Mexico's Taxation of Income Earned in Mexican Territory by Artists and Athletes, Nonresidents of Mexico
Generally, nonresidents of Mexico—whether Mexican nationals or foreigners—are obliged to pay taxes for income earned in Mexican territory, as provided by Mexico’s Income Tax Law ( Ley del Impuesto Sobre la Renta, hereinafter LISR). The authority in charge of taxation matters at the federal level is the Tax Administration Office ( Servicio de Administración Tributaria, hereinafter SAT).
More specifically, individuals and corporations must pay taxes in Mexico for income earned in sports and public and artistic events. Income earned in those instances is classified as “accidental income.” In such cases, the source of income is considered to be within Mexican territory if the sport, public, or artistic event takes place—in whole or in part—in Mexico.
This article analyzes the income tax obligations toward Mexico of nonresidents of Mexico engaged in sports, public, and artistic events for income earned in that country from such activities.
Options for Tax Calculation: Over Gross Income or Over Net Income?
The LISR offers two options for taxation of nonresident earning income in sports, public, or artistic events: either apply a flat rate to the gross income without taking any deduction, or apply a higher tax rate to the net income, allowing for appropriate deductions.
Opting for the flat rate over the gross income offers the advantage of neither requiring the taxpayer to name a legal representative in Mexico, nor making any documentation available for review by the Mexican tax authorities.
The choice of applying a higher tax rate—more accurately, the highest rate available—to the net income has the advantage of deducting the expenses related to the sport, public, or artistic event. It also requires, however, naming a legal representative in Mexico, and keeping the expense receipts available to the Mexican tax authorities for five years in case a tax audit is conducted. Also, the taxpayer has to guarantee the payment of taxes by buying a bond.
Deciding on whether to opt for the flat rate over gross income or the highest rate over net income will depend on the nature of the activities to be developed by the nonresident of Mexico. For instance, it will make more sense for a professional boxer participating in a bout in Mexico to opt for the first option, since he practically will have no significant expenses related to his activity within Mexico.
On the other hand, a plastic artist mounting an exhibition of her work, consisting on ten tons of plastic roll applied over the Zócalo Plaza in Mexico City, may well opt for the second option due to the high expenses associated with her line of work.
Who Has to Make the Tax Payment to the SAT?
Whether the party making the payment to the athlete, artist, or public performer is a resident of Mexico for tax purposes or has a permanent establishment in its territory or not is germane to the issue of who makes the payment of taxes in the case in study. In the first case, the party making the payment must withhold taxes; in the latter, the athlete, artist, or public performer has to pay the taxes directly.
The party making the payment to the nonresident athlete, artist, or public performer must withhold the tax for the earned income if one of two conditions is met: (1) the party making the payment is a resident of Mexico; or (2) being a nonresident of Mexico, the foreign paying party has a permanent establishment in Mexican territory.
In cases of withholding of taxes, the tax payer will receive payment for their services minus the amount of taxes to be paid, and will request a receipt of tax withholding from the withholder agent.
For these cases, the SAT has well–developed tools to collect the taxes from the withholder agent, since the latter lives in Mexico or has significant contacts with the country. If the agent fails to withhold the tax from the nonresident, the agent itself will be liable; if the withholder agent fails to pay the taxes, the athlete, artist, or public performer taxpayer will remain liable.
The second scenario listed in this section arises when the party making the payment is neither a Mexican resident nor has a permanent establishment within Mexican territory; in this situation, the fiscal obligation remains on the nonresident taxpayer, who has to make the payment of taxes directly. The timeframe for paying the taxes directly is extremely short: income tax must be paid the day after the income is earned.
It should be noted that most—but not all—cases of accidental income by nonresidents athletes, artists, and public performers involve a Mexican resident as the organizer of the event and paying party, who therefore has to act as a tax withholder. In such cases, the task for the taxpayer is to calculate in advance how much money will be withheld, and what support documentation is to be requested from the withholder agent.
However, events organized or sanctioned in Mexico by foreign entities such as professional sports associations based in the United States, who do not have a permanent establishment in the Latin American country, could fall in the second category, prompting the rule of direct tax payment by the athlete, artist, or public performer. The following section describes the mechanics to be followed in such cases.
How Can the Nonresident Athlete, Artist, or Public Performer Make Direct Payment of Taxes in Mexico?
As stated previously, if the party making the payment to the athlete, artist, or public performer is not a resident of Mexico or has a permanent establishment within its territory, the taxpayer then has to pay the taxes himself. The LISR requires the latter to calculate the amount due and pay it directly at the local office of the SAT where the event took place. However, if the amount to be paid is significant, the local office might not be equipped to receive the required payment.
Section 1 on this article explained the two options set by the LISR for nonresidents of Mexico earning income in sports, public, or artistic events, namely: (1) apply a flat rate without taking any deductions, or (2) apply a higher tax rate to the net income after deductions. Further, naming a legal representative and providing a bond requires the legal representative to pay the tax the month after the event takes place.
Generally, most athletes, artists, or public performers will opt to pay their taxes directly. In this case, it is of utmost importance to plan in advance and contact the SAT authorities of the place where the event is to occur and discuss the options for payment. The rules of LISR are established contemplating the taxpayer is a resident of Mexico, has a permanent establishment in Mexico, or has a fixed source of income in Mexico. Paying taxes in Mexico as a registered taxpayer is easy; doing the same as a nonresident, without having a tax identification number or a bank account in Mexico, can be a true challenge.
The intensive interaction with the SAT authorities often involves meetings in the city where the event took place, email and telephonic communications with high ranked officers in Mexico City, coordination with banks in the United States and Mexico, and follow-up with SAT to obtain the proper tax receipts.
Addressing the tax issue in advance is fundamental because income taxes can be due one day after earning the income. Depending on the amount of taxes to be paid, it could be necessary to obtain specific route numbers and bank data to make a wire transfer from the United States rather quickly.
Effects of the Mexico-United States Tax Convention on the Facts
Mexico and the United States are signatories of a bilateral Tax Convention (hereinafter the tax convention) that applies where an athlete, artist, or public performer who earns income in Mexico is a tax resident of the United States.
There are at least three relevant aspects of the tax treaty to be reviewed:
- The specific purpose of the tax convention is to avoid double taxation; in the case analyzed in this article, it would be unfair to collect taxes twice on the same income: one in Mexico—by the SAT—and one more time in the United States—by the IRS. Generally, income tax paid by a U.S. resident in Mexico can be credited against their income tax in the country of their residence.Income earned by U.S.-based entertainers and athletes from their personal activities in Mexico, if taxed and paid in Mexico will be credited on any tax obligations in the United States.
- Tax exemption for events funded by the host government. Article 18(3) of the tax convention exempts athletes, artists, and public performers from tax in the country not of his residence if the sporting event for which they earn income is substantially supported by public funds of the host state or a political subdivision or local authority thereof. However, they may have to pay income tax in the country of their residence.
- No tax under $3,000. Income earned in Mexico by artists, actors, musicians, or athletes residents of the United States, not exceeding $3,000 U.S. dollars in a fiscal year, is exempt from taxation in Mexico.
Plan in Advance
Nonresidents of Mexico are obliged to pay taxes for income earned in Mexican territory. Nonresidents athletes, artists, and public performers must pay taxes in Mexico for income earned within its territory.
In these cases, the source of income is considered to be within Mexican territory if the sport, public or artistic event, takes place—in whole or in part—in Mexico. Athletes, artists, and public performers can either apply a flat rate to the gross income without taking any deduction, or apply a higher tax rate to the net income, allowing for appropriate deductions.
If the party making the payment to the athlete, artist or public performer is a resident of Mexico for tax purposes or has a permanent establishment, that entity must withhold the income tax and pay it to the SAT. If the party making the payment to the athlete, artist, or public performer is not a resident of Mexico for tax purposes or has a permanent establishment in its territory, the athlete, artist, or public performer has to pay his or her taxes directly.
In most cases, the athlete, artist, or public performer will pay their taxes directly; thus, it is of utmost importance to plan in advance and contact the SAT authorities of the place where the event is to take place, and discuss the options for payment. Addressing the tax issue in advance is fundamental because income tax paid directly is due one day after earning the income. When facing this situation, make sure to review the treaty between the United States and Mexico, which permits a credit on U.S. taxes for taxes paid in Mexico…and exempts up to $3,000 of U.S. income paid.
Mr. Pinto–León is an attorney licensed to practice in Mexico and in New York. He is also admitted in the United States District Court for the Southern District of Texas. He can be reached at Ignacio.Pinto@jurismex.com.
© Copyright 2008, American Bar Association.