On August 21st, 2019 the Mexican tax authority published the first amendment resolution to the Miscellaneous Tax Resolution (MTR) for 2019, which includes amendments to Exhibit 3 thereof titled “Non-mandatory Criterion of Tax Provisions”; as part of these amendments, criterion number 41 was added to the Income Tax Act, titled “Lodging Services through technology platforms. These are subject to payment of Income Tax” and criterion number 10 of the Value Added Tax Act, titled: “Real estate used for lodging, through environmental platforms.”
Next, we shall proceed to briefly explain each, however it is important to mention that the following analysis is applicable only to those individuals who, as part of their economic activities, provide lodging services through technology platforms such as: Airbnb, Trivago, Expedia, etc, as these new criteria are addressed to this sector of economic activities offered by individuals in Mexico.
41/ISR/NV. Lodging services through technology platforms. Subject to the payment of Income Tax.
Income Tax Act establishes that individuals shall determine and pay Income Tax depending on the tax regime they are under, that is, depending on the activities they perform, for example: wages (Title IV, chapter I), business activities (Title IV, chapter II), income on leases (Title IV, Chapter III), revenues from the sale of goods (Title IV, chapter IV), and so forth.
With regards to Chapter III “income from leases (…)”article 114 sets forth what shall be understood as rendering the temporary use of real property: (author’s emphasis)
I. Those obtained from lease or sub-lease and in general, for granting the temporary use of real property for a price, in any manner.
II. (…)
With this definition, the Law leaves no doubt as to the definition of income from leases.
This is relevant as those individuals receiving income from leases in Mexico may determine their tax profit with two different methods and this shall later be used as grounds for the calculation of taxes:
Option 1 – income less authorized deductions
The first option consists on considering the difference between decreasing deductions authorized by the law from revenues, this includes: payment of property tax, maintenance expenses, real interest paid, salaries, commission, etc., insurance and investment in construction.
Option 2 – Blind deduction
The second option consists of considering the difference from decreasing a deduction of 35% from total revenues as a tax profit and in addition, property tax may be deduced in lieu of other deductions listed on the above paragraph. This deduction of 35% over the total revenues is also known as “blind deduction”.
However, from the tax authority’s stand point, lease rendered through technology platforms shall be deemed income from business activities (chapter II) and not income from leases (chapter III) hence preventing taxpayers from using the blind deduction mentioned above and they shall determine their profit in a traditional manner, that is, subtracting authorized deductions from income, which could lead to a larger payment of tax for individuals rendering these services.
At the same time, the same criterion indicates it is an undue tax practice to “advise, counsel, render services or participate in the execution or implementation of blind deduction corresponding to the application of the 35% rate on the total revenues obtained, making it clear that the authority’s stand is that income obtained from the lease of real estate through technology platforms shall be deemed income from business activities in order to refrain from using the benefit of the blind deduction.
NOTE: It is important to mention that this blind deduction benefit only applies to taxpayers obtaining income from leases, but not for legal entities (e.g. corporations, LLC, etc).
10/IVA/NV. Real estate for lodging, through technology platforms.
On the other hand, the criterion in connection with VAT only establishes that income from the lease rendered by technology platforms shall be subject to a VAT rate of 16% and shall not be deemed tax-exempt activities, therefore, service providers shall transfer the tax to the authority no later than the 17th of the month immediately after, just as any other taxpayer subject to VAT Act.
In fact, said criterion mentions that the following is an “undue practice:”
- I. Taxpayers failing to pay the corresponding VAT on granting lodging services through the use of technology platforms.
- II. Advising, rendering or participating in the execution or implementation of the no application of the corresponding VAT.”
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