Below please find our comments on recent tax developments related to Digital Economy.

1. SAT Criterion 10/IVA/NV

Please be advised that this new position is part of the criteria regularly issued by the SAT, which is non-binding, and which is used by SAT to qualify the activities described therein as undue or tax abusive practices. At this time, non-binding criterion 10/IVA/NV focuses specifically on VAT and it is expressly addressed to hosts (e.g. hosts/home owners, whether individuals or legal entities) who provide lodging services offered through digital platforms.

In a nutshell, in terms of this criterion, the SAT is informing taxpayers (here, hosts) that the omission to pay VAT triggered upon the provision of lodging services offered through digital platforms is considered by SAT as an abusive tax practice

The criterion can be interpreted as a "heads up" for taxpayers/hosts who are currently not paying VAT due on lodging services and it merely constitutes a way to inform (i.e. no actual combat to tax evasion in connection with lodging services offered through digital platforms) that SAT is aware of taxpayers/hosts not paying VAT which would result -once the taxpayers/hosts are discovered- in the SAT determining, upon exercising audit powers, that they are not complying with their tax obligations.

However, in our opinion, this criterion (and the one mentioned below) could also be interpreted as a way to justify future law amendments addressed to the digital platforms -not to their usersimposing tax obligations in Mexico.

2. SAT Criterion 41/ISR/NV

Based on our review to the new set of non-binding criteria issued by SAT, in addition to criterion 10/IVA/NV the SAT issued an additional relevant criterion in similar terms (in that it is addressed/applies solely to hosts) but related to income tax. This is criterion 41/ISR/NV.

Just like in the case of the VAT-related criterion, through non-binding criterion 41/ISR/NV, SAT informs that taxpayers/hosts who do not recognize, for income tax purposes, any income derived from lodging services offered through digital platforms are deemed to be engaged in a tax abusive practice.

3. Joint Committee for Potential VAT amendments re. Digital Economy

We would like to take this opportunity to comment on the public announcement issued by Prodecon (the Mexican Tax Ombudsman) regarding a cooperation agreement that has just been signed with the Mexican Congress to draft a proposal to amend the Mexican VAT Law in order to include a collection procedure when digital platforms render services to Mexican customers. The collection procedure will be implemented to solve the practical issues that the tax poses in this regard -i.e. the self-assessment by Mexican end users. To this end, further tax amendments could be proposed to either allow or oblige (TBD) foreign digital platforms to be registered as taxpayers in Mexico for VAT purposes in order to collect the VAT triggered on the digital services rendered to Mexican customers.

4. Draft Bill submitted to Congress.

Finally, please note that last Wednesday, August 21 (same day when the SAT published its nonbinding criteria), a congressman from political party MORENA submitted a new draft proposal before Congress regarding digital platforms. The draft proposal contains somewhat simplistic terms without much explanation on the technical aspects and possible further amendments to other provisions that, in our opinion, would have to be modified. Following you will find a brief description of the content of the proposal:

a) VAT.

First, the proposal amends Article 1 of the VAT Law to "clarify" that the subjects of the tax will be individuals and legal entities both, Mexican and foreign residents, then it goes on to display the hypothesis in which the tax would be triggered and include a new hypothesis: "services rendered as intermediaries through technological platforms in order to conduct electronic commerce".

Finally, it mentions that the intermediaries that render services through a technological platform should keep their accounting records separate.

Our initial reaction is that the proposal lacks clarity with regards to the new legal hypothesis to impose VAT on digital platforms, for instance, it does not mention how the tax should be paid by foreign residents.

b) Income Tax.

On the other hand, the draft bill intends to modify also the Mexican Income Tax Law (MITL) by including a new hypothesis in Article 1 which the tax would be triggered: "individuals and legal entities, national and foreign that render services through a technological platform to conduct commercial activities of goods and services".

Moreover, in connection with Article 2 of the MITL, which is the provision that determines when it should be considered that a permanent establishment (PE) is created in Mexico, the proposal includes a new paragraph that intends to establish the basis for the creation for a PE by digital platforms. In somewhat confusing terms, the paragraph seems to say that a PE will be created when i) "individuals and legal entities, national and foreign, use a platform as intermediaries" in which case they should have their tax domicile in Mexico; ii) as well as when "individuals and legal entities, national and foreign, sign agreements to appoint representatives in Mexican territory with the purpose to carry out intermediation economic activities aiding the exchange of goods and services through technological platforms" in which case they would be deemed to have their permanent residence in Mexico for income tax purposes.

It is worth mentioning that if the PE concept is broaden in the MITL to include foreign residents using digital platforms, the Double Tax Treaties signed by Mexico as well as the OECD Commentaries would have higher hierarchy than said provisions.

Again, the proposal lacks clarity with regards to the intended tax treatment to consider foreign digital platforms as Mexican taxpayers. Considering the work being done by the joint committee mentioned in point 3. above, it would be interesting to see how this proposal develops in Congress.

We will keep you posted on any further developments on the matter.

Should you have any additional comments or questions, please do not hesitate to contact us.

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