What Taxes do Foreigners Pay in Mexico
There are a number of taxes in Mexico, some hidden, some
not. Unless you enter the business world in Mexico, below are the most common
tax issues you will encounter.
IVA (Sales Tax)
IVA (16%) is a value
added tax charged on ‘most’ goods and services. In theory it is supposed to be
charged on ‘all’ goods and services. Normally (but not
always) it is built into the price so you don’t even notice it. Larger stores
and businesses will automatically include IVA on everything. However, some of
the smaller ‘Mom and Pop’ shops do not. You’ll find out when you request a
Factura, which is an official Tax Receipt. Often when asked for a Factura, they
will tell you you will need to pay 16% more if you want a Factura as they have not
factored it into the price. A number of these small time operations try to
avoid paying taxes and don’t report everything to the government.
The underground economy in Mexico is still alive and well.
However in recent years, the government is taking steps to ensure everyone pay
their share of taxes.
As of 2010, there is now a special tax on products and
services; this covers certain internet and cable TV services, alcohol,
cigarettes and gaming. Mexico is trying to catch up with the rest of the world.
Most foreigners like to pay their property taxes. This is a
municipal tax paid annually. It is based on the tax value of the property which
is about 60% of the retail value. For a normal property they can range from
$100 to $250 US. If paid in the first two months, you get a discount.
If you work in Mexico you will pay income tax. However,
normally it is deducted at source from the employer and paid to SAT (known as
Hacienda) – the Federal Tax Collection department. If you are an Independent
Contractor vs Employee, then in this case you would pay your own taxes directly
to the government. Having a good accountant is essential as the tax rules in
Mexico can be a little convoluted (to say the least) and they can change with
Tax on Rental Income
The law says that you must pay tax on any income derived in
Mexico, therefore if you rent out your house and collect revenue, you should be
paying taxes (you can offset expenses). Americans can claim the tax paid in
Mexico so they can avoid double taxation.
There are some options on how to calculate tax on rental
income: (Source: www.settlement-co.com)
1. The blind deduction of 35% of total income,
without deductions with tax of 35% paid on the remaining amount;
A 30% tax on income, less allowable
deductions which include property tax, maintenance, interest on loans for
construction expenses, insurance, salaries of employees and commissions paid to
rental agents and property managers..
3. A 25% tax on the gross income, no
is paying more attention to internet advertising and is beginning to inquire
into the income of those who are renting their homes. It makes sense to become legal since
penalties for non-compliance can be considerable. Methods one and two above require the RFC
(taxpayer identification number) which can be challenging for a foreigner to
obtain. Method three outlined above
does not require residency or official status.
Tax on Sale of Primary Residence
You can sell one Primary Residence every five years and be
exempt from the tax on the gain.
Tax on Cash
In an effort to tax the small Vendors in Mexico who work on
the street and receive cash and do not report it, the government decided in
2009 to levy a 2% tax on any deposits in a given month over $25,000 pesos. With
the recent new Tax Law, this 2% tax was eliminated. But now, banks receiving
cash deposits of over $15,000 pesos in any one month are required to report it
to Hacienda (SAT). They are also required to report any large credit card
payments to SAT.
Often when you stay in a hotel at the beach in Mexico and
they quote you a certain rate, when you go to check out you’ll find the amount
charged is higher. Normally it is 15% tax plus 2% lodging tax. This applies all
over Mexico with the exception of the State of Quintana Roo. There the tax is
only 10% plus the 2% lodging tax. So if you go to Cancun one year and then
Puerta Vallarta the next year and notice the tax is different, don’t be
surprised. They are not trying to rip you off; they simply have different
Mexican Tax Treaties with the United States and Canada
Foreigners are not taxed on money they bring into Mexico.
However, recently there has been some sharing of information between the three
NAFTA countries, which may require you to be more diligent in your reporting of
investment income in Mexico and property purchases or rental income.
The United States is much more strict than Canada and levies
very serious fines and even jail time, when this requirement is not met. For
instance, if you have over $10,000 US any one month in ‘all’ your foreign bank
accounts outside of the U.S. you must declare this or you can be charged a fine
from $10,000 to $50,000 US per account over, and possible jail time. It appears
they are very serious about American citizens paying their worldwide taxes. So
if you want to sleep nights, best to declare.