Tax Law Income

Mexico: Covid-19 – An perception into the Mexican tax reform 2021

January 15, 2021

Shortly

The pandemic declared by the World Health Organization has severely affected Mexico's economic performance as many activities have been interrupted to prevent the spread of the SARS-CoV2 virus (COVID-19). The Mexican president will direct government efforts and actions to assist the most vulnerable populations during this crisis. The President went on to say that the economic and social panorama in Mexico was encouraging and that the Mexican government was determined to continue investing in projects that create jobs. These include the Maya Train, Felipe Ángeles International Airport, the New Dos Bocas Refinery, and the interoceanic corridor of the Isthmus of Tehuantepec.

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  1. Mexican tax effects on income of foreign legal entities and tax transparent companies or legal entities
  2. The Mexican DAC-6
  3. Changes to the recently enacted Mexican General Anti-Avoidance Rule (GAAR)
  4. Taxing the Digital Economy: The Kill Switch
  5. Additional changes
  6. Possible reform of labor / tax subcontracting (outsourcing)

The Mexican President has submitted the Revenue Bill 2021 to Congress, which, together with the 2020 economic package, aims to achieve the following:

  1. Expanding and strengthening the capacities of the health system, particularly services aimed at caring for the most vulnerable.
  2. Promote rapid and sustained reactivation of employment and economic activity.
  3. Further reduce inequality.
  4. Lay the foundation for long-term balanced and vigorous development.

It is estimated that the reactivation started in the second half of 2020 will continue until 2021 as the economic units adapt to the new environment and the containment of the disease allows the gradual elimination of the containment measure and consequently greater utilization of the installed production capacity. Finally, the focus is on administrative simplification, legal certainty, efficiency of tax collection and the fight against tax evasion and tax avoidance behavior.

The public finances projections aimed at achieving the above objectives are as follows:

  • A 4.6% growth in the Mexican economy (a number that could be adjusted if the availability of a vaccine for diseases caused by COVID-19 allows for a full reopening early next year)
  • Exchange rate of MXN 22.1 per USD 1
  • Average nominal interest rate of Cetes after 28 days of 4%
  • Price of the Mexican mix of USD 42.1 per barrel
  • Expected annual inflation rate of 3%
  • Tax collection of 3.5 billion MXN
  • Total income of 6.2 billion MXN

One may wonder if foregoing is realistic in the current environment. In my opinion, a much more robust tax reform that stimulates and protects investment, accompanied by comprehensive stimulus packages to deal with the current economic crisis, would ensure adequate sustainability of public finances and greater redistribution of public finances, which would benefit everyone, including the most endangered. Notwithstanding this view, current tax policies seem to tend to increase collections through more aggressive auditing.

Only recently, both the lower and upper chambers of the Mexican Congress approved the tax law of 2021. The tax reform of 2021, officially published on December 8, 2020, will come into force on January 1, 2021. The most important changes concern the Income Tax Act (ITL), the Value Added Tax Act (VATL) and the Federal Tax Act (FTC).

Mexican tax effects on income of foreign legal entities and tax transparent companies or legal entities

It should also be noted that certain changes that were already made to the ITL in January 2020 will come into effect on January 1, 2021. Some of them pose a particular challenge for taxpayers and advisors as there are no administrative guidelines that should be issued in early 2020. In particular, taxpayers must be ready to apply Articles 4-A and 205 of the ITL from January 2021 and recognize the Mexican tax effects on the income of foreign legal entities and tax-transparent companies or legal entities.

Taxpayers should consider the tax effects of maintaining tax transparency of foreign vehicles after December 31, 2020 deployed in private wealth structures and private equity funds that Mexican residents resort to to invest overseas. What is the tax treatment of the Canadian Limited Partnerships, a vehicle that is widely used by residents of Mexico as they lose their tax transparency treatment, etc.? Unless otherwise stated in a tax treaty effective January 1, 2021, Mexico would not recognize the tax transparency of foreign companies and legal entities that are considered tax transparent under their national jurisdiction. If these companies and legal entities are considered resident for tax purposes in Mexico for the purposes of the FTC (Mind and Management in Mexico), they are subject to Mexican income tax under Titles II, III or VI, like Mexican companies are subject to ITL. In all other cases, these foreign legal entities and entities pay income tax under Title V of the ITL on all income from Mexican sources; H. About withholding tax.

It confirms that a tax-transparent company in a particular jurisdiction cannot be considered resident in that jurisdiction and therefore cannot claim any contractual benefits. Mexico's international tax policy does not provide for tax transparency except where the specific tax treaty provides for such recognition. The reform thus removes the tax transparency attribute of foreign companies and legal persons, regardless of whether all or some of their members, shareholders or beneficiaries record the income attributable to them in their country of residence.

The Mexican DAC-6

What will happen to the planned and / or implemented reportable systems that taxpayers or their tax advisors will have to notify the tax authorities in 2021 for tax years before or after 2020 (Mexican DAC 6) taking into account the fact that the rules were published just a few days ago instead of early 2020? On November 18, 2020, the tax administration published Administrative Guidelines (AG) 2.22.1 through 2.22.28, which set out the specific reporting requirements for taxpayers and tax advisors in connection with the reportable systems in which they have participated in one of the ways described from the FTC.

While the WGs are quite extensive, they haven't yet set the long-awaited economic thresholds per system that would trigger the report. Since there is no threshold, all reportable systems must be disclosed regardless of the level of the system. These guidelines are intended to provide a detailed description of the requirements that the relevant report must meet. In addition, a number of annexes for submitting the information requested in the WGs have been published. AGs determine the reportable information that taxpayers and tax advisors are required to disclose in connection with each of the reportable systems described in Article 199 Sections I through XIV of the FTC.

Changes to the recently enacted Mexican General Anti-Avoidance Rule (GAAR)

Article 5-A paragraph 7 of the FTC has been amended to explicitly include the possibility of criminally influencing the conclusions reached through the application of the GAAR if the tax authorities disagree with the strength of the business reasons cited by the taxpayer. We must remember that by applying this provision the effect that taxpayers have on their business can only be ignored for tax purposes, albeit without prejudice to the criminal investigations that may arise in connection with the commission of crimes. In our opinion, this amendment was not necessary because, in the interests of a holistic interpretation of the Statute, criminal investigations could have been initiated if the facts to be analyzed gave rise to the criminal activity either under the general anti-avoidance rule or in some other way.

For the purposes of Article 5-A of the FTC, legal transactions that have no business purpose and that bring the taxpayer direct or indirect tax benefits have the same tax effects as those that correspond to the transactions that would otherwise have been carried out in the economic benefits reasonably expected by the taxpayer.

Taxing the Digital Economy: The Kill Switch

Articles 18-H BIS, 18-H TER, 18-QUÁTER and 18-H QUINTUS are included in the VATL to punish all non-residents without PE in Mexico with the temporary block / suspension of Internet / digital services. Digital services for recipients in Mexican territory in breach of the obligations set out in Sections 18, D Sections I, IV, VI and VII of Article 18-J and Article 18-J Sections II (b) and II of VAT, as described below:

  1. Failure to comply with the obligation to register with the federal tax register within the next 30 days from the date on which the digital services were provided for the first time (Article 18-D, Section I)
  2. Lack of legal representative and residency in Mexico (Article 18-D, Section VI)
  3. Failure to secure their electronic tax signature in advance (Article 18-S, Section VII)
  4. Failure to calculate and pay the relevant VAT and transfer the withheld taxes, as well as failure to submit the relevant tax returns and informative returns in accordance with Article 18-D, Sections IV and 18-J, Sections II, subsection b) and Section III for three consecutive months or two consecutive quarterly periods for informative returns in accordance with Article 18-D Section III

In addition to blocking digital services, the taxpayer's ID number can be deleted and deleted from the SAT list. The foregoing is independent of the application of other provisions of the Tax Code that penalize non-payment of taxes, transferring withheld taxes and filing regular and informative declarations.

Additional changes

A number of changes have been made to the ITL and FTC to accommodate new obligations for authorized individuals and hypotheses that could cause them to lose their eligibility to receive exempt donations that are deductible for the donor.

New hypotheses are now being added that expand the joint and several liability of shareholders. Emphasis is also placed on the documentation that demonstrates the economic substance of transactions in general, and in particular of the transfer of tax losses

Finally, this time around it includes important changes related to the following:

  1. Preventive measures as part of tax audits
  2. The Mexican Alternative Tax Dispute Resolution Mechanism (acuerdo Conclusivo)
  3. A number of formal procedural issues related to the attachment of assets as part of tax inspections
  4. tax returns
  5. Presumption of income level

Possible reform of labor / tax subcontracting (outsourcing)

A bill has been submitted to Congress to prohibit subcontracting and to regulate the provision of specialized services and work. The bill, if passed, would reform the Federal Labor Act (FLL), the Social Insurance Act, the National Workers Housing Fund Institute Act (INFONAVIT), the FTC, the ITL and the VATL. Our Labor Practice Group and Tax Practice Group are closely monitoring this matter and have identified the following key features of this bill:

  1. Subcontracting to staff would be prohibited.
  2. The provision of specialized services and the execution of work would be limited and the activities of recruitment agencies would also be regulated.
  3. The ability to provide specialized services would require Ministry of Labor and Social Affairs (STPS) approval and is subject to additional requirements.
  4. Compliance with obligations related to subcontracting and providing specialized services and work would need to be verified by the STPS and the Mexican Social Security Institute, which could result in higher penalties and an obligation to report to the tax authorities if companies do so not adhere to.
  5. The deduction of service fees for income tax purposes would not be allowed and the VAT credit would not be allowed when subcontracting staff.
  6. The beneficiary of the subcontracted personnel services is jointly and severally liable for the necessary contributions to outsourced workers. If contributions are omitted, the tax penalties would increase.
  7. Tax fraud due to subcontracting of staff is considered a criminal offense.

In view of the foregoing, companies that subcontract personnel services and companies that provide and benefit from specialized services and work should continue to monitor developments and review their structures and activities in Mexico in the light of the bill.

This law should come into force on January 1, 2021. However, due to the importance of the matter, the shorter window for discussion at Congress, and the willingness of all parties to reach consensus, discussions on the law had to be postponed to February 2021. We also understand that one of the main subjects of the analysis is the petition from the employers 'sector to negotiate a profit-sharing cap, ie three or four months' salary.