One of the sectors that immediately and significantly affect the economy of a region is the real estate sector, recently as binomial Puerto Vallarta-Riviera Nayarit, has maintained a broad growth in the sale of both land and properties intended for residential use. In addition, within this environment of globalization and the need to have avant-garde designs, ecologic and self-sustainable styles designed for real estate projects, in the last years the large number of real estate developers has increased that hire professional services from foreign individuals and companies for them to support at the design, architecture, supervision, among others; with the purpose of being top shelf at the products (properties) that they offer to their potential clients.
The need to create new styles and innovative projects has led to the importance to have the participation of foreign professionals, who are not tax residents in Mexico, a situation that brings a monetary effect that real estate developers should value and consider within their work budgets as analyzed in detail below.
Considerations of the Law on Value Added Taxes (VAT)
According with current legislation this tax obligates a payment to people who perform certain activities in Mexican territory. It is an indirect tax, which the final affected for it will be the final consumer of the product or service, a situation that is not shared in most cases because in the market it is very common (mistakenly) to consider this as an overprice that the consumer pays.
According to this legislation, the sale of both land and dwelling houses is considered an exempt activity for this tax; this is, the seller will not transfer (will not add to his income) the corresponding VAT when performing any of the operations mentioned, i.e., if the sale of a dwelling house is for $500,000 pesos, the buyer will not pay an additional 16% on the value of construction that he would forcibly need to pay if the property he is buying were a premise to be used for commercial purposes.
While it is true that the developer does not add any amount for this tax on the sale, all VAT paid to providers must be considered either within the cost of the project or as a business expense. In both cases, this will represent either a decrease of his gain or an increase to the price of sale of the property.
On the other side, as we previously mentioned, the developer sometimes requires to contract services that are not carried out in domestic territory, and that are considered as import of services according to legal provisions and for which he is obligated to pay VAT, as if we were talking about a person who is importing some product at the border and subject to payment of said tax.
To companies that import services, but that their sales of products or services are obligated to add VAT (16%) to the price, where costumers end up paying this indirect tax, there is no monetary effect for these companies at the import of services, since in turn the same Law allows them to accredit (reduce) an amount equal to the accrued tax at the import of the service, this is known as virtual VAT, which in other words means that when importing services no tax payment is accrued, only the obligation to show that the service paid abroad generated a 16% payable tax but that in turn that payment is “deleted” with the same amount for the credit allowed by law.
However, it should be mentioned that this accreditation is only allowed for individuals or companies whose sales are taxed, that is, for those who invoice their income plus VAT, so that for the real estate developers which we have been analyzing, where their income is exempt because their business is to sell land or dwelling houses, they must pay VAT for the services they import and cannot make any credits or reductions on such amounts, as the case described above.
To illustrate this effect, we add the following chart:
|Developer that sells commercial land||Developer that sells land|
|Professional services paid to a foreigner for tax purposes and rendered abroad||$100,000||$100,000|
|Tax to pay||$–||$16,000|
Financial and tax effect of VAT for importing services.
Considering that there is no possibility of reducing VAT accrued by the import of services, it must be recognized as part of the cost of the project or work, or as an additional expense, recognition that will depend on the type of service received. In other words, if the service paid is for the design of the project, it will most likely have to be part of the cost of the project, but if the imported service was to coordinate administrative activities from abroad, its recognition will be as an expense.
Fiscally, this Tax must be registered as a liability and must be paid the month following the one on which the service was paid to the foreigner, as part of the monthly tax return of the company.
It should be mentioned that the opinion of the judicial system is to agree with this “additional cost” since it has expressed in a judicial resolution that taxpayers are not harmed by having to pay VAT for the import of services, due to the fact that this is part of their cost and they can be recovered through an increase at the price of its products, situation that is not widely shared by developers as it affects their competitiveness in the real estate market.
For budget purposes, you must have a clear idea of what services are going to be imported to add a 16% on the cost of the same in order to have sufficient cash flow within the development of the project.
The momentary effect on real estate developers we are referring to, that is to say, 16% on the cost of the importation services, will be important as long as the project requires the participation of foreign professionals during the project, construction and commercialization of the same. We consider it important to carefully review your situation, regardless of the stage your project is at, and determine the prevention of possible contingencies; our group of professionals has carried out studies in this regard and will gladly support you in case you need a more specific advice.
If you need more assistance to solve the reason of the rejection of your refund request or any other related problem, you can contact us and we will go through your case immediately.
At TR&A we are able to give advice about this as well as help you with the filing of the corresponding reports. You can contact us via:
C.P.A. | L.D. Gabriela Rojas
Teran Rojas & Associates.
Telephone: +52 (322) 209 1416, (311) 2584177
This article was written by Gabriela Rojas. You can find more articles and seminars in www.teranrojas.com.This article is owned by TR & Associates and its reproduction requires the written consent of Ms. Rojas, who have the rights of this work. Copyright 2018. This article is a general explanation of tax issues valid at the time of publication. “That article may be contrary to the interpretation of the tax authorities”.For each particular case we recommend obtaining written information from the applicable fiscal responsibilities of your case.