.

Certain goods and services are exempt from VAT, primarily to reduce the tax burden on essential items. Exemptions include unprocessed food products such as fruits, vegetables, milk, and tortillas, as well as medicines and books. Educational services, public transportation within cities, and residential property sales are also exempt. Unlike zero-rated goods, which allow businesses to claim input VAT credits, exempt transactions do not grant this benefit, meaning companies engaged exclusively in exempt activities cannot recover VAT paid on expenses.

Exports are taxed at a 0% rate, enabling businesses to claim refunds on VAT incurred in their supply chain. This benefits manufacturers and suppliers involved in international trade by preventing tax cascading and improving cash flow. To qualify, exporters must provide proof that goods have physically left the country. Failure to meet documentation requirements can result in VAT being deemed payable, leading to unexpected tax liabilities.

Invoicing and Documentation

Businesses must issue electronic invoices, known as Comprobantes Fiscales Digitales por Internet (CFDI), for every VAT-liable transaction. These invoices must follow the government’s approved format and be validated through the SAT before being sent to customers. The CFDI system ensures real-time reporting of sales activity, reducing tax evasion and improving transparency.

Each invoice must include the taxpayer’s RFC, a unique folio number, date of issuance, and a digital seal authorized by the SAT. Additionally, CFDIs must categorize transactions correctly using the SAT’s product and service codes. Misclassification can trigger audits or result in denied VAT deductions. Invoices must specify the VAT amount separately from the transaction value. Businesses are required to retain XML and PDF versions of their CFDIs for at least five years, as electronic records are subject to review during tax audits.

Filing and Payment Timelines

Businesses must submit monthly VAT returns detailing taxable transactions and the corresponding tax liability. These filings are due by the 17th day of the month following the reporting period. Late submissions can result in fines and interest charges.

VAT returns must include a breakdown of output tax collected from sales and input tax paid on business expenses. If input VAT exceeds output VAT, companies may apply for a refund or carry the excess forward to offset future liabilities. Refund requests are subject to review by the SAT, and processing times vary. Exporters often receive priority, as they frequently accumulate VAT credits. Maintaining accurate records and ensuring all invoices meet regulatory requirements can help streamline the refund process.

Penalties for Noncompliance

Failure to comply with VAT regulations can result in financial and operational consequences. The SAT imposes penalties for late filings, underreporting, and failure to issue proper invoices, with fines ranging from MXN 1,400 to MXN 34,730, depending on the severity of the infraction. Repeated violations or deliberate tax evasion can lead to business closures or criminal charges.

Businesses that fail to remit VAT on time are subject to interest charges, calculated based on Mexico’s official interest rate plus a surcharge. The SAT also has the authority to suspend a company’s tax registration, preventing it from conducting legal transactions until compliance is restored. To avoid these risks, businesses should implement strong internal controls, conduct periodic tax reviews, and seek professional guidance when dealing with complex VAT matters.