Mexico has become the latest country to impose a Value Added Tax (VAT) registration requirement for foreign entities that provide digital services or goods to residents in their country. The new requirement serves to remind U.S. colleges and universities how they may be affected by countries widening their VAT net to capture foreign entities so that they have to register to remit VAT on their fees and income.
The VAT was introduced as part of Mexico’s 2020 tax reform and applies to digital services provided through an online platform as of June 1, 2020. Digital services include those involving downloads or access to movies, videos, music and games (including gambling), but also extend to long-distance teaching or testing and related intermediary services. Downloading or accessing books, newspapers and electronic journals appear to fall outside the definition of digital services for these purposes. Furthermore, it appears that the tax provision applies to both business-to-consumer and business-to-business services. The Mexican VAT rate is 16%, in line with the global average.
Digital services provided by a non-resident having no permanent establishment in Mexico will be deemed to be sourced to Mexico if any one of the following conditions are met:
- The customer is domiciled in Mexico
- The payment intermediary through which the digital service is purchased is located in Mexico
- The IP address of the device used to purchase the digital services is located in Mexico
- The SIM card country code of the phone used to purchase the digital services is located in Mexico
It is thus important to U.S. colleges and universities to identify whether their services fall within the definition of long-distance teaching or testing. Experience with other countries indicates that this is not always clear and may depend on the level of human involvement by the institution in providing the service, such as whether the service is fully or partly automated.
There are now roughly 60 countries that have similar rules, including most of Europe, South Africa, Australia and Singapore. Unfortunately, each defines digital service” differently and has its own exemption rules. For example, some countries allow an exemption for education services or only apply the rules once the revenue from residents in their country exceeds a certain threshold. However, it is entirely possible for a U.S. establishment or entity to have VAT registration and reporting requirements across the globe, all depending on the location of their students and customers.
Higher education institutions in the United States that provide digital services abroad should begin to identify and evaluate global VAT compliance requirements for the educational sector. Determining whether services to foreign students and other bodies fall within the definition of “digital services” and considering ways to maximize the benefit of any exemptions could minimize the adverse impact.
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