Mexican government searches for an attractive solution for taxing large digital platforms

17/04/2021

Mexico has broken new ground in the global campaign to find ways to tax large digital multinationals. The parliamentary group of the ruling party, with a majority in both chambers, presented this week an initiative to establish a new 7% tax on the fees of streaming services such as Netflix or Apple TV.

Pending its final approval and on the eve of the June elections -the congressional sessions close at the end of this month- which could change the balance of power in parliament, the initiative is a novelty with respect to the line followed by most countries, driven by the OECD, which focuses on taxing the income of the platforms through the so-called Google tax.

There are two particularities in Mexico. On top of focusing on the sales of companies through a new consumption tax, it leaves out digital services that have a physical extension, such as distribution or transportation. That is to say, Amazon or Uber would not enter into the bag of the new law. Indeed, this is not Mexico's first move to tighten the tax siege on large platforms. In June last year, a new regulation came into force that obliged foreign digital companies to pay VAT on their services.

Tax domicile is the main issue in the campaign to ensure fair taxation for large platforms, which operate in countries where they often have hardly any corporate presence. The Mexican initiative even penalizes multinationals for not even having an office. "In the event that the service provider does not have a domicile or permanent establishment in national territory, the tax rate will be 15%," reads the legislative bill. Another justification of the Mexican initiative is that "they are mounted on the public telecommunications networks of telephone and Internet operators but do not invest in their installation and deployment".

What is at the heart of the matter is a very strong need to increase tax collection. Mexico is the country with the lowest tax collection in the OECD and also lower than most Latin American countries.

At the same time, negotiations are continuing within the OECD to introduce a tax on income, the so-called global Google tax. In 2017, the organization accepted the G20's mandate to reform the rules of international taxation in a world where data has become the new raw material and where technology companies establish their headquarters in countries with lax taxation.

The OECD has set itself the goal of having a universal digital tax in place by 2020. Its forecasts, however, have not been met. The complexity of finding a balance that would bring more than 130 countries into the agreement was compounded last year by the outbreak of the pandemic and the decision of the US administration of Donald Trump to withdraw from the negotiations.