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Digital economy, taxation and Mexico

Digital economy, taxation and Mexico
abril 04
01:32 2018

March was a disruptive month for the digital economy all over the world and Mexico was no exception. There were many changes in the country in this arena, led by the publication of the new “Fintech Law” (Law Regulating Financial Technology Institutions). This innovative legal framework mainly seeks to regulate digital financial services and transactions, including those related with crowdfunding, online payments, and cryptocurrencies.

Nevertheless, the tax legislation in Mexico remained untouched, so the tax treatment of transactions regulated by this new Fintech Law will have to be based on the current tax laws, even if this means that some transactions might escape taxation.

One ought to wonder if the Mexican tax system is slowly becoming obsolete to the new economy. Traditional income tax rules related with source jurisdiction haven’t caught up with the digital reality. The out-of-date legislation does not consider the existence of major digital businesses that make substantial profits without a physical presence in the country.

OECD

The Organisation for Economic Co-operation and Development (OECD) is taking action. Following the 2015 Base Erosion and Profit Shifting (BEPS) Project Report on Action 1 (Addressing the Tax Challenges of the Digital Economy), the OECD has released an Interim Report regarding the “Tax Challenges Arising from Digitalisation”, agreed by more than 110 jurisdictions.

The Report analyses digital business models and their potential implications in taxation. It also puts forward different approaches and solutions proposed to allocate taxing rights, especially in relation with nexus and profit allocation rules. The Report also discusses interim measures that some countries believe should be implemented in the meantime, although the OECD’s ultimate objective is to achieve a long-term solution by 2020.

EUROPEAN UNION

Europe is definitely leading this endeavour. The European Commission just proposed new rules to ensure that digital business activities don’t go untaxed in the Member States of the European Union. These novel regulations position the users of digital companies at the spotlight of value creation.

The innovative rules seek to establish a connecting factor between the users of a digital business and the country where these users are located. This nexus allows the Member States to exercise their source jurisdiction to tax different items of income.

The European Commission has two proposals to tackle the problem: one is a short-term answer, whilst the other one pursues a more permanent solution. These proposals still need to be submitted to the Council of the European Union for adoption.

The short-term proposition suggests the implementation of an interim tax of 3% on the revenues of businesses dedicated to three major digital activities: the sale of online advertising spaces, the sale of user data, and digital platforms that facilitate interactions between users (like eBay and Craigslist). The tax will be collected by the Member States in which the users are located, but only if the company has total annual worldwide revenues of at least €750 million and revenues in the European Union of at least €50 million. Of course, the proposal includes mechanisms to alleviate double taxation.

Moreover, the long-term proposal advocates a reform to corporate tax rules, allowing the profits to be taxed where there is a significant digital interaction with the users of a specific business. Regardless of a physical presence, a digital company will be taxed on its profits if there is a taxable digital presence or a virtual permanent establishment in a Member State. This will occur if one of the following criteria is met: the company has annual revenues in a Member State that exceed a threshold of €7 million, the enterprise has more than 100,000 users in a Member State in a taxable year, or the company creates over 3,000 business contracts for digital services with its business users in a taxable year.

MEXICO

The Mexican Income Tax and the Value Added Tax Laws, have some rules that may allow taxation of certain new digital businesses. Nevertheless, these rules were not drafted considering all the possible digital activities. Therefore, a major tax reform is needed to update the rules, especially those related with source jurisdiction. This would place traditional businesses and digital enterprises on the same footing, at least regarding taxation. Its undeniable that a reform in such terms would impact countless digital businesses, such as social media companies, collaborative platforms and online content providers, like streaming services (i.e. Netflix, HBO, and Spotify).

Nevertheless, considering that general elections will take place on 2018, it is unlikely that a tax reform will occur in this year. Probably, Mexico will wait until the OECD reaches a consensus-based solution and will then adapt it to its legislation, even if this implies that some taxation related with digital activities won’t be collected in the meantime.

 

*Notice: The information contained in this article does not constitute a professional legal opinion or advice. Therefore, the author shall not be held liable for any use given to it at any time. The content is for general and informative purposes only and it may occur that the Mexican authorities do not share the author’s views and interpretations. For a specific case, we encourage any interested party to obtain a professional opinion or advice. Finally, this text should not be copied or published without the author’s previous written authorization.

 

Lic. Juan de la Cruz Higuera Ornelas, LL.M.
Senior Associate at JCH Abogados
info@jch-abogados.com

 

 

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