The SAT (Tax Administration Service) of Mexico has announced that as of January 1, 2020 changes will be implemented concerning those who live in Mexico and have a bank account in another country.
If you are a resident of Mexico making or receiving transfers to or from a foreign account under your name and you do not declare the transfer to the Hacienda (Mexico Department of Treasury) and Public Credit, you may be subject to an investigation by the SAT. This will affect those who live in Mexico and work in the United States.
The Tax Administration Service “SAT ” announced that as of January 1, 2020 changes will be implemented in the way of filing taxes and watch out if you are one of the people who work for a company or individual in another country but live in Mexico, this information will be of your interest.
The announcement sent shock waves through social media, as nationals and foreigners alike were outraged at what they assumed was spying on private citizens. However, this is nothing new. Due to FATCA, the bi-national fiscal exchange agreement, both the SAT and others nations, such as the US Internal Revenue Service (IRS) have been sharing this information for years, usually on amounts greater than MXN$50,000, although that amount is not set in stone, and in fact, any amount of transfer is suspect to investigation.
If you live in Mexico but work in another country
After January 1, 2020, if you are a resident of Mexico and the SAT discerns that you are making payments through transfers of a foreign account in your name, without having a declaration in the systems of the Ministry of Finance and Public Credit, you may be subject an investigation.
If the SAT authorities do not see a statement of income by the same resident in their systems, an investigation process of how the money was earned begins ,” said Miguel Ángel Guillén de León, creator of Fiscal content at Concanaco Servytur and former department head at SAT Tijuana.
Once the SAT starts the process to examine your expenses, you will receive a notification asking you to clarify the income you are receiving.
That is why if this is your situation, what you should do is submit a statement to the SAT, to avoid fines or possible jail time. Although this does not mean that you will have to pay double taxes.
Billing on Purchases with Debit/Credit Cards
Purchases made with credit cards raised the most concern on social media. While ordering a book from Amazon and paying for it with a credit card may not start an investigation, you can be sure that buying more expensive merchandise that exceeds your income reported to SAT will most certainly result in an investigation. The SAT is going to be very interested in how you are spending more money than you are reporting.
This is also going to affect those government employees that accept bribes and make cash transfers to a foreign bank on which they are holding a debit/credit card. They are going to want to discover why a supervisor that works for CFE and earns MXN$38,715 (USD$2,048.65) a month can afford to travel the world and stay in expensive 5-star hotels in Dubai and Paris spending twice his reported income using the foreign debit/credit card three times a year.
During a press conference last month, the head of the Association of Banks of Mexico (ABM), Luis Niño de Rivera, indicated that the instant billing service will be integrated into the point-of-sale terminals and that credit cards and debit will have taxpayer tax information.
According to Niño de Rivera in the final stage of the program, you must enter your Federal Taxpayer Registry (RFC) at the point of sale terminal. As long as your purchases are below your reported income, there should not be an investigation started.
The Treasury ensures that the change is not intended to contrast your income with your expenses; but get rid of billing to third parties, provide a way of immediate billing for all taxpayers and have a true record of expenses that are taxable.
What Taxes Do Foreigners Pay In Mexico
Whenever foreigners reside in Mexico, earn income while residing in Mexico, own a rental property, or have a business, they must deal with the taxation process in Mexico. If you are an individual US citizen, you are taxed on your worldwide income. It does not matter where the money is earned, how it is earned, or where you live, you must file a report and pay taxes on the income. If you are a US citizen and report the income in the US, you will receive a foreign tax credit to avoid double taxation on the same income. However, you must file a report with SAT and show that you paid taxes on the income to the US to receive the tax credit. Multinational US corporations only pay US tax on earnings in the US, not abroad.
Mexican legislation has established that any foreigner residing in Mexico, or a foreign company operating in Mexico, for more than 183 days a year, or earns more than 50.1-percent of their income in Mexico is considered a tax resident of Mexico.
When a foreigner is a tax resident of Mexico, they are must report to the SAT any income obtained from the following:
- Income: money obtained from salaries and other benefits derived from an employment relationship, overtime, additional benefits, compensation, retirement, pensions, retirement insurance, bonuses, among others.
- Fees: income earned by providing independent professional services, that is, not granted in a subordinate manner.
- Compensations to members of councils, government administrators, curators, and managers: salaries received by members of boards of directors, oversight, consultants, fees to administrators, commissioners and general managers.
- Leasing of real estate: income for renting real estate that is located within the national territory of Mexico.
- Timeshares or tourist service contracts: for use, enjoyment, occupation or enjoyment of temporarily or definitively of one or more real estate or part of them for tourism, vacation, recreational or sporting purposes.
- Disposal of shares: When income is obtained from the sale or disposal of shares or other securities.
- Financial leasing: interests generated from leasing with an option to purchase or with the right to participate when the good is sold to a third party.
- Royalties, technical assistance and advertising: profits obtained through the use of patents, inventions, trade names, copyrights, by the transmission of visual images, sounds or both.
- Income from exempt interests: discounts for the placement of securities, payments made for the opening of credits, payments to a third party when there is an acceptance of an endorsement, profits from the sale of securities placed among the investing public, the income obtained by a resident abroad for the acquisition of a right or credit of any kind, present or future.
- Prizes: lotteries, raffles, betting games, or contests of any kind.
- Artistic activities, sports, or public shows: profits or income obtained by residents abroad that carry out sports, artistic or public shows in Mexico.
- Dividends and profits distributed by legal persons: When residents abroad obtain income from profits distributed by legal entities residing in Mexico.
- Sale of real estate: when income is received from the sale of some real estate that is within the national territory of Mexico.
- Construction, installation, maintenance or assembly in real estate, inspection or supervision: those who provide construction services, installation, maintenance, or assembly in real estate within the national territory of Mexico
Foreign residents are subject to Mexico’s income tax on their world income, regardless of their nationality. The Federal Tax Code establishes that a foreigner will be considered a resident of Mexico for tax purposes when his domicile has been established in Mexico, unless he has been physically present in a foreign country for more than 183 days, consecutive or not, in a calendar year, and is able to demonstrate residency for tax purposes in that other country.
In order to work within these tax laws, most foreigners set up an offshore company. They use one structure to manage investments (usually an LLC) and one to hold their business (usually a corporation). Then they bring into Mexico only the income necessary to operate in Mexico.
Also, most foreigners set up a residency in a foreign country that will not tax their income. Because they’ll be spending time in Mexico, they also need a country that doesn’t have a physical presence requirement to maintain the residency visa in that country.