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All About Taxes in Mexico

Taxes in Mexico 2014What 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.

Special 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. Darn!

Property Taxes

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.

Income Tax

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 the wind.

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;

                2.  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 deductions.

                Hacienda 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.

Hotel Tax

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 rules.

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.

 


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