What is IVA: How to Calculate It, Types & When It Must Be Paid

Ever noticed "IVA" on your receipts in Mexico? It's a tax hiding in plain sight, adding to the cost of everyday purchases.

IVA is a tax paid when conducting certain commercial transactions. For most consumers, this tax is practically everywhere, and we rarely stop to pay attention to it — it's already part of the final price of the product.

But things change significantly on the other side of the transaction. Sellers must include IVA on an invoice or receipt when processing a sale for a product or service.

This can get tricky for freelancers or remote workers, who might not know about IVA, and don’t add it to their invoices or while managing their accounting.

Understanding this tax in Mexico can improve your personal or business finances by ensuring accurate budgeting and avoiding costly mistakes.

This guide will break down everything you need to know about IVA — what it is, how it works, and why you need to know about it.

What is IVA?

IVA stands for “Impuesto al Valor Añadido”, which translates to Value Added Tax (VAT).

It's a tax applied to most goods and services purchased by both individuals and businesses —  clothing, restaurants, entertainment services like cinemas... the list goes on.

While there are some exceptions, you can expect to see IVA included in the final price of most things you buy.

The "added value" in IVA doesn't refer to the final price you pay. Instead, it refers to the value added at each stage of production or distribution.

The IVA tax is essentially a small percentage taken from that added value.

Unlike income tax (ISR) that takes a chunk out of your paycheck, IVA is an indirect tax.

It's added as a percentage on top of the selling price of most goods and services you buy, not directly on your income, like a small fee on your consumption, not a direct tax on your earnings.

According to Mexico's IVA Law, most businesses selling goods, leasing products, providing services, or importing anything must register with the tax authority (SAT) and collect IVA on their sales, so everyone contributes their fair share.

Introduced in 1978 (and enforced in 1980) to help navigate an economic crisis, IVA has become a cornerstone of the country's tax system.

The tax rate has fluctuated over time, so staying informed is crucial for businesses to maintain accurate accounting.

Understanding IVA calculations ensures proper financial management and compliance with regulations.

How is IVA Calculated?

As of October 2023, IVA in Mexico is calculated as 16% of the value of most goods or services.

While the IVA rate has fluctuated throughout history, the current 16% has held steady since 2010.

But there are some exceptions to keep in mind:

• In Mexico’s border zone, the rate of IVA is just 8%.

• Some goods and services are exempt from IVA, like non-commercial houses, books and magazines, and agriculture equipment, to name a few. But this list is subject to change due to tax reforms to the Mexican tax law, so it's important to pay special attention to these changes.

Calculating IVA is simple: if it’s at the standard 16% rate, multiply the price of the product or service by 1.16; if it’s at the 8% border zone rate, multiply it by 1.08.

If those rates changes in the future, just change the decimal numbers to the new rate.

What is the Purpose of IVA?

So what does IVA do? Well, for the most part, IVA generates revenue for public spending, so the Mexican government can invest in development plans across the country, such as for schools and roads.

That way, all citizens can contribute to the nation’s development.

To make things easier, you pay IVA to the seller, not directly to the tax authority (SAT). The seller then collects all IVA they charged and submits it to the government annually.

For freelancers issuing invoices for services, to legally charge IVA (Mexico's VAT) on your services, you need to register with SAT. Then, you can collect IVA from clients and report it annually.

As a self-employed person, calculating and submitting your IVA statements are your responsibility.

What's the History of IVA?

The idea of Value-Added Tax, like IVA, has been around since the mid-20th century. In fact, France pioneered it in 1954 to jumpstart their post-WWII economy.

By the late 1960s, VAT was spreading across Europe and Latin America. Mexico, which, until 1968, relied heavily on a failing commercial income tax system, saw VAT as a more effective solution and started the process of switching to IVA in 1978.

After a long period of adoption, IVA came into effect in Mexico on January 1, 1980, starting with a rate of 10% and 6% in border areas, and a food exemption from IVA payment.

Who Has to Pay IVA in Mexico?

Everyone must pay IVA — it’s added to most goods, services, and imports, so if you’re paying for something that has IVA, you’ll need to that added tax.

This applies to everyone, from individuals buying groceries to businesses offering services. There are some exceptions, but for most everyday purchases, expect IVA to be included in the final price.

Types of IVA in Mexico

There are three main types of IVA in Mexico, so let's break them down.

IVA Acreditable (Creditable IVA)

This applies when you pay cash for a product and the IVA is added right away to the cost price.

Within this type of IVA, you also have pendiente por acreditar, which translates to “pending to be credited”, which is applied when purchases are made on credit or in instalments.

Then, when the total amount has been paid, you can then claim it back during tax declarations.

IVA Trasladado (Transferred IVA)

This is the most common type of IVA, when the seller adds to your final bill, essentially "transferring" the tax responsibility to you.

IVA Causado (Caused IVA)

This isn’t as common as the other two types of IVA, but it can impact some businesses.

IVA Causado refers to the total IVA a business has generated through its sales — basically, it's the tax they owe to the government based on everything they've sold.

This "caused" IVA can then be offset by "creditable IVA" (the IVA they've paid on their own purchases) when they file their tax returns.

How to Declare IVA

In Mexico, businesses typically declare IVA monthly to the tax authority (SAT), which you can do this online or in person at their offices.

Declaring IVA in Mexico, you’ll need an active RFC (Federal Taxpayer Registry), an FIEL (Advanced Electronic Signature) for online submissions, and meticulous record-keeping of all monthly business transactions.

Here's your simple step-by-step process to declare IVA online in Mexico:

1. Log in to the SAT portal with the FIEL.

2. Select the "Declaraciones" option.

3. Select the "Impuesto al Valor Agregado" declaration type.

4. Enter the information for the operations carried out for the month.

5. Validate the declaration.

6. Submit the declaration.

There you have it! Your monthly declaration is registered.

If you'd rather make the declaration physically, just follow these steps:

1. Download the IVA declaration document.

2. Enter the information for your operations carried out for the month.

3. Sign the declaration.

4. Submit the declaration at the SAT offices.

In the IVA declaration, taxpayers must report the following information:

• Taxable income

• IVA charged to customers

• Creditable IVA

• IVA for the declaration period

Remember to make sure your IVA declarations are submitted accurately and on time.

If you miss a deadline or make mistakes, you may be charged a penalty. The amount depends on different factors, such as the severity of the mistake or length of the delay.

Activities Exempt from IVA Payment

Not everything gets taxed with IVA. Here are the six categories that are exempt according to Mexican law:

• Acts and activities with a 0% rate.

• Exemptions for alienation (sale).

• Exempt service provision from IVA payment.

• IVA payment exemptions for leasing.

• The 0% rate for exportation.

• Imports exempt from IVA payment.

Ultimately, the IVA tax on purchases is a key way citizens can contribute to government funding for essential services and national development — each purchase with IVA helps power the progress of the country.

For freelancers, staying on top of your IVA declarations (filing them correctly and on time) helps you avoid penalties that can slow your business growth.

Just like good financial habits, proper IVA management keeps things smooth and avoids problems later down the line.

If you have a remote role in a foreign company outside of Mexico, you likely won't owe IVA on those earnings.

But tax laws can vary, so it's always a good idea to do some research and understand the specific VAT rules that apply to your situation.

Using a service that offers international payment options and competitive exchange rates, like DolarApp, can be a safe and secure way to manage your finances efficiently.

That way, you can save money and streamline transactions with clients abroad.