In which cases does the 6% VAT withholding apply?
In which cases does the 6% VAT withholding apply?

Since the entry into force of the 2020 tax reform[1], there has been uncertainty among taxpayers about the interpretation of the norm provided in section IV of article 1-A of the Value Added Tax Law [in Spanish: la Ley del Impuesto al Valor Agregado], (LIVA), which establishes an obligatory withholding of 6% to legal entities and individuals engaged in entrepreneurial activities that receive services in which personnel is provided, regardless of the designation given to it in the contractual obligation.

The lack of certainty created by the final wording of section IV of Article 1-A was reinforced by the statement of the rationale that gave rise to this rule since said obligation initially referred only to those who might receive outsourced labor services per the Federal Labor Act [in Spanish: la Ley Federal del Trabajo], (LFT).

For this reason, the Tax Administration Service [in Spanish: el Servicio de Administración Tributaria], (SAT), has issued a Frequently Asked Questions document[2], intending to clarify any doubts and address new scenarios related to the application of the 6% VAT withholding. The position of the authorities concerning certain operations is provided below: 

  Cleaning services

Legal entities or individuals hiring cleaning services are obligated to withhold 6% of the VAT, regardless of whether the service is provided by a related party or by a third party.

  Security services

Companies hiring security services must withhold 6% of the VAT incurred by whoever provides the services.

However, the Office for the Taxpayers' Defense [in Spanish: la Procuraduría de la Defensa del Contribuyente], (PRODECON), issued a criterion that indicated that specialized private security services are not subject to a 6% withholding of the VAT[3], since it is not considered that personnel is made available to the contracting party because the functions performed by the said staff are used directly by the contractor based on the independent private security service it provides.

By the above, it is worth conducting an analysis to identify if the provision of security services is considered specialized and might not be subject to a 6% withholding of VAT. 

  Maintenance services

Individuals engaged in entrepreneurial activities that hire preventive maintenance for computers are obligated to withhold 6% of the VAT when legal entities provide these services.

It is worth mentioning that when it concerns preventive maintenance services and/or corrective maintenance of vehicles, regardless of whether the contracting party is an individual or legal entity, the withholding mentioned in the previous paragraph will not apply.

  Accounting, legal, and customs services

If an individual or legal entity hires accounting, legal, or customs services, provided by another individual or legal entity, the 6% withholding will not apply since the activities carried out by the contractor's personnel are not directly utilized by the contracting party, but rather by the contractor that requires them for the preparation of the document deliverables to the contracting party.

Keep in mind that legal entities must withhold two-thirds of the VAT[4] when the provider of the services described above is an individual.

  Services provided by interpreters, actors, or musicians who are affiliated with an association

Legal entities hiring services from unionized members or affiliates to an association of interpreters or actors, a musicians union, and collective management societies established under the Copyright Act [in Spanish: la Ley Federal del Derecho de Autor], are not obligated to withhold 6% of the VAT.

  Transportation services

Regarding personnel transportation services, the 6% withholding of the VAT will be applied when they are provided by companies dedicated to it.  

Conversely, the withholding will not be applied when ground transportation services of passengers or of pre-cooked foods are hired by an individual through a technology platform.  

Concerning road freight transport of goods hired by an individual and provided by a legal entity, the 6% withholding of the VAT will not be applied. However, if a legal entity hires the service, it will be obligated to withhold 4% of the VAT[5], regardless of whether the provider of the service is an individual or legal entity.

  Infrastructure contracts

The 6% withholding of the VAT will not apply when the company enters into an infrastructure contract in which the construction company oversees the work, delivers the materials, assumes all risk until the completion of the work, and the price of the same is paid upon delivery unless otherwise agreed. 

Services related to the procurement of food and beverage servers

Nor will the 6% VAT withholding proceed in the case of food acquisition services in which the service provider's staff serve the prepared food. However, when a taxpayer hires a company to provide personnel so that they are only in charge of serving food, the 6% VAT withholding will proceed.

It should be noted that each question has some specific considerations that must be met for the withholding to be applicable or not.

To correctly withhold and credit the tax, it is important to be attentive to the positions published by the authorities regarding section IV of Article 1-A of the Value-Added Tax Law.

J.A. Del Río provides advisory services to assist you in complying with this new norm so that you can avoid penalties stemming from a misunderstanding of the same.

[4]  Inciso a) de la fracción II del artículo 1-A, de la Ley del IVA, en relación con el artículo 3, fracción I, inciso a), de su Reglamento
[5] artículo 1-A, fracción II, inciso c) de la Ley del IVA en relación con el artículo 3, fracción II de su Reglamento