Mexico budget proposes numerous tax law changes

September 2021

In brief

On September 8, the Mexican Ministry of Finance submitted to Congress the proposed budget for the year 2022. The budget is composed of the General Criteria of Economic Policy (GCEP), the Federal Revenue Law (FRL), the Mexican Income Tax Law (MITL), the Value-Added Tax Law (VATL), and the Federal Tax Code (FTC), among other documents, and initially was delivered to the House of Representatives for review and approval.

The Federal Revenue Law for 2022 must be approved by both the House of Representatives and the Senate no later than October 31, 2021. 

Key proposals in the budget include the following:

  1. Business reasons would be required to access various tax benefits, such as transfer of shares at cost basis or the deferral of the capital gains tax derived from business restructurings, as well as for tax-neutral mergers and spin-offs.
  2. Maquiladoras could not comply with transfer pricing obligations through Advance Pricing Agreements (APAs), and the only applicable mechanism to determine the profit margin would be the safe-harbor rules.
  3. The tax report (‘dictamen fiscal’) obligation carried out by a CPA registered with the Mexican Tax Authority would be reinstated.
  4. Activities related to hydrocarbons would be subject to greater controls and penalties for noncompliance with the relevant tax obligations.
  5. Taxpayers that carry out acts or activities considered as ‘non-object’ to the VATL would not be able to credit the tax paid to suppliers or on the importation of goods when linked to those ‘non-object’ activities.
  6. If under a tax treaty a Mutual Agreement Procedure (MAP) is entered into, the tax interest would have to be guaranteed.

The takeaway: Given the broad nature of the proposed bill, multinationals with operations in Mexico should analyze the impact of these proposals and the relevant business requirements and tax formalities that would become relevant in determining the Mexican tax treatment.

The proposed budget includes the following economic policy objectives and forecasts:

Corporate Income Tax (CIT) – General rules

Determination of foreign exchange rate for tax purposes

The foreign exchange rate gain or loss may not be less than or exceed, respectively, that which would result from applying the foreign exchange rate established by the Mexican Central Bank that is published in the Mexican Official Gazette.

Priority of credits for advance payments of CIT versus taxes paid abroad

Taxpayers must apply credits against their annual CIT liability in the following order: first, the amount of monthly advance payments of CIT made and, subsequently, the foreign tax credit.  

Back-to-back loans

Financing operations that derive interest from legal entities or permanent establishments in Mexico also would have the treatment of back-to-back loans, whenever such operations lack business reasons.

Business restructurings

Mexican tax authorities would only authorize the transfer of shares at cost basis in cases of business restructurings where the parties are tax residents in Mexico belonging to the same group. Additional requirements are included for purposes of the issuance of the tax report that should be issued by a CPA.

Whenever the Mexican tax authorities, during a tax audit, detect that the business restructuring lacks a business reason or that it does not comply with any of the relevant requirements, the authorization would be void and the tax corresponding to the transfer of shares must be paid.

In addition, in cases where taxpayers perform a “relevant transaction” within the five years after the business restructuring is implemented, then an informative tax return should be filed.  A relevant transaction is understood to occur, among other situations, whenever a right on assets or profits is granted to the issuer or to the acquiring company or the selling company, as well as in the event of any type of capital redemption or liquidation.

Bare legal title and usufruct rights  

Provisions related to transactions through which the ownership rights of an asset are segregated would be modified. Under the new proposals, the value of the usufruct right would be considered taxable income when the bare legal title and the usufruct are consolidated. In that case, the bare legal title holder would be obliged to perform the appraisal and accrue the relevant taxable income.

Furthermore, the acquisition of the usufruct right over immovable property would be considered a fixed asset.

Technical assistance, technology transfer, or royalties

Payments in connection with technical assistance, technology transfer or royalties paid to Mexican residents would only be deductible in the case of specialized services or the execution of specialized works, which are not part of the corporate business purpose or the preponderant economic activity of the beneficiary of the services, in accordance with the recently enacted subcontracting/outsourcing reform.

Thin capitalization

For purposes of the thin capitalization rules, net operating losses pending to be offset that have not been considered in the determination of the tax result should be included in the calculation of the accounting total equity for the year based on the tax attributes balances. This option may not apply when the result of the aforementioned operation exceeds 20% of the accounting total equity of the fiscal year in question, with certain exemptions. 

Certain clarifications are proposed to be included for hydrocarbon exploration and extraction activities. Also, the exception applicable to SOFOMs (Mexican non-bank banks) no longer would apply for activities with related parties.

Tax losses in spin-offs 

In the case of spin-offs, the tax losses pending to be offset against tax profits must be divided between the spun-off entities that have the same business activity.

Limitation on losses amortization

Various cases are included for purposes of the limitation on losses amortization due to the change of control of an entity. 

New simplified CIT regime for small companies

A new cash-basis tax regime is introduced for some small Mexican resident companies whose total income in the immediately preceding year does not exceed approximately USD $1.7 million.

Non-Mexican residents

Income from the acquisition of immovable property

In the case of Mexican-source income derived from the acquisition of immovable property obtained by a non-Mexican resident, in the event that the Mexican tax authorities determine a difference between the agreed sale price and the appraisal value of the property, the party liable to pay the tax would be the seller if it is a resident in Mexico or a nonresident with a permanent establishment in Mexico.

Capital gains tax 

In the case of Mexican-source income derived from the disposal of Mexican shares between related parties, the new proposals introduce an obligation to include in the relevant tax report documentation to demonstrate that the sale price of the transferred shares is the fair market value. Additional rules should be issued in case of publicly traded shares. 

In connection with tax-deferral authorizations for intra-group reorganizations, the deferred tax would become due whenever the Mexican issuer and the acquirer cease to consolidate their financial statements. Moreover, such authorization would be void when, during a tax audit, the tax authorities determine that there were no business reasons, or that business reorganization generated an income subject to a preferential tax regime.

Legal representative

Legal representatives who are appointed in Mexico by non-Mexican residents would voluntarily assume joint and several liability, which would not exceed the taxes to be paid by the non-Mexican residents but must have sufficient assets to respond as a jointly liable person.

Related parties’ transactions 

The proposal makes clear that related parties’ transactions with residents in Mexico should be included in the transfer pricing documentation which is requested from related parties and not only from the taxpayer.

In addition, the filing of the local file would be made on the same dates applicable to the filing of the tax report.

Under the new proposals, comparable information used in the transfer pricing documentation should be related to the same year as that of the relevant transfer pricing report. 

Observation: This situation could present practical constraints due to the lack of information at the time of preparing the documentation or informative tax returns.

Maquiladora regime

For maquiladora companies and those that have a shelter program, the new proposals eliminate the possibility for requesting a particular resolution or APA with the Mexican tax authorities to comply with their transfer pricing obligations and avoid triggering a permanent establishment in Mexico. The so-called ‘safe harbor’ rules will be the only available method to comply with this requirement.

Value Added Tax (VAT)

Acts or activities ‘non-object’ to the VATL

Acts or activities ‘non-object’ to the VATL are defined as those that the taxpayer does not carry out in national territory, as well as those not specifically listed in the VATL, for which the taxpayer obtains income or compensation and makes expenses, investments, or imports and VAT is paid. Under the new proposals, the VAT paid by the taxpayer that is linked to activities that are ‘non-object’ to the VATL would not be recovered.

Federal Tax Code

Alienation of goods

Whenever the tax authority detects, during a tax review process, that a merger or spin-off has no business reasons, or the relevant requirements to apply for a tax-free reorganization are not met, an alienation would be considered to have occurred.

Concept of spin-off

The new proposals clarify that in the case of a spin-off, the share capital is transferred, which is in accordance with the provisions of the General Law of Commercial Companies.

Concept of royalties

The budget contains a proposal to incorporate within the concept of the use or granting of use of a copyright in a literary, artistic, or scientific work, the right to the image.

Joint and several liability

For purposes of defining joint and several liability in the acquisition of a negotiation, the cases that may arise from such a situation are listed.

Those legal entities or individuals who are appointed in compliance with the tax provisions also are jointly and severally liable with taxpayers, up to the amount of the taxes and in terms of the relevant provisions. 

Tax report

Taxpayers who meet certain parameters would be required to obtain a tax report by an authorized CPA.

Controlling beneficiaries of legal entities, trusts, and tax figures

In seeking to ensure that the tax authorities comply with international standards requiring minimum levels of transparency in relation to the controlling beneficiaries of legal entities, trusts, and other legal figures for tax purposes, the budget proposes to include the obligation of such vehicles to obtain and maintain, as part of their accounts, and to disclose with the Mexican tax authorities, the relevant information related to their controlling beneficiaries in a reliable, complete, and up-to-date manner. For such purposes, the definition of controlling beneficiary is included.

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Bernard Moens

US International Tax Inbound Leader, PwC US

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