On 8 September 2020, Mexico’s federal executive submitted the 2021 Economic Package (in Spanish only) to the Chamber of Deputies for review, including, among others, proposed amendments to the Income Tax Law, the Value Added Tax (VAT) Law, and the Federal Tax Code (CFF). If approved by Congress, the proposals would become effective as from 1 January 2021.
A summary of the most relevant tax proposals is presented below.
Income tax law
Currently, articles 179 and 180 of the income tax law provide transfer pricing guidelines applicable to companies entering into transactions with related parties and transfer pricing methods that may be used in transfer pricing studies. In addition, article 182 establishes a transfer pricing safe harbor rule for individuals or entities resident in Mexico that are engaged in maquiladora operations. Article 182 further states that an advance pricing agreement (APA) from the tax authorities (SAT) is not needed for a maquiladora to certify its transfer pricing compliance and confirm that the non-resident on whose behalf it acts does not have a permanent establishment in Mexico. A proposed amendment would limit the options for maquiladoras such that either obtaining an APA from the SAT pursuant to article 34-A of the CFF or satisfying the safe harbor rule in article 182 would be the only way for maquiladoras to certify their transfer pricing compliance and confirm that the non-residents on whose behalf they act do not have a permanent establishment in Mexico (i.e., they no longer would be able to use transfer pricing studies pursuant to articles 179 and 180).
VAT law
- The VAT law’s definition of digital services includes digital intermediation services between third parties offering goods or services and those requesting such services but excludes intermediation services intended for the sale of used goods. The reform would eliminate this exception.
- Non-residents without a permanent establishment in Mexico that provide the following digital services would not be subject to the VAT law as long as the intermediary withholds the corresponding VAT:
- The downloading of, or access to, images, movies, text, information, video, audio, music, games (including games of chance), other multimedia content, multiplayer environments, and cell phone ringtones.
- The display of online news, traffic information, weather forecasts, and statistics.
- Online clubs and dating websites.
- Distance learning, tests, or exercises.
- The digital service access of non-residents without a permanent establishment in Mexico that provide digital services to recipients located in the country temporarily could be blocked by the concession holders of a public telecommunications network in Mexico if they fail to enroll with the Federal Taxpayers Registry (RFC), appoint a legal representative before the SAT, provide a domicile in Mexico, perform the procedures necessary for obtaining an advanced electronic signature, or pay or withhold tax. Access would remain blocked until the non-resident fulfills its obligations. The SAT would publish the service provider’s name on its website and in the official gazette (DOF), together with the date as from which digital service access is temporarily suspended, to enable service recipients in Mexico to abstain from contracting for future services with that service provider.
- The proposal would add the following provisions regarding digital intermediation services between third parties:
- Intermediaries would have the option to publish on their website, application, platform, or any other similar media, the price of the goods or services offered by vendors, service providers, or providers of the temporary use or enjoyment of goods without expressly and separately indicating the applicable VAT, as long as the prices displayed are inclusive of VAT and are labeled “VAT included.”
- Non-residents without a permanent establishment in Mexico, whether individuals or entities, that provide digital intermediation services, would have to withhold 100% of the VAT they collect. Also, in this case, when requested by the recipient, they would have to issue and send electronic receipts to the users of the digital services in Mexico, whether in the name of the individual or entity from which tax is withheld or in their own name.
- However, non-residents that provide digital services through intermediation platforms and from which 100% of the incurred VAT is withheld would not be required to provide to the SAT the information listed in the VAT law’s chapter on digital services.
Federal Tax Code (CFF)
Business purpose
For tax purposes, a general anti-avoidance rule (GAAR) characterizes transactions that lack a business purpose and that generate a tax benefit according to their reasonable economic benefit. The CFF currently assumes that a business purpose requirement applies to all transactions regardless of whether a particular tax rule refers to it and the application of this standard is limited to the determination of taxes and ancillary government charges and fines. However, this does not preclude the SAT from conducting investigations and imposing criminal penalties on taxpayers who commit tax offenses under the CFF. A proposed amendment would make this explicit in article 5-A.
Joint and several liability
- A new provision would remove the limit applicable to joint and several liability for taxes if, following the transfer of all or a portion of the assets, liabilities, and capital of a corporation in a spin-off, an item or entry arises in the stockholders’ equity that was not recorded or recognized in any of the stockholders’ equity accounts on the statement of changes in financial position presented and approved at the general partners or stockholders meeting when the spin-off was approved.
- Joint and several liability would apply to companies resident in Mexico or non-residents with a permanent establishment in Mexico who effect transactions with foreign related parties over which they have effective or full control (as determined in the rules for preferential tax regimes) if the transactions cause the foreign related parties to have a permanent establishment in Mexico. The joint and several liability would not exceed the amount of taxes that would have been incurred by a foreign related party on these transactions as a permanent establishment in Mexico. The assumptions used to determine the existence of effective control also would apply to entities in Mexico controlled by a non-resident, without detriment to the application of the rules for preferential tax regimes.
Federal Taxpayers Registry (RFC)
- Currently, a notice must be filed with the RFC providing information regarding a company’s partners and stockholders. A new rule would substantially modify this by requiring that the notice include the name and RFC number of the company’s partners, stockholders, and any other persons, regardless of their title, who form part of the organic structure of the company and who have this capacity according to the entity’s bylaws or formation documents, each time they are amended or incorporated.
- A new provision would allow the SAT to suspend or reduce a taxpayer’s obligations when the SAT’s systems or information provided by other authorities or third parties confirm that the taxpayer has not performed any activities in the three preceding fiscal years.
- A new provision would require taxpayers that file an RFC cancellation notice due to the total liquidation of their assets, the suspension of their operations, or a corporate merger to meet the following requirements established in the SAT’s general rules:
- The taxpayer should not be subject to a tax audit or have outstanding tax liabilities.
- The taxpayer should not (i) be included on the list of individuals or entities that have used tax receipts to support nonexistent transactions without having demonstrated that the transactions effectively occurred; (ii) have issued receipts for nonexistent transactions; or (iii) unlawfully transferred tax losses.
- The income declared and tax withheld by the taxpayer, as detailed in returns filed for estimated tax payments, withholdings, or definitive or annual tax returns, should match the amounts detailed in the respective electronic invoices (CFDI’s), files, documents, or databases maintained by the SAT or to which the SAT has access.
The SAT would establish general rules whereby taxpayers would not have an obligation to file periodic tax returns or continue to comply with their formal obligations once they have filed an RFC cancellation notice.
Retention of accounting records and related documentation
- A new provision would be added whereby the information and documentation needed to implement agreements reached as a result of a tax treaty’s dispute resolution procedure should be retained throughout the life of the company or contract in question.
- New document retention requirements would apply to: minutes of meetings certifying capital increases and related account statements; account statements for capital reductions performed by reimbursing partners; statements of changes in financial position and changes in stockholders’ equity in cases of corporate breakups and mergers, together with the working papers prepared to determine the CUFIN (net after-tax profits account) and CUCA (capital contributions account) balances of the immediately preceding and subsequent years; and certificates issued or received by companies when distributing dividends or profits, for which account statements also would have to be retained.
- Currently, the SAT performs tax audits for fiscal years in which tax loss carryforwards are applied. Under a new proposal, the SAT also would perform audits for fiscal years in which dividends or profits are distributed or paid; a company’s capital is reduced; stockholders are reimbursed and remittances are sent according to the income tax law; there are changes in CUFIN and/or CUCA balances; there are movements in any other tax or book accounts related to the transactions listed above; or other events occur for which taxpayers must provide documentation to certify the origin of a tax loss or support the balance and origin of accounts and events.
Standard for the automatic exchange of information on financial accounts for tax purposes (Common Reporting Standard)
Reporting entities under the OECD’s Common Reporting Standard would have to present annually information on high-value and new accounts, and low-value and pre-existing accounts, by filing a tax return with the SAT no later than 31 August, instead of 30 June currently.
Unlawful transfer of tax losses
- An unlawful transfer of tax losses would be presumed when a taxpayer obtains tax losses and reports deductions as a result of subscribing to a credit instrument or any other type of debt instrument while settling the required obligation through a form of payment other than one provided in the income tax law for deduction purposes.
- A taxpayer would have to provide additional information to the SAT if the SAT contests the transfer of a taxpayer’s losses. Under a new provision, when making declarations and submitting documentation considered pertinent in responding to the SAT, the taxpayer would be required to indicate the purpose of the actions that resulted in the transfer of the taxpayer’s right to deduct tax losses. This would enable the SAT to determine whether the transfer essentially was intended for the development of the taxpayer’s business activity and not to obtain a tax advantage.
- Through their personal tax mailbox on the SAT’s website, taxpayers would be able to request a single 10-day extension to provide this additional information and documentation, as long as the extension request is filed within 20 days of the taxpayer receiving the notification from the SAT.
- If the taxpayer has failed to correct its tax situation within the 30-day period, the SAT would have the right to conduct an audit, without detriment to any penalties that might be applicable under the CFF, while also considering that the transfer of the right to deduct tax losses under article 69-B Bis of the CFF constitutes a simulated act, which is a punishable offense under the CFF.
Source: content by Deloitte Mexico.