Do those who receive money from the USA pay taxes in Mexico?

According to the report Migration and Remittances Yearbook (Mexico, 2017), prepared by Banco BBVA and CONAPO, in the last decade remittances have reached a historical limit in Mexico, being -mostly- from the United States. That is why there is so much interest in knowing if it is necessary to pay taxes in Mexico for receiving money from the USA. This far from light growth finds its first vestige in the years 2000-2006. In that period, remittances from abroad experienced a growth of 290%, reaching a total of almost 26 billion dollars.’

But, Where do these remittances come from and where do they go? More than 95% come from US citizens and Mexican immigrants and at least 40% of them are for people over 65 years of age. It would be logical to say that Mexican workers in the US use part of their salary to help their parents cover their basic needs for food, clothing, health and public services.

The contribution of remittances to the Mexican state is so great that, before the arrival of the pandemic, it was estimated that by 2020 they would represent almost 3% of the GDP of the Latin American country. How much does this translate to? At about 35 billion dollars.

The economic impact of remittances and their migratory component leaves us with an unknown, Do those who receive money from the USA pay taxes in Mexico?

Do those who receive money from the USA pay taxes in Mexico?

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The factor behind the increase in remittances

Before we dive into the subject, we need to pause to discover What factors have promoted the increase in remittances in the country?. In itself, there are several components behind this increase:

  • The decline in purchasing power of Mexicans. In the last six years, the Mexican peso has devalued almost 50% against the dollar. This depreciation translates into a decrease in the purchasing power of Mexican families and, of course, increases the level of difficulty in keeping their basic needs 100% covered.
  • The informality rate in the Latin American country. Even before the pandemic, the Mexican unemployment rate was not the best in the world. However, it was also not as high as that of other countries in the region. The problem itself has always been the rate of informality. More than half of the working-age population is engaged in informal activities. This means that, despite the fact that they can earn money month after month, they are in precarious conditions, that is, without health insurance, without job stability, without access to banking, among others.
  • The dependence of the Mexican economy on remittances. Although it is not a factor that directly motivates Mexicans in the USA to send money to their families, it is important to note that this is the fourth recipient country of remittances in the world, being surpassed only by China, India and the Philippines; two of which have ten times more population of origin than that of the Latin American territory.

Note: Remittances in Mexico have increased nationally. However, there are certain states that are ahead, since they are the ones that receive the most money. Which? There are several, but the main three are Guanajuato, Michoacán and Jalisco. Curious fact? That is the destination of the remittances sent to Mexico, but what about the origin? Again, three states stand out on the list: California, Illinois and Texas.

  • The quality of work and salaries of relatives in the United States. Despite popular belief, many of the remittances sent come from legally resident immigrants and US citizens. These have managed to access better jobs and, therefore, earn more money month after month. This factor has allowed them to increase the amount of money transferred to their families and, depending on their state of residence, take advantage of that amount for the tax deduction.

Important: In some US states, US citizens and residents can deduct the amount of remittances they send on their tax return.

  • The low cost of money transfers. Two decades ago, sending money to Mexico cost up to five times more than it does today. In fact, nowadays anyone can send money to their relatives in Mexico for as little as $5-7; this according to figures published by the World Bank. When this rate is compared to other countries, we find that the economic cost of remittance transfers between the United States and Mexico is one of the most affordable in the world.

Having this clear, we have to answer the million dollar question: If I receive money from abroad, do I have to pay taxes?

Remittances in Mexico are NOT subject to the payment of direct taxes

If you live in Mexico and your income comes from the USA (remittances) you will not have to pay taxes, at least not directly. For now, all you have to do is show your printed SAT RFC -which is processed free of charge- to withdraw the dollars (in pesos) that your relatives have sent you. However, the fact that there is no special tax on remittances does not mean that those who receive extra money from the US are exempt from paying taxes.

The problem is that it is not a direct tax on remittances, but is combined with the collection of related taxes, such as the Value Added Tax (VAT) and the Income Tax (ISRL). This is perhaps the way in which those additional dollars that Mexicans receive within their country swell the figure of the public treasury.

Payment of VAT for receiving remittances

Mexico does not have a tax culture like that of the United States. A little more than 30% of its collection comes from taxes on the production of oil and its derivatives, while the tax on economic activity barely reaches 12%. How is the country holding up? By increasing VAT, in essence.

This is understandable because, as we indicated earlier -and as is the case with other Latin American countries- the Mexican informality rate is quite high. Because the state has decided to tax purchases by raising the Value Added Tax. All that money earned by the informal -and also those who receive remittances- increases consumption. And each purchase made is taxed with VAT.

To give you an idea, it is presumed that in 2006, the families receiving remittances contributed with more than one billion dollars for VAT to the coffers of the Mexican state, which translates into almost 2% of the total collection. What is the VAT rate in Mexico? Nothing more and nothing less than 16% of the subtotal amount of the products and/or services.

ISRL payment for receiving remittances

Again, the Income Tax is not, in itself, a direct tax on remittances. However, any Mexican who receives money from the United States -provided that he/she does not have applicable deductions, is not exempt from paying taxes or does not earn enough to make a payment- must declare and pay taxes on the remittances received.

The rate, in this case, varies between 30-35% of the amount, unless the sender of the remittance is the father, mother, spouse or child of the recipient. (Which is what happens in most cases)

How does the Mexican state know that a family receives remittances? Thanks to the RFC, which is a document issued by the SAT (Tax Administration Service). Anyone who decides to withdraw their remittances in Mexico must present this printed certificate. Otherwise, you will not be able to receive the money.

Note: Remember that Mexican banks must report any operation that exceeds $20,000 pesos. This is another of the ways in which the SAT could discover that someone does not declare their remittances.

It is possible that the myth that you have to pay taxes on remittances in 2020 is due to a presidential campaign promise of Republican candidate Donald Trump. In his second presidential campaign, Trump argued that he would make Mexico pay for the border wall and that the mechanism he had devised to do so was to tax the remittances sent by Mexican immigrants residing in the United States to their relatives in your country of origin.

However, this is not a new promise. This is something he had already said in his first presidential campaign. Now, what was President Trump proposing? At first, charge 2% of the amount sent to immigrants who are within the country. Fortunately, this measure is inapplicable in real life for many reasons.

The first, that many of those who send remittances to Mexico are not illegal immigrants, but american citizens. Second, that the next largest percentage on the list groups the residents without citizenship, but legal in the country. But perhaps the most important of all is that, if there is a barrier like this, a black market for remittances would open.

Of course, there are other obstacles that the United States would have to overcome if it decides to put a tax on remittances like this:

  • If the tax on remittances is established, informal work would be legitimized because part of that money comes from workers who are not legally hired in the country.
  • This would lead the Senate and Congress to discuss the issue. Being a strict state in labor matters -and one of the freest countries, economically speaking- It would be necessary to find a way to legalize this informal employment and, therefore, assume the burden of a group of labor rights that would derive from that act..

If you study this case carefully, it is possible that the United States will not dare to impose a tax on remittances.

This is the North American side, but what about in Mexico? Recognizing that remittances are an integral part of the economy and the growth of Mexican family finances, from Peña Nieto to Manuel López Obrador have announced that they will protect the income of Mexicans.

One of the solutions that have been proposed in a scenario like this is open windows of Mexican banks in the United States so that the deposit is made directly and, therefore, free of American taxes. Of course, nothing is decided, mainly because the imposition of a tax on remittances is seen as an unrealistic and distant possibility; but the specialists have already anticipated it.

Are there limits for sending remittances from the United States to Mexico?

No. The United States does not impose any limits on family members sending remittances to Mexico. However, what the sender is required to do is inform the Internal Revenue Service (IRS) of that movement through Form 709, 8300 or 114, as the case may be. Luckily, Mexico has not established limits for receiving the money either. Those who do have limitations are the actors who participate in the operation.

For example, Western Union, which is one of the world’s leading remittance agents, imposes a limit of $5,000 per transaction. Banks, on the other hand, increase this figure up to $10,000. In the case of TransferWise and other similar platforms, the limits are almost non-existent. In fact, they allow the transfer of up to $1,000,000.

Of course, each bank is free to set its own limits. Citibank remains between $3,000 and $10,000 per week, while Wells Fargo reduce the amount to as little as $1,500 a day.

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