By Rene Cacheaux

Mexico, having followed the European and Canadian systems, established a consumption tax called the Value Added Tax, which is also known by its initials VAT. The tax is imposed on the general consumption of goods and services, and applies at every level from the first producer until sale to the final consumer, which is accomplished through a system of VAT credits. A peculiar element of the VAT is this tax credit system, which allows producers and intermediate parties to recover VAT paid toward the purchase of necessary raw materials in order to produce their goods and services. Producers of goods or services must pay VAT at the general rate of 16% of the value of raw materials, parts and components necessary to manufacture their goods or provide services. Taxes paid represent a tax credit for those making the payment, which is to say that the taxpayer has the right to recover VAT paid in relation to such raw materials, parts and components. Upon selling the goods or services, the seller or service provider is obligated to collect from the purchaser or consumer Value Added Tax equal to 16% of the value of the products sold or services provided. Upon collection of VAT from the purchaser or goods or services, the seller or provider of such services retains the VAT paid in relation to the acquisition cost of raw materials, parts and components, thus making effective the tax credit mentioned above. As a difference in value between the raw materials, parts and components and the value of the final goods or services provided will obviously exist, the VAT applicable to such difference which is collected by the seller must be remitted to Mexico's tax authorities. This same mechanism applies in the various links of the chain of production until reaching the final consumer, who bears the responsibility for paying VAT on the value of the final goods or services purchased and who does not have a Value Added Tax credit to offset such payment. Certain basic goods and services are exempt from VAT on final consumers, but subject to VAT in relation to the raw materials, parts and components originally acquired. This occurs, for example in the construction and sale of housing. Value Added Tax must be paid on the construction materials, but the final purchaser of the home does not pay VAT upon such acquisition. In addition, certain cases exist where VAT is paid in the production and distribution chain, but VAT is not received from purchasers of the goods or services, as is the case in export sales. The raw materials, parts and components necessary to produce a good that is exported are subject to Value Added Tax, but the export sale of the final good or service is subject to a 0% rate, which means the purchaser does not pay VAT to the Mexican exporter/seller. In this case, the seller will recover VAT paid in relation to such raw materials, parts and components through an application for reimbursement of VAT filed with Mexico's tax authorities, or the taxpayer may prefer to credit the VAT against other federal taxes due. Finally, it is worth noting that in Mexico's border regions, in order to protect the competitiveness of cities and markets located in such border regions, the VAT rate is reduced in comparison to the general VAT rate.