On-chain Andes (4): Analysis of the dynamics of Mexico's crypto tax system and regulatory frontiers

1.Introduction

The United Mexican States (Spanish: Estados Unidos Mexicanos, English: United Mexican States), abbreviated as "Mexico", is an economic powerhouse in Latin America and an important mining producer in the world. Mexico has not fallen into a hyperinflation crisis like Argentina, Venezuela and other countries, but its financial industry has been monopolized by foreign capital for a long time, traditional banks cannot achieve the sinking of target users, and it is difficult to meet the credit needs of a large number of private enterprises. With the development of fintech, the financial function of cryptocurrencies has been discovered in Mexico, which has also contributed to Mexico becoming one of the Latin American countries with the highest adoption of blockchain and cryptocurrencies. Finance is a key factor driving the development of cryptocurrencies in Mexico, and Mexico's crypto tax system is inextricably linked to financial regulation. This article will analyze Mexico's cryptoasset regulatory and tax system from four aspects: basic tax system, cryptocurrency regulatory policy, cryptocurrency tax system, and cryptoasset tax system, and predict its future development direction.

2.Overview of Mexico's basic tax system

2.1Mexican Tax System

According to the Mexican Constitution, the federal government and the state (municipal) government have the right to levy taxes, which is a tax system at the federal and local levels. At the local level, there are two levels, the state and the city, and the federal government has the power to collect the main taxes in the country, especially the corporate income tax, and no local government at any level has the power to collect it.

The current tax system includes income tax (including corporate income tax, personal income tax, and capital gains tax), value-added tax, property tax (a minimum tax levied on an asset-based basis), import and export duties, and wage and salary tax (mainly including taxes levied on wages, social insurance, and workers' housing funds). In addition, federal taxes include taxes on mineral resources and special goods and services, such as excise taxes on alcoholic beverages, tobacco, gasoline, telecommunications services, and automobiles.

Local governments include state and municipal governments, and the types of taxes they have the power to collect include real estate tax, salary tax (mainly levied on employers), real estate transaction tax, business property tax, etc., as well as other fees for property registration and business license issuance.

2.2.1 Income Tax

A Mexican tax resident enterprise under the Mexican Federal Tax Code is a legal entity whose principal place of business or effective place of management is located in Mexico. In tax treaties, Mexico generally follows the concept of a resident business as set out in the OECD Model Text. Therefore, a resident business in a tax treaty is a person who is taxed in the country under the laws of the country by virtue of its location, place of residence, place of administration, place of establishment (tax treaty with Mexico) or other similar conditions. However, it does not include those who are taxed only on income derived from that country. In principle, a legal entity is considered a Mexican non-resident business if it does not meet the definition of a Mexican tax resident business. Corporate income tax is levied on corporations, corporations, and other legal entities that engage in business activities in Mexico. Mexican non-resident enterprises with a permanent establishment in Mexico are required to pay corporate income tax in Mexico on income attributable to the permanent establishment and income derived from Mexico, while non-residents without a permanent establishment in Mexico are only required to pay Mexican corporate income tax on income derived from Mexico. However, net taxable gains from the sale of immovable property and shares and short-term income from construction, installation and similar works are taxed at a higher rate. In certain cases, if such a company is determined to have a permanent establishment or permanent operation in Mexico for income tax purposes, it will be taxed in the same way as a registered branch of a foreign company in Mexico from the time of recognition, in accordance with the tax rules for resident companies. Capital gains from the sale of fixed assets, stocks, and immovable property are considered ordinary income and are subject to corporate income tax. Mexican law allows gains from the sale of real estate, stocks, and other fixed assets to be linked to the inflation index.

According to Mexico's federal tax law, a person who has an individual's permanent residence in Mexico is considered a resident of Mexico, and if the person also has a personal permanent residence abroad, then the main factor determining their tax residency status is the location of his center of vital interests. There are two scenarios in which Mexico is the center of vital interests: in a calendar year, the individual receives more than 50 per cent of the total income from Mexico; The main location of professional activity is located in Mexico. An individual shall be considered a resident of Mexico if his or her center of vital interests is located in Mexico. Individuals who do not meet the above conditions are non-residents. Mexican residents are subject to personal income tax on all of their worldwide income; Non-resident individuals are subject to personal income tax by law if they operate through a permanent establishment in Mexico and receive income from Mexican sources. Foreigners residing in Mexico are taxed only on their income in Mexico. Residents are allowed to deduct medical expenses, charitable donations, education expenses and other expenses from their taxable income, while non-residents are not allowed to deduct them. Since 2018, the Personal Income Tax (ISR) has been subject to a progressive rate capped at 35%.

2.2.2 VAT

Mexico's VAT taxes income from the sale of goods and services, rental income, and imports of goods and services. In determining the applicable tax rate, the operating income that is non-VAT taxable income together with the VAT taxable income is used as the basis for determining the tax rate. When a taxpayer fulfills his tax obligations and benefits from his or her exemptions, the tax passed on due to investment expenses must be adjusted for a later tax year. Under the new tax law, the current basic VAT rate in Mexico and border areas is 16%, and a VAT of 16% will be levied on some items that were previously zero-rated. At present, the items exempt from VAT include: agricultural products, basic food and medicine, service exports, labor exports, etc.

2.2.3 Property Tax

Operating property tax is an important local tax. It is an asset-based minimum tax levied at 2% of the value of a company's assets and is in addition to the federal income tax. The operating property tax is levied by the states and the Federal District and varies in tax rates. This tax applies to both personal and business assets. The tax base of the immovable property tax is based on the appraised value of the National Land Registration Board and the local finance department, which are jointly responsible for the assessment of the value of the property. Real Estate Transaction Tax is also one of the important taxes of local governments, and its tax rate is set by the state government. It originally emerged as an alternative to stamp duty on immovable property transactions, including legacy donations, donations to non-profit organizations, various immovable property transfers, etc.

3.Mexico's Cryptocurrency Regulatory Policy

The characterization of cryptocurrencies determines the direction of Mexico's cryptocurrency regulatory policy. According to the Banco de Mexico, virtual assets such as cryptocurrencies do not conform to the classic function of money, although cryptocurrencies and other currencies can be exchanged for goods or services. For example, Bitcoin's high volatility makes it difficult to function as a store of value and unit of account, and at the same time, there are currently fewer merchants accepting cryptocurrencies, and cryptocurrencies cannot be a universal medium of exchange. [1] Moreover, cryptocurrencies are not financial assets per se, and the investment gains and losses caused by their value volatility can only function like financial assets.

Mexico is the first country in Latin America to enact specific laws to regulate internet finance companies in the fintech sector. Currently, there are three ministries in the country that regulate the financial sector: the Ministry of Banking, Finance and Public Credit (SHCP) and the National Commission for Banking and Securities (CNBV). Mexico's cryptocurrency regulatory policy revolves around laws such as the Fintech Law (Spanish: Ley Fintech) and the Detailed Rules for the Supervision of Fintech Institutions (Level 2 Law).

In 2018, Mexico passed a fintech law on the wave of rapid development of fintech. The law deals with two main aspects of authorization: the authorization of crowdfunding institutions (Spanish: Instituciones de Financiamiento Colectivo-IFC) to carry out "crowdfunding" transactions, such as capital transactions regarding bonds, equity or ownership, and the authorization of electronic payment institutions (Spanish: Instituciones de Fondos de Pago). Electrónico-IFPE) issues, manages, redeems, and transmits electronic funds through digital means, and virtual assets such as cryptocurrencies are also covered. Both types of institutions are required to comply with minimum capital requirements, with electronic payment institutions meeting the standard of 500,000 UDI (index fund units used by Mexico as a stable alternative to the Mexican peso) if they operate only in Mexican currency, and 700,000 UDI if they are trading in virtual assets or foreign currencies or operating derivatives using the underlying virtual assets.In March 2019, the Bank of Mexico issued a secondary law on fintech to include cryptocurrency companies in its jurisdiction, and since then companies using cryptocurrencies to conduct business must also obtain relevant authorizations, violators can be fined $9,500-47,000, which means that cryptocurrency businesses are subject to stricter qualifications and controls. It should be made clear that the law does not apply to small and medium-sized enterprises that use cryptocurrencies as a means of payment, and only companies in the fintech sector that use electronic trading mechanisms or raise funds (crowdfunding) require authorization. Interestingly, the Bank of Mexico, one of the authorized institutions, did not approve a single company in the months following the passage of the secondary law, instead advising investors to be wary of cryptocurrency companies.

In addition to the aforementioned provisions, Mexico's Financial Intelligence Unit (FIU) has also issued reporting guidelines on cryptocurrencies, requiring the reporting of cryptoasset transactions and related intermediaries and service providers.

4.Mexico's Cryptocurrency Tax System

Mexico's crypto tax system is not complicated, and crypto assets such as cryptocurrencies rarely have special tax rules, but mainly comply with Mexico's general tax law regulations. Back in 2014, Mexico's Federal Tax Service issued Announcement No. 230, which regulates the tax treatment of Bitcoin and other similar virtual currencies. The announcement makes it clear that Bitcoin and other similar virtual currencies are not considered legal tender or foreign currencies and therefore do not apply to Mexico's foreign exchange control laws. From a tax point of view, the Mexican tax authorities do not discriminate between virtual assets and other assets, i.e., any acquisition and circulation of crypto assets should be subject to the same general income tax and VAT rules as other movable assets.

However, there are three peculiarities about Mexico's cryptocurrency tax system: First, the Mexican government has established the Financial Intelligence Secretariat (CARF), which aims to establish a unified tax framework, which indicates that Mexico's cryptocurrency tax system may become more sophisticated. Second, intraday cryptocurrency transactions similar to stocks or foreign exchange conducted by related enterprises are subject to 35% corporate income tax, which aims to guide the intraday trading behavior of cryptocurrencies and prevent excessive volatility in the financial market to stabilize the operation of the financial market. Thirdly, according to the provisions of the Fintech Law, since September 10, 2019, in addition to the normal declaration of income tax, value-added tax and other taxes, relevant cryptocurrency companies must make a separate tax declaration when the transaction volume exceeds 50,000 Mexican pesos or 2,700 US dollars, which shows that the Mexican financial regulator and tax authorities pay close attention to cryptocurrency companies.

5.Summary and outlook of Mexico's cryptoasset tax system

Mexico's crypto-asset tax system is still in its infancy, and its tax system is mainly dependent on the general tax system, and the applicable tax regulations mainly depend on the Mexican government's legal characterization of crypto-assets. The few special provisions on the taxation of crypto assets are mainly aimed at strengthening compliance reviews to protect the interests of investors and prevent potential financial risks of crypto assets such as cryptocurrencies, but do not reflect the policy attitude of the Mexican government to encourage and support the development of the crypto asset sector. In general, although the Mexican government continues to respond to the new development of crypto assets through regulation, taxation and other means, and does not deny the legitimacy of cryptocurrencies and their transactions, it still prefers to use crypto assets as a tool to promote economic development, and has been very vigilant about the financial risks behind crypto asset transactions and the impact of cryptocurrency circulation on national monetary sovereignty.

In January 2022, the Bank of Mexico announced that it was working to create a central bank digital currency (CBDC) and expected to put it into circulation in 2024. And in July of that year, Mexican Senator Indira Kempis introduced a bill that would give Bitcoin fiat-like status in Mexico. As of the time of writing, the bill has not been passed, and Mexico's central bank digital currency has not yet been launched, but it is foreseeable that regardless of whether Mexico chooses the path of centralized cryptocurrencies and whether to give decentralized cryptocurrencies legal tender status, the establishment of an independent and perfect tax system for decentralized cryptocurrencies such as Bitcoin is an unstoppable trend, and only in this way can we follow the wave of cryptocurrency development and better balance the relationship between economic development, financial security and monetary sovereignty.

Exegesis

[1]https://www.banxico.org.mx/sistemas-de-pago/1---que-es-un-activo-virtua.html#saltos

References

[1] Blockchain & Cryptocurrency Laws and Regulations 2024 (Legal Considerations in the Minting, Marketing and Selling of NFTs) | Insights | Skadden, Arps, Slate, Meagher & Flom LLP. (2024). Lukka, & Lukka. (2022, July 11). Overview of Mexico’s crypto taxation. Lukka.[2] Kereibayev, O. (2024, January 16). How to Comply with Mexico’s FinTech Law. Sumsub.[3] Ley para Regular las Instituciones de Tecnología Financiera [Law to Regulate Financial Technology Companies] arts. 30–34, Diario Oficial de la Federación [D.O.F], Mar. 9, 2018, available as originally enacted on the website of Mexico’s House of Representatives.

[4] Ma Hongxia. (2023). Development status, operational risks and trend prediction of global central bank digital currencies. Huxiang Forum, 36(5), 1-10.

[5] The Bank of Mexico's new fintech law strictly prohibits cryptocurrencies. (n.d.).

[6] Chinese Academy of International Trade and Economic Cooperation, Ministry of Commerce. (2022) Country (Regional) Guide for Foreign Investment Cooperation – Mexico

[7] Research Report: Blockchain Regulations, Applications and Opportunities in Mexico Golden Finance.