Since the beginning of the new Federal Public Administration in December 2018, Mexican tax authorities have strengthened collection and control policies, with the aim of eliminating evasive practices and tax avoidance. In many cases, these measures have affected compliant taxpayers, which has brought an increase in tax disputes, with the result that in Mexico, tax advice has become necessary for all taxpayers.
By 2020, a new tax reform was approved that establishes new parameters to increase the base of taxpayers and taxable activities, as well as a limit on certain deductible items, in addition to implementing new control mechanisms targeted at combating tax avoidance which include the tightening of prison sentences.
Digital stamp certificates
As a key element designed to eliminate the movement of invoices covering nonexistent transactions, the tax authorities can now temporarily restrict the “digital stamp certificates” (necessary for the issuance of invoices) of invoice issuers and recipients, where the actual existence of the transactions has not been proved.
It is important to remember that the first rule of this kind has been signed into law since 2014, when a control mechanism was implemented to shift to all taxpayers receiving goods and services the burden of proving the substance of the transaction, the same rule has the effect of rendering invalid the tax effects that this recipient has given to its transactions with taxpayers that are listed as Companies Billing Simulated Transactions.
The measures described above were also supplemented by recent criminal law reforms that define a new single criminal offense for issuers and recipients of fake invoices with an estimate of between 2 and 9 years in prison, and determine, in addition, that organized crime and crimes against national security would be considered to exist, where the purchase or sale of invoices exceeds the amount of $ 7’804,230.00 MXN, which would result in immediate preventive detention.
Also needing to be mentioned among the most important amendments of the 2020 tax reform is the implementation of mechanisms to apply effective tax assessments of IT and VAT to digital commerce.
Elsewhere, in matters related to “outsourcing”, the contracting party will have to collect and submit to the tax authorities 6% of the relevant VAT.
Also, a new regime has been added to tax foreign entities and foreign legal arrangements, so that, regardless of whether their beneficiaries accumulate income abroad, they are taxed as Mexican legal entities.
In relation to entities subject to Preferential Tax Regimes (“REFIPREs”), the criteria to determine that there is control over a foreign entity have been modified, the rate on income for individuals has been updated, and the rules on tax credits have been amended.
Deduction of interest
Moreover, it has been specified that payments made to related parties or through a “structured agreement” are non-deductible, where the income of their counterparties is subject to a Preferential Tax Regime, or, where the payments made to an entity that is not in a Preferential Tax Regime are used to make a payment to an entity subject to a Preferential Tax Regime.
Similarly, the tax reform has placed a limit on the deduction of interest, as an alternative to thin capitalization, under which the net interest in a year that exceeds 30% of the adjusted fiscal profit (new term equivalent to the financial concept of “EBITDA” for tax purposes), is considered non-deductible, with the chance to treat that surplus as deductible in the following ten years.
Additionally, to define the term “business reason”, the tax authority is empowered to consider whether the legal acts of the taxpayers have the tax effects of those they would have performed to obtain a reasonable economic profit, where these cause a direct or indirect tax benefit without a business reason.
As a matter of high importance, a list of 14 “reportable schemes” has been incorporated, which, for such purposes, taxpayers and tax advisors must disclose to the tax authorities, before or during their implementation by the taxpayers. Failure to disclose, and late, incomplete or error disclosure will lead to penalties.
On another note, looking at the dynamic economy that the Mexican market represents, the outlook for investments is positive and therefore M&A transactions have stayed at positive levels.