What Is IVA Tax in Mexico and How Does It Work?

Understanding Mexico’s IVA Tax

Mexico’s tax system includes a consumption tax known as Impuesto al Valor Agregado (IVA), or Value Added Tax. This tax is applied to most goods and services, as well as imports, playing a significant role in the country’s revenue generation. It is a fundamental component of financial transactions across Mexico, impacting both businesses and consumers directly.

IVA functions as a consumption tax, levied on the value added at each stage of a product’s or service’s journey through the economy. Businesses collect this tax from their customers, but the final cost is ultimately borne by the consumer. This design ensures that the tax burden is distributed across the consumption chain.

The standard national IVA rate applied throughout most of Mexico is 16%. Businesses selling goods or providing services charge IVA to their customers. When these businesses make their own purchases for operations, they also pay IVA, which is known as input tax.

Businesses then subtract the IVA they paid on their inputs from the IVA they collected from customers. The resulting difference is the amount they remit to the Mexican tax authority, the Servicio de Administración Tributaria (SAT). This mechanism allows the government to collect tax incrementally as value is added, while businesses act as collection agents.

Specific Rates and Exemptions

While the standard national IVA rate is 16%, Mexico also implements specific rates and categories of goods and services that are either zero-rated or exempt. A reduced IVA rate of 8% applies in certain border regions, including municipalities along the northern and southern borders such as Baja California and Quintana Roo. This reduced rate is part of a strategy to foster economic competitiveness in these areas. The tax incentives for these border regions have been extended through December 31, 2025.

Zero-rated items are those where IVA is charged at 0%, but businesses can still claim input tax credits on related purchases. Common examples include exports, certain basic food products, patented medicines, and some agricultural supplies. Books, newspapers, and magazines are also zero-rated.

Conversely, exempt items are not subject to IVA, and businesses cannot claim input tax credits on purchases related to these activities. This category includes educational services, medical services, and financial services. Residential rent and the sale of residential land and buildings are also generally exempt from IVA.

IVA in Common Scenarios

IVA is typically included in the price consumers see for goods and services in Mexico. This applies to everyday purchases such as clothing, restaurant meals, and hotel stays, where the 16% standard rate is levied. Professional services and general transportation also incorporate this tax.

For larger purchases, the application of IVA can vary. Commercial real estate transactions, including sales and rentals, are subject to the 16% IVA rate. Sales of new residential homes and rentals of residential properties are generally exempt from IVA. Vehicles, including new cars, also have IVA applied to their sale price.

Non-residents and tourists in Mexico pay IVA on their purchases just like residents. However, a refund program exists for foreign tourists on certain goods purchased from participating stores. To be eligible, the tourist must be a non-resident and the goods must be returned abroad by air or sea. A minimum purchase of 1,200 Mexican pesos (MXN) per store is required for electronic payments, or up to 3,000 MXN for cash purchases per tourist.

The refund process involves obtaining a tax receipt or tax-free form from the store and validating the goods at designated stations, often at airports, before departure. Goods valued at 5,000 MXN or more (including tax) usually require physical validation by customs. The refund amount is paid in Mexican pesos, either electronically to a credit or debit card, or as cash up to a maximum of 50% of the refundable amount, not exceeding 10,000 MXN.

Basic Principles for Businesses

Businesses collect IVA from their customers, known as “IVA trasladado” or transferred IVA, which is added to the sale price of goods or services. Simultaneously, businesses pay IVA on their own operational expenses and purchases, referred to as “IVA acreditable” or creditable IVA.

Periodically, typically on a monthly basis, businesses calculate the net amount of IVA. This involves subtracting the IVA they paid on their purchases from the IVA they collected from their sales. The resulting difference is then remitted to the Mexican tax authority, the SAT.