Mexico - response to BEPS

Mexico - response to BEPS

As an OECD member and G20 country, Mexico is fully aligned and committed to the OECD’s anti-BEPS project.

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The Mexican Tax Authority (MTA) has been following the BEPS results closely and actively participated in the OECD’s working groups. Among its significant contributions, the MTA sent a senior official in charge of its tax legal area on rotation to the OECD to work on Action Plan 14.

Mexico has also embraced the anti-BEPS movement through early legislative change. In 2014, Mexico implemented a tax reform based on certain concepts mentioned in preliminary BEPS reports, including several new deductibility restrictions: 

  • Limits on deductibility of interest, royalty, and technical assistance payments – Such payments made to a foreign entity that controls or is controlled by the taxpayer are non-deductible (subject to exceptions) where: 
    • the receiving entity is transparent
    • the payment is disregarded for tax purposes in the foreign country
    • the foreign entity does not consider the payment as taxable income.
  • Non-deductibility of certain payments – The deduction of payments is denied where a related party is entitled to deduct the same amount, except when the related party includes the amount in its gross income for the same year or the next. 
  • Non-deductibility of payments to recipients whose income is subject to a preferential tax regime – In order to deduct these payments, the taxpayer must demonstrate that the amount paid is equal to the price or consideration that would have been agreed in comparable transactions by independent parties. 

Taxpayers have filed for injunctive relief against the first two of the above three provisions and other 2014 tax reform measures on the basis that they are unconstitutional. Whether the measures will survive these legal challenges remains to be seen. 

Mexico has also changed its tax treaty policy and is now seeking to include limitation on benefits clauses. Additionally, a new provision for related party transactions was introduced allowing the tax authorities to request a statement under oath indicating that there is a legal double taxation on the Mexican source income received. Again, it is possible that the Mexican courts will reject the constitutionality of this provision on the basis that it overrides a treaty. In the meantime, the provision is allowing the MTA to collect information about the types of double non-taxation occurring through the use of Mexico’s tax treaties.

In 2015, Mexico implemented a requirement for taxpayers to report certain transactions by filing Form 76, ‘Relevant Transactions’. Taxpayers are required to file the form whenever they perform certain transactions and (except for taxpayers comprising the Mexican financial system) the accumulated balance of such transactions in the period in question is equal to or more than 60 million Mexican pesos (MXN). Relevant transactions include:

  • Financial operations, including compound financial operations, financial transactions for trading and advance termination of financial transactions.
  • Transfer pricing operations involving adjustments that modify the transaction’s original amount by more than either 20 percent or MXN5 million.
  • Transactions involving equity participation and tax residence, including amendments to the direct or indirect shareholding investment, share transfers, changing from foreign to Mexican residency, and obtaining dual tax residence.
  • Reorganizations and restructurings, including those derived from a transfer of shares and the centralization or decentralization of relevant functions by the economic group to which the taxpayer belongs.
  • Other relevant transactions, including the alienation of intangibles or financial assets, the contribution of financial assets to a trust with the right to reacquire them, the alienation of goods due to a merger or spin-off, and transactions with countries that have a territorial tax regime where treaty benefits were obtained.

The new form must be filed quarterly, and it is due on the last day of the second month after the end of the quarter.

Moratorium on tax reforms

In February 2014, the Mexican government announced a tax certainty agreement after taxpayers launched constitutional challenges to the 2014 tax reforms.

The agreement commits the federal government to a moratorium on creating new taxes or increasing current taxes until the current presidential period ends in November 2018.

The agreement is aimed to foster tax stability and economic growth by providing taxpayers with the certainty to facilitate their business decision-making and planning. The moratorium does not extend to possible tax changes that aim to facilitate foreign investment, such as pending secondary laws regarding Mexico’s energy reform.

Taking non-legislative action

The tax certainty agreement does not stop the MTA from taking non-legislative action against BEPS activities, for example, by re-negotiating treaties, revising regulations and adopting new administrative measures. 

In fact, the 2016 tax reform introduced the following new reports that will expand Mexico’s existing transfer pricing disclosure requirements.

Master file — Information to be submitted under ‘master information returns’ of the multinational group would contain the following information regarding that group:

  • organizational structure
  • description of activity, intangibles, financial activities with related parties
  • financial and tax position.

Local file — Information to be submitted under ‘local information returns’ for related parties would include:

  • description of the organizational structure, business and strategic activities, and intercompany transactions
  • the taxpayer’s financial information and information of comparable transactions or companies used in the transfer pricing analysis.

Country-by-country reports — Members of multinational groups must report the following information:

  • information by tax jurisdiction related to the global allocation of the MNE group’s income and taxes paid
  • indicators of the location of the economic activities in the tax jurisdictions in which the MNE group conducted business activities in the fiscal year, including the tax jurisdiction(s); total income, distinguishing income derived from related-party versus third-party transactions; profit and loss before taxes; income tax ‘effectively’ paid; income tax accrued in the fiscal year; capital accounts; accumulated profit and losses; number of employees; filed assets and inventories
  • a list of all MNE group members and their permanent establishments, including the main business activities of each MNE group member; tax jurisdiction of incorporation where it differs from the entity’s tax address; and any additional information that would clarify the requested information.

The country-by-country reporting requirement applies to:

  • Mexican residents
  • entities that have subsidiaries under Mexican GAAP or permanent establishments located outside Mexico
  • entities that are not subsidiaries of a foreign resident
  • entities that prepare consolidated financial statements either according to Mexican GAAP or derived from entities that are located in other tax jurisdictions
  • entities that have accounting consolidated revenues in the fiscal year of MXN12 billion or more.

The new information returns must be filed in December of the year following the year to which the return corresponds, with the first set of reports for 2016 due in December 2017.

On the administrative front, the MTA has become much more focused on investigating BEPS activities, adding more resources and strengthening its international tax audit capabilities. Among other things, the MTA announced a Pilot Tax Audit program involving about 26 companies with cross-border transactions, with special focus on principal structures, permanent establishment issues, payments to foreign parties and transfer pricing documentation. The MTA is also strengthening its transfer pricing team.

The MTA says it will review any transaction that reduces Mexico’s tax base and demand evidence that substantiates that changes to the operation in Mexico justify any decreased profitability. The MTA has published some non-binding criteria for what it considers as aggressive tax planning, such as certain tax planning involving intangible property.

While Mexico is a strong supporter of anti-BEPS initiatives, measures like the tax certainty agreement show the current government is equally interested in attracting foreign investors. Companies doing business in Mexico should be prepared to meet increasingly aggressive and sophisticated international tax audit and enforcement activity. On a brighter note, they will probably enjoy certainty in Mexican tax legislation between now and the end of 2018, which will help them guard against tax authority challenges.

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