VAT in Mexico: Cash flow traps and compliance realities for multinationals

A first surprise for foreign companies operating in Mexico is that VAT in Mexico is only creditable if two main conditions are met: a valid electronic invoice (CFDI) is issued, and the expense has been effectively paid. This differs from the EU, where credit is usually recognised on an accrual basis, and from the US, where sales tax applies only to final consumers. A simple delay in supplier payments, for example, 90 days, can result in millions of pesos of VAT locked until payment is cleared.

Inventory used for samples, promotional gifts, or displays often raises questions. In some jurisdictions, this restricts creditability. In Mexico, however, VAT is still creditable as long as the expense is deductible for income tax purposes and supported by a CFDI. This nuance is often overlooked by foreign tax teams, but can provide opportunities when structuring marketing and promotional strategies.

Exemptions add further complexity. Mexico exempts categories such as: 

• Unprocessed food;
• Long-term housing rentals;
• Formal education; and 
• Wages. 

For multinational companies, these exemptions often translate into unexpected embedded costs, particularly in consumer industries. When comparing the effective VAT burden across jurisdictions, these carve outs make Mexican operations less straightforward than they might seem.

Cash flow is perhaps the greatest challenge. Since Mexican VAT operates on a cash flow basis, unpaid expenditures cannot generate VAT credits. Exporters and businesses with high input VAT balances may request refunds, but the process is slow and subject to detailed audits by the tax authorities. Unlike European systems where refunds are generally faster, in Mexico they can take six to twelve months, tying up liquidity. We have seen exporters accumulate hundreds of millions of pesos in VAT balances, waiting months for release after exhaustive reviews.

Other practical realities matter as well. Payments for services provided by individuals require the purchaser to withhold part of the VAT. A reduced 8% border rate exists but only with registered branches and formal authorisation. Exports of services are generally taxed at 0%, but this is defensible only if contractual documentation fully supports that the benefit accrues abroad. Each element adds operational complexity that multinationals do not always anticipate.

In short, VAT may be global in concept, but its local enforcement can be decisive. Mexico’s regime shares principles with Europe, yet the cash flow requirement, electronic invoicing, and slow refunds create unique risks. For multinationals, success lies not only in knowing the rules but in managing how they are applied.

At Guerrero & Santana, as part of GGI, we support international companies in bridging this gap – aligning VAT strategies with Mexican compliance, ensuring e-invoicing accuracy, and managing refund processes to safeguard liquidity and avoid tax controversies.

Important key takeaways

• VAT in Mexico is only creditable with a valid CFDI and effective payment.
• Refunds are possible but often slow and audit heavy.
• Exemptions and withholdings can generate hidden costs.
• Local expertise is essential to align global VAT policies with Mexican realities.

---

Prof Sergio Guerrero Rosas, Managing Director at Guerrero y Santana, has over 25 years’ experience advising companies from SMEs to multinationals, as well as individuals, on tax and estate planning. He is also Global Vice Chair of the GGI Trust & Estate Planning (TEP) Practice Group.