Key takeaways

In circumstances where access to or the download of a video game is granted through payment of a membership or subscription, the 8% IEPS rate shall be applied exclusively to the portion of the price attributable to the video games with violent content, provided that the corresponding invoice distinctly itemizes the price for each one. In the event that the tax invoice does not specify the price for access or download of each video game, it shall be presumed, for tax purposes, that seventy percent (70%) of the total amount charged for the membership or subscription pertains to the taxable supply of video games subject to the IEPS.

In depth

1. Tax obligations for digital platforms (Mexican and non-Mexican)

• Digital intermediary platforms — including, but not limited to, app stores and video game marketplaces — that facilitate access to or enable the download of video games characterized by violent, extreme, or adult content and deemed unsuitable for individuals under the age of 18 are legally required to withhold and remit one hundred percent (100%) of the IEPS that applies to such transactions. This obligation extends to transactions conducted both with Mexican tax residents and with foreign individuals or entities that do not maintain a permanent establishment within Mexican territory.
• The amount of tax withheld by the digital platform in connection with transactions subject to IEPS shall be deemed the definitive payment of the tax for the service provider. This means that the platform substitutes the original service provider (taxpayer) before the tax authority.
• Digital platforms that grant direct access to or enable the download of such video games are legally obligated to collect the 8% IEPS from users.
• For the provision of these services, defining whether the service is rendered within Mexican territory shall be applicable the VAT rules, specifically by considering the recipient’s location in national territory according to the applicable criteria.
• Monthly tax return filing and payment: The digital platforms must remit the withheld tax to the SAT no later than the 17th day of the month following the month in which the payment was made.

2. Administrative obligations

• Registration with the taxpayers registry: Foreign digital platforms that do not have a physical presence or office in Mexico are required to officially register with Mexico’s Federal Taxpayers Registry (“RFC” by its acronym in Spanish) and obtain an electronic signature for tax compliance purposes.
• Appoint a legal representative and domicile in Mexico for notification and compliance monitoring purposes regarding tax obligations.
• Offer and charge the IEPS included in the digital services price.
• Maintain records of service recipients and provide this information to the SAT along with the monthly tax return.
• Issue electronic tax invoices (CFDI by its acronym in Spanish) to customers in Mexico, with IEPS itemized, when requested by the recipient.

It is important to note that digital platforms subject to this new tax should already be registered in the RFC for digital services VAT purposes, so it will be necessary to review updating their registration to comply with the new IEPS obligation, as well as the possibility of issuing the corresponding tax invoices.

3. Our recommendations

• Digital intermediary platforms must determine whether the video games they offer, enable for download, or make accessible in Mexico qualify as “video games with violent, extreme, or adult content, unsuitable for individuals under 18 years of age”.
• Foreign digital platforms must ensure strict compliance with the following new tax obligations: registration with the taxpayers registry, appointment of a legal representative and domicile in Mexico, issuance of electronic tax invoices (CFDIs) itemizing the IEPS when requested, and timely submission of monthly tax returns.

4. Legal remedies

In our view, entities obligated to transfer, withhold, and remit this new tax may contest its constitutionality by filing an indirect amparo action. Each affected company must initiate this proceeding individually to seek constitutional relief.

The principal legal arguments that may be asserted are: (i) the justification for the new tax is groundless, as it relies on a 2012 study concerning the impact on children, which is not conclusive; (ii) the taxable event target is adult video games, while the intended behavior to regulate apply to violence in games for children; and (iii) the presumption that 70% of membership or subscription fees are used to access or download such video games is unreasonable. Additional arguments may also be presented.

We remain available to provide further details regarding this legal remedy, including guidance on the appropriate timing for filing such actions.