If you are not a Mexican tax resident and you are subject to tax withholding on your gross income obtained in Mexico within the Digital Platforms Tax (DPT) framework you may be entitled to credit the amount withheld against your tax payable in your country of residence. Many countries allow for foreign tax credits to help reduce tax burdens and avoid double taxation. It is strongly recommended to consult with your local tax advisor to assess your personal situation and confirm your entitlement to this credit.
How does it work?
If you are a US tax resident (or a country other than Mexico), Airbnb is required to withhold Mexican taxes from your Mexican sourced earnings. In the US it is possible to obtain foreign tax credits to help reduce your US Income tax burden in certain cases.
To illustrate the above, suppose someone files an income tax return with a $15,000 USD payable tax. If this taxpayer had $4,000 withheld in Mexico, this amount may be credited against the payable tax, reducing the due amount to $11,000.
| Item | Amount |
| Income tax payable in your country of residence | $15,000 |
| Tax withheld in Mexico | $4,000 |
| Amount due | $11,000 |
Note: This illustration is for demonstration purposes, not to be taken as legal or tax advice. It is strongly recommended to consult with your local tax advisor to assess your personal situation and confirm your entitlement to this credit.
How do I take this credit if I am a US resident?
To claim a credit for the income taxes paid or accrued in Mexico, a US individual is required to submit an accurately completed Form 1116 with your timely-filed U.S. tax return for the taxable year in which the credit is claimed. The IRS instructions for the filing of Form 1116 can be viewed in Instructions for Form 1116.
Note that if audited by the Internal Revenue Service, you may be required to provide evidence that shows that Mexican taxes were actually paid. In that case, you could use a receipt for each tax payment. Tax receipts or returns must either be the original, a duplicate original, or a duly certified or authenticated copy.
Overview of the US foreign tax credit system and ability to claim a foreign tax credit
The US Foreign Tax Credit allows US taxpayers who pay foreign income taxes to claim US tax credits on a dollar for dollar basis up to the amount of income taxes that they’ve already paid to another country, thus reducing their US tax liability.
The amount of foreign tax credit that a US taxpayer can claim is generally limited to the US tax liability associated with the income that is taxed in the foreign country. This limitation is computed based on the following formula:
| Total US tax liability before foreign tax credit | X | Foreign source taxable income |
| Total U.S. taxable income |
As noted, the foreign source taxable income that a US taxpayer receives from his Mexican property will generally be equal to the U.S. taxable revenue received from the property less any U.S. tax deductions properly allocated to the property. U.S. tax deductions properly allocated to the property may include management fees, utilities, insurance, property taxes, depreciation, etc.
Note: The computation of the foreign tax credit limitation is complex, especially if the US taxpayer has more than one source of foreign source income. Note that the income earned through Airbnb will likely be considered “general basket income” for purposes of determining the foreign tax credit limitation.
Generally, the following four tests must be met for any foreign tax to qualify for the credit:
- The tax must be imposed on you
- You must have paid or accrued the tax
- The tax must be the legal and actual foreign tax liability
- The tax must be an income tax (or a tax in lieu of an income tax)
The tax must be imposed on you
A foreign tax credit is only available if you are the taxpayer in the foreign country. In this case, the Mexican withholding tax deducted from your rental income should be considered to be imposed on you.
You must have paid or accrued the tax
You can claim a credit only if you paid or accrued the foreign tax to a foreign country. The withholding tax should be considered payment of the foreign tax.
The tax must be the legal and actual foreign tax liability
Your qualified foreign tax is only the legal and actual foreign tax liability that you paid or accrued during the year (or referred to as a “compulsory” tax). The amount of foreign tax that qualifies is not necessarily the amount of tax withheld by the foreign country. The amount of the foreign tax that qualifies for the credit must be reduced by any refunds of foreign tax made by the government of the foreign country.
US regulations require that a US taxpayer exhaust all practical methods to reduce the Mexican tax in accordance with Mexican law. As an example, US taxpayers will need to assess whether it is possible and practical to file a Mexican tax return to receive a refund of some or all of the Mexican income tax that has been withheld. If upon audit the US tax authorities determine that the US taxpayer did not exhaust all practical methods to legally reduce his Mexican tax, such as through filing a Mexican tax return, the US foreign tax credit may be reduced to the extent that Mexican tax could have been reduced.
It should be noted that if certain conditions are met, the US taxpayer may elect for the Mexican tax withheld to be considered the final tax liability, in which case no Mexican tax return would need to be filed. However, this election is only available to individuals that meet certain requirements, one of which is that the individual cannot receive more than 300,000 Mexican Pesos in a year through the platform and cannot have any other Mexican source income. If this election is made the tax withheld will be considered the legal and actual foreign tax.
The tax must be an income tax (or a tax in lieu of an income tax)
Generally, only income, war profits, and excess profits taxes (collectively referred to as income taxes) qualify for the foreign tax credit. The tax must be a levy that is not payment for a specific economic benefit and the predominant character of the tax must be that of an income tax in the U.S. sense. The withholding tax on income earned through the Airbnb platform should qualify as an income tax.
How do I Take this Credit if I am a Canadian Resident?
The ability to claim a foreign tax credit, and the content of a Processing Review Response is dependent on each Canadian resident’s facts and circumstances, so please consult with your tax advisor on how these rules apply to your specific situation.
To claim a foreign tax credit for income taxes paid to Mexico, a Canadian resident taxpayer is required to complete and submit Forms T2209 and T2036 with its Canadian tax return for the year.
The amount of the foreign tax credit that a Canadian resident taxpayer can claim is limited to the lesser of the following:
- Total tax paid for the year paid to the foreign jurisdiction
- Canadian tax otherwise payable as it pertains to the foreign source income.
To the extent that the full amount of eligible foreign taxes paid have not been credited then the taxpayer may be able to claim a deduction for the remainder against their taxable income.
In order for the foreign tax to be eligible for a foreign tax credit the following criteria must be met:
· The payment made must be a payment of tax, not any other payment. Examples of certain ineligible payments include user charges, charges to finance a regulatory scheme, a recoupment of costs for services rendered, or any voluntary payments.
· The payment of tax must be made to the federal government of a foreign country, foreign state, foreign province, or any other political subdivision within that country;
· The payment of tax cannot be conditional on the availability of a foreign tax credit in Canada. The payment would have to have been mandatory regardless of the foreign tax credit availability in Canada.
· The tax paid must be an income or profits tax. To determine if the tax is an income or profits tax, the Canada Revenue Agency (“CRA”) suggests reviewing the application of the foreign tax comparatively to the application in Canada. For example an elective gross revenue test may be considered an income or profits tax if it is “tightly linked and subordinate” to the net income tax.
For a Canadian resident host who is eligible to be taxed on a gross rents basis (i.e. earning < 300,000 MXP) such tax may be eligible for a foreign tax credit in Canada.
For a Canadian resident host who is eligible to be taxed on a gross rents basis (i.e. earning < 300,000 MXP) such tax may be eligible for a foreign tax credit in Canada.
For hosts that are not eligible for such election, and who chose not to file a Mexican tax return to determine their final Mexican tax liability, the CRA may deny the foreign tax credit on the basis that the payment was a voluntary contribution.
Generally speaking the CRA’s current assessing policies are to request documentation in support of foreign tax credit claims. Although not all taxpayers who claim a foreign tax credit will receive such a request for every year, a significant portion of such taxpayers do. Such requests can either be received prior to the Notice of Assessment being issued or subsequent to it.
In responding to such request, the taxpayer is generally asked to provide the following documents in support of their claim within 30 days (although limited extensions can be provided on request):
– A completed copy of Form T2209 and T2036.
– A statement showing total income earned and total tax payable from the foreign tax jurisdiction
– Any foreign income slips received
– Copy of the foreign tax return (or proof that one was not required).
– Notice of Assessment issued by the foreign tax authority or if such document is not available evidence of the balance due payment or refund being issued (i.e. cancelled cheques)
In the event that the taxpayer is unable to provide the requested documentation the CRA will deny the foreign tax credit claimed.
Do I get a withholding certificate from Airbnb?
Yes. Airbnb will provide a monthly tax certificate totaling the monthly tax withheld. You may view and download this document through the link you will receive from Facturify in your email after the month closes.