Hola everyone, my name is Diana Cuevas and I am an attorney specializing in international law and law in Mexico and I am the new legal blogger for Expats In Mexico.
One thing I have learned over the years is that expats want to communicate with a human, a fellow expat, a person that understands their frustrations and their needs and can relate to their issues. I am in a constant state of learning to ensure that I have answers to your legal questions. I have lived in six different countries, and know how challenging it can be to process every aspect of a new country, a new culture and a new system.
I think you will agree that it is most important to have peace of mind when it comes to our financial stability, especially when living in a foreign country. So, I will start my first blog talking about taxes.
The two most important legal frameworks for expats in Mexico to consider are the U.S. government’s Foreign Account Tax Compliance Act (FATCA) and SAT (Service de Administration Tributary), which is the federal tax collector in Mexico. SAT collects all federal taxes such as Capital Gains O tax, the IVA (Added Value) tax, the IDE (Tax on Cash Deposits) and the IEPS (Special Tax on Production and Services).
FATCA regulations stipulate that when overseas bank accounts and estates are not reported when filing taxes, harsh and severe penalties and punishments may be issued. However, in order to be in compliance in Mexico, you must first report what you own in Mexico in terms of bank accounts, real estate profits, investments and income to SAT.
I will explain in a very broad way how to determine what is taxed in Mexico and what you should pay.
IVA: This 16 percent tax (11 percent border zones) is the Value-Added Tax that is charged on goods and services. The only exemptions are medicines and food. Often this tax is INCLUDED in the price of food served in a restaurant and in clothing stores. The IVA tax is charged on lodgings, hotel rooms and, please note, furnished homes that are rented as vacation homes.
Income Tax: Any income generated from sources within Mexico is taxable. From business or salary, the rates are variable depending upon the amount of income received. The average tax paid is between 12-17 percent. In Guanajuato, also add a 2 percent estate tax.
Property Tax (Predial): This is a municipal tax with assessments on properties generally made annually. The tax can be paid in six installments (every two months) but probably should be paid in full within the first two months of the calendar year to obtain a discount. Rates vary from area-to-area but are often far lower than U.S. or Canadian property taxes.
It also is important to understand the difference between Tax Resident and Non-Resident for tax purposes. First, the Tax Resident is the person, citizen or non-citizen, who has acquired his/her Federal Taxpayer Identification Number, also known as RFC, and who files and declares taxes in Mexico on his/her worldwide income. Second, any party receiving income from Mexican sources, such as from rental or from the sale of real properties, or from business activities. And third, no distinction is made between citizens of Mexico and non-citizens as to tax rates.
When you file your taxes, keep in mind that tax authorities in the U.S., Canada and Mexico are working together and share information. Every day, there is more cooperation between the countries due to tax treaties. It is no longer possible to own a property in one country, enjoy income from that property and not report it in BOTH the country where the property is located and the country where the owner lives. Failure to comply means the owner is subject to double taxation and heavy penalties when the omission to file and declare is discovered.
Since 2010, U.S. citizens have had to comply with FATCA regulations. Each year you must report all income in foreign accounts. Failure to do so may result in fines and severe penalties.
Furthermore, FATCA requires specific actions by overseas financial organizations. These include the identifying of United States account holders. A yearly report must be sent to the IRS about these individuals who are American citizens. These banks must also provide the U.S. IRS 30 percent of earnings from any non-participating institutions that do not participate in the agreement, have account holders that do not disclose their own nationality and disclose any account holders of overseas account where the identity of owners and stockholders are hidden.
When a report has not been filed for financial assets in foreign accounts on the form provided for tax purposes, a penalty of US$10,000 is often levied. If someone does not report their income, penalties may reach up to US$50,000. Any underpayments for taxable income in these accounts that hold financial assets may have additional penalties that reach up to 40 percent of the amount contained in the accounts.
While it does take resources to discover those individuals evading taxation, there is usually enough time to identify and prosecute them.
Be aware of the law and don’t let this happen to you! If you want more information on FATCA, read the Expats in Mexico article, “How FATCA Impacts Expats in Mexico.”
If you have any topics about the law in Mexico you are interested in, please post a comment or contact me at firstname.lastname@example.org and I will feature them in future Mexico Law blogs.