On December 15, 2021, the Mexico City Congress approved certain reforms to the Mexico City Tax Code. Among other changes, what probably stands out the most is the incorporation of a new “fee” that will have to be paid by digital platforms that provide intermediation or similar services that relate to the delivery of goods in Mexico City.
Although it has not yet been published in the Official Gazette of Mexico City, it is expected to have effects as of January 1, 2021, and based on the wording we were able to review of this new Article 307 TER of the Mexico City Tax Code, all individuals or entities that conduct digital intermediation, promotion or enabling through the operation and/or administration of applications and/or platforms that allow users to connect with third parties that offer goods, for the delivery or reception of food packages, groceries or any type of merchandise in Mexico City, shall pay a fee for the use and/or exploitation of the infrastructure of Mexico City.
This fee, which shall be paid monthly, will be equal to 2% of the total pre-tax amount of commissions or fees that under any denomination, are charged for each intermediation, promotion or enabling conducted in Mexico City.
Furthermore, the provision would clearly state that the fee is not transferrable and will not be subject to any shifting, nor shall it be included in the total cost of the charge to the user or charged to the third parties that offer the goods or services or any other third party that delivers the packages, food, groceries, or any other type of merchandise.
It is also clarified this fee will not apply to those that merely deliver the products, courier or messenger service providers, third party delivery services, or individuals or entities that directly manage the offer and delivery of the goods that are sold. Therefore, the intention is clear that it should only apply to the marketplace, peer-to-peer or similar digital platforms that act as intermediaries.
Considering the above, based on the wording of the provision, as well as the discussions had at local Congress and the justification for the initiative, the intention is for these platforms to pay for the use of the Mexico City infrastructure. As a result, the intention would be for it qualify as an “exploitation”, which based on the Federal Tax Code is a fee that is paid to the Mexican government for its public law functions different from taxes, revenue derived from financings and those obtained by decentralized organisms and companies owned by the State. In other words, based on general Mexican tax legislation, this does not qualify as a tax, but rather, as a fee that is paid to the Government in exchange for a service or similar, in this case, for the use of the Mexico City infrastructure. Therefore, although it could greatly depend on the corresponding local tax provisions, it would initially seem to us that this would most likely not be allowed as a foreign tax credit for the foreign companies in their country of residence. However, we believe that a case could be made against this qualifying as an “exploitation” based on general Mexican law due to its nature, but as we have seen with DST’s enacted in other countries, even it qualifies as a “tax”, the foreign tax credit could prove difficult.
This fee adds to the complex tax framework that digital platforms and similar companies must navigate in Mexico. Although Mexico is traditionally a country with heavy focus on taxation at the Federal level, States and Municipalities also have some taxing rights and this adds to the already existing local tax obligations that can be imposed on digital transactions, such as Mexico City’s (and more than a handful other States as well) obligation for platforms to collect the tax on accommodation services and Guanajuato’s obligation for platforms to collect the local tax triggered on business activities by those transacting the platform. Of course, all of this in addition to the already existing Federal tax obligations for platforms to withhold and pay VAT and income tax from individuals at the Federal level as well.
Note that Mexico City is the first State to incorporate such a fee, but it could be expected for other States to follow suit, like it happened with the previously mentioned obligation for platforms to collect the tax on accommodation services, which also started with Mexico City and has since been incorporated by almost all States.
In addition to the conceptualization of this as an “exploitation” or fee, we believe that there could be arguments to challenge this new obligation, which we would suggest analyzing for each specific case. In any event, we would also strongly recommend digital companies doing business in Mexico to conduct a full analysis of all Federal and Local obligations that they must comply with, which will certainly be complex and burdensome given the different levels and systems that may have to be used. Just as a reminder, it is worth pointing out that at the Federal level, failure to comply with the tax obligations, which are in effect since June 2020, could potentially lead to the application of a kill-switch provision by the Mexican Government, which allows suspending the digital platform’s connection to the Internet in Mexico.
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As always, the Partners and Associates are at your service for any comments or doubts on the content of this Bulletin.