Global

Details

  • Service: Tax, Global Indirect Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Business and industry issue, Regulatory update, Survey report
  • Date: 5/1/2012

Country perspectives on taxing the cloud – Mexico 

KPMG in Mexico takes a look at how local tax authorities are approaching the challenge of cloud computing, by examining the potential taxes applied.

Digital distribution of a certain shrink-wrapped software

tax infographic

Permanent establishment

Assuming that the Mexican third party channel partners do not exercise authority to enter into agreements in the name of or on behalf of the vendor, in order to conduct the vendor's activities in Mexico, then these channel partners should not cause the vendor to have a permanent establishment (PE) in Mexico.


Furthermore, if the Mexican third party channel partners conduct activities that are preliminary or ancillary or are within the framework of their own activities, and they receive arm's length remuneration, then these channel partners should not cause a vendor to have a PE in Mexico.


Provided the local country sales agent in Mexico does not exercise authority to enter into agreements in the name or on behalf of the vendor, and receives arm's length remuneration for its services, then the sales and marketing assistance of this agent should also not cause the vendor to have a PE in Mexico.


Where the third party channel partners' and Mexican local country sales agent's activities are the same as those of the vendor, this may cause the vendor to have a PE in Mexico.


Related party transactions

All related party transactions must be at arm's length terms and prices.


Withholding tax

In general terms, digital distribution of shrink-wrapped software should be considered for Mexican tax purposes as a sale of goods, and hence no withholding tax is applicable. Regardless, under certain conditions the shrink-wrapped software payment could be considered as a royalty for Mexican tax purposes, and consequently, a withholding tax would apply. Therefore a deeper analysis is required to determine the tax consequences on a case-by-case basis.


If the payment is made to a US tax resident who is the beneficial owner, payments for the use of software should be taxed at 10 percent as a royalty payment (according to Article 12 of the US- Mexico treaty).


Indirect tax

Value Added Tax (VAT) is applicable if goods are imported or if the sale is considered to be carried out of Mexico.


Customs duties apply only if goods are imported.


Other issues or planning opportunities

Business Flat Tax (IETU) is not applicable to foreign residents that do not have a Mexican PE.


The server must be located outside of Mexico; otherwise it would cause a vendor to have a PE in Mexico.


Public cloud

tax infographic

Related party transactions

All related party transactions must be at arm's length terms and prices.


Withholding tax

Where the end user pays the vendor for software in order to enter into the cloud, such payment would be likely to be taxed as a royalty payment, and hence the 10 percent withholding rate would be applicable according to the tax treaty (Article 12 of the US-Mexico treaty applies if the vendor is a US tax resident).


On the other hand, if the end user pays for using the cloud service (assuming that no software is required for entering into the cloud), then the payments could be considered as a service payment, and should be taxable only in the country of residence of the service provider. (Article 7 of the US-Mexico treaty applies if the service provider is a US tax resident).


In all circumstances a case-by-case determination of the type of payments should be carried out.


Indirect tax

VAT is applicable on the importation of intangibles or services and must be self-assessed by the end user.


Other issues or planning opportunities

IETU is not applicable to foreign residents that do not have a Mexican PE.


The server must be located outside of Mexico; otherwise it would cause a vendor to have a PE in Mexico.


Private cloud

tax infographic

Permanent establishment

There would be no business activities carried out in Mexico by the foreign vendor in this scenario; consequently, the vendor should not have a PE in Mexico.

 

The server must be located outside of Mexico; otherwise it would cause a vendor to have a PE in Mexico.

Related party transactions

All related party transactions must be at arm's length terms and prices.


Withholding tax

Where the Mexican affiliate pays a vendor for software (license) in order to enter into the cloud, this payment would generally be taxed as a royalty payment and hence, the 10 percent withholding rate would be applicable, according to the tax treaty with the US (Article 12 of the US-Mexico treaty).


On the other hand, if the Mexican affiliate pays for using the cloud service (assuming that no payment for software is required for entering into the cloud), the payment should be considered as a service payment, and should be taxable only in the US (the country of residence of Vendor - according to Article 7 of the US-Mexico treaty).


In all circumstances a case-by-case determination of the type of payments should be carried out.


Indirect tax

VAT is applicable on the importation of intangibles or services and must be self-assessed by the end user.


Other issues or planning opportunities

The server must be located outside of Mexico; otherwise it would cause a vendor to have a PE in Mexico.


Business Flat Tax (IETU) is not applicable to foreign residents that do not have a Mexican PE.

 

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Contact

Catherine Thibault

KPMG in Mexico

+52 55 52 46 84 74