What is VAT?: learn how to identify it and calculate it

VAT is an indirect tax that taxes the consumption of products and activities, in order to increase tax collection and allow the financing of public and social initiatives. In Mexico, the VAT rate is equivalent to 16% of the value of the product.

When buying, when selling, when invoicing, he will appear. This is a tax you will interact with, no matter what side of the trade you are on. For this reason, we have prepared this article for you with the necessary information to know what is VATwhat is the current rate charged in Mexico and how should you calculate it.

What is VAT?

The Value Added Tax (VAT) is a type of tax applied to the consumption of goods and services in different countries. This tax consists of a percentage or rate determined by the tax institutions that is added to the final cost of those products or services that you consume.

It is known as an indirect tax because, unlike other amounts that are applied directly to taxpayers’ income, VAT is applied to the production and sale of goods and services consumed. In other words, VAT is not applied directly to people, but indirectly to the products they consume.

The clearest example to understand this is to compare it with , such as , which is applied directly to salary, while VAT is paid when buying a flat screen or the monthly payment of your streaming platform.

What is VAT in Mexico?

VAT in Mexico is the indirect tax that is applied on the consumption of those products or services established in the and whose compliance and application is the responsibility of the Tax Administration Service (SAT).

In Mexico, the individuals subject to the payment of VAT are all those natural persons (you, your employees) or legal entities (an organization or incorporated company) that carry out the following activities:

• Alienation of assets.
• Leasing of goods.
• Provision of independent services.
• Import of goods and services.

📢 Tip: In the fiscal field, it is considered as ‘alienation of assets’ when ownership of a thing is transferred through a transaction that generates income. Yes, it is a very formal way of calling the sale or purchase of products.

VAT arises in Mexico when it was issued as a tax law in 1978, created as a tool to generate revenue and lessen the impact of the economic crisis. It came into force in 1980 and since then, the applied VAT rate has been changing, increasing and decreasing over the years, which leads us to our next point.

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How much is VAT in 2022 in Mexico?

In 2022, the percentage of VAT in Mexico corresponds to 16% on the value of the product. This general rate applies to the consumption of almost all goods and services, with two notable exceptions:

1. Products and activities in the border area of ​​our country, where VAT corresponds to 8% of the value.
2. There are products and activities that do not cause VAT, that is, they have a 0% rate or are exempt from paying this tax.

The amount of VAT in our country, as well as the exempt products and activities, are updated through tax reforms, which are modifications and adjustments to the tax law in Mexico.

Although it is entirely possible that the amount will change over the years, the current rate of 16% VAT has remained that way in Mexico since 2010; however, the amount paid in the border area and the exempt products and activities have changed.

📢 Tip: The reason why the VAT is lower in the border area is to generate a stimulus to national consumption in those people who have the facility to buy in neighboring countries (United States, Guatemala and Belize). A convincing way for Mexican money to stay in our country, to put it another way.

How to get VAT from a total value?

If you want to calculate the VAT of a product, just you need to know the current rate —which in the case of Mexico is 16% for almost the entire country, except the border area where it is 8%— in addition to the cost of the product. With this data, you have two options:

1. If you want to know the amount of VAT that corresponds to a product that does not have it, just multiply the base cost of the product by 1.16.
2. If what you are looking for is the amount corresponding to the VAT of a product that already has it, you need divide your final price by 1.16 to get the base price, then find the VAT.

We are going to explain both operations to obtain 16% VAT with a simple example, do you think?

A) Let’s say you want to buy a washing machine whose base cost is $10,000 MXN + VAT. This is where you prepare your calculator:

To find out what the final price of that washing machine will be with VAT already applied, you multiply the base cost by 1.16; 10,000 x 1.16 = 11,600. The final cost of that washing machine with VAT is $11,600 MXN.

B) Now, suppose you arrive at a store and that washing machine has $11,600 MXN on the label as the final price, but you want to know how much of that amount corresponds to VAT:

In this case, you take the final price of the washing machine and divide it by 1.16; 11,600 ÷ 1.16 = 10,000. That base price is subtracted from the final price; 11,600 – 10,000 = 1,600. The VAT of that washing machine is $1,600 MXN.

📢 Tip: If the VAT you want to find changes to another rate, simply adjust the last digits to the multiplied amount. A VAT of 13% would be calculated with 1.13. Simple, right?

You want to practice? I invite you to read our article. Or try to obtain the cost of that same washing machine in the border area with the 8% VAT. It is not worth crossing the border to buy the washing machine! 😒

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Different types of VAT (with examples)

When it comes to VAT, you will come across different types related to this tax. These are the most common:

• creditable
• To be credited
• transferred
• to move
• caused

Let’s go through each one with a brief example to make them very clear:

creditable

It is known as VAT creditable to the payment of the tax when a product is purchased and the payment is made in cash. This generates an invoice that accredits the payment of VAT by the buyer.

Example: You go to a department store to buy a washing machine for cash at a cost of $11,600 MXN. You have already covered the creditable VAT and it corresponds to $1,600 MXN that will appear on your invoice (just like in the example we saw above).

To be credited

The VAT to be credited is the one that is presented when the purchase you make is on credit or in payments and therefore, this concept is specified in the invoice. When liquidating the total credit, this VAT to be credited becomes creditable.

Example: You buy the same washing machine from the example, but this time, you do it on credit. At the time of invoicing in a tax return, the $1,600 MXN is considered as VAT to be credited and will be credited when the total credit is settled.

transferred

We speak of transferred VAT when a seller sells their products and charges their customers the tax on the total when invoicing. This action transfers the VAT amount to the buyer from the seller.

Example: The store that sold the washing machine in our first example for cash, for invoicing and reporting purposes, will consider the $1,600 MXN of VAT generated by the sale as VAT passed on to the buyer.

to move

The VAT to transfer corresponds to the amount of the tax generated by the sale of a product made on credit or in payments. Once the purchase on credit has been settled, the VAT to be transferred becomes transferred VAT.

Example: the credit sale of the second washing machine generates a transfer VAT of $1,600 MXN, which will be transferred to the buyer once he/she settles the total purchase.

📢 Tip: did you notice? The creditable and transferred VAT correspond to the same action, seen from the point of view of the buyer and seller, respectively. Depending on which side of the court the transaction is viewed from, it is the name that will be given for tax and billing purposes.

caused

This is the VAT generated effectively in the alienation or sale of goods, which falls on the product. In other words, it is the VAT already applied and creditable when carrying out a sale.

Example: When you bought the first washing machine in cash, your purchase caused a VAT or had a VAT of $1,600 MXN. It is now possible to deduct that amount when requesting a tax refund (if applicable).

What products and activities are exempt from VAT?

There are six categories contemplated in the VAT Law that are exempt from VAT payment:

1. Acts and activities with a 0% rate.
2. Exemptions for alienation (sale).
3. The provision of services exempt from payment of VAT.
4. VAT exemptions for lease.
5. The rate 0% for export.
6. Imports exempt from VAT payment.

Let’s briefly look at what each of these categories includes.

Acts and activities with a 0% rate.

A) The sale of:

• Non-industrialized animals and vegetables (exceptions apply).
• Patent medicines and products intended for human and animal food (exceptions apply).
• Ice and non-carbonated or compound water.
• Ixtle, palm and lettuce.
• Tractors to drive agricultural implements, power tillers, plows, cultivators, harvesters, sprinklers and dusters, as well as other tools for agriculture (exceptions apply).
• Fertilizers, pesticides, herbicides and fungicides for agricultural use.
• Hydroponic greenhouses and irrigation equipment.
• Gold, jewelry, metalwork, artistic or ornamental pieces and ingots, provided that their disposal is not made in retail sales with the general public.
• Books, newspapers and magazines, edited by the taxpayers themselves (exceptions apply).
• Sanitary pads, tampons and menstrual cups.

B) The provision of the following services:

• Those directly related to agriculture and livestock.
• Grinding or crushing corn or wheat.
• Milk pasteurization.
• Those related to hydroponic greenhouses.
• Cotton seeding.
• Slaughter of cattle and poultry.
• of reinsurance.
• Water supply for domestic use.

C) The temporary use or enjoyment of machinery and equipment dedicated to agriculture and livestock.
D) The export of goods or services (with exceptions).

📢 Tip: If you are in doubt as to whether the tractor you are planning to buy has a 0% VAT rate, or if you want to delve into the exceptions for these products and activities, check the where all this information can be found.

Exemptions for disposal (sale)

• Soil.
• Constructions attached to the ground, intended or used for residential homes.
• Books, newspapers and magazines, as well as the right to use or exploit a work, made by its author.
• Used personal property, except those sold by companies.
• Tickets and other receipts that allow participation in lotteries, raffles, raffles or games with bets and contests of all kinds, as well as their respective prizes.
• National currency and foreign currency, pieces of gold or silver that would have had such character and the pieces denominated…