On September 8, 2019, President Andrés Manuel López Obrador presented to Congress the economic package for fiscal year 2020, which includes bills that, if approved, will significantly modify tax provisions contained in several of our existing laws and regulations, as described in more detail below. The economic package includes an initiative to modify various tax […]
On September 8, 2019, President Andrés Manuel López Obrador presented to Congress the economic package for fiscal year 2020, which includes bills that, if approved, will significantly modify tax provisions contained in several of our existing laws and regulations, as described in more detail below.
The economic package includes an initiative to modify various tax provisions. If approved, the most relevant changes would be as follows:
a) Business Reason. The tax authorities are granted powers to re-characterize transactions that generate a tax benefit when, in their opinion, the only business reason is the tax benefit itself, to instead give them the tax treatment that they would have had based solely on the economic benefit of such transactions, or , in the absence of any such economic benefit, declare such transactions void.
b) Permanent Establishment. In line with action 7 of the BEPS Project, the definition of permanent establishment in Mexico is broadened to include the fact pattern in which agents that do not have the character of independent and “play the main role in the consummation of contracts entered into by residents abroad”.
c) Foreign Disregarded Vehicles. The transparency regime currently applicable to foreign fiscal transparent entities (eg. Limited Liability Corporations of the USA) and foreign legal figures (eg. Limited Partnerships of Canada) is eliminated, so that from now on they have the tax treatment of a legal entity. This initiative is of the greatest relevance to investment funds established abroad and investing in the country.
d) Interest Deduction. The deductible amount for interest payments may not exceed 30% of the amount of the adjusted net tax profit of the legal entity. Some exceptions to this limitation are contemplated, such as the first 20 million pesos of deduction, as well as in the case of financing for public infrastructure, real estate construction, activities related to the oil and gas, electricity and water industry.
e) Reportable Schemes. As of July 1, 2020, tax advisors will have the obligation to report to the authorities such tax structures and plans that are included in a list of “reportable schemes”, for which their clients have obtained a tax benefit in Mexico.
f) Tax Joint Liability. The chief executive officer, general manager or sole director of a companies, will be jointly and severally liable for the payment of contributions when the assets of the company are insufficient to cover the tax assessment. The same obligation would apply to the partners or shareholders of such companies, but in this case only for an amount equal to their respective capital contributions. .
g) Private FIBRAS. The beneficial tax regime applicable to real estate investment trusts known as FIBRAs would no longer be available to privately held real estate investments trusts.
h) VAT to Digital Economy Services. Digital services (eg. download or access to images, movies, text, information, video, audio, music, games, among others) provided by foreign tax residents with no establishment in Mexico would be deemed services subject to VAT, when the service recipient is in Mexico. In these cases, the digital service provider must pay 16% VAT and comply with formal obligations. Otherwise, the tax authority will have the power to suspend the connection that the digital service provider has with the concessionaire of a public network of telecommunications in Mexico.
i) Hybrid Entities. The modification of rules applicable to hybrid entities is proposed to avoid the deduction of any payment made to related parties or by virtue of structured agreements, if the recipient of those payments is subject to low tax regime (REFIPRE).
j) WHT on Interest. An increase from 1.04% to 1.45% in the withholding tax rate applicable on the principal amounts that generate interest income to Mexican individuals would be applied as withholding by members of the financial system in Mexico.
k) Subcontracting. Certain subcontracting obligations are repealed in order to deduct the expense or credit the related VAT, such as receiving the digital payroll vouchers from the contractor. Likewise, the obligation to withhold VAT caused to legal entities or individuals with business activity receiving subcontracting services is added. We recommend analyzing this proposal together with specialists in labor matters.
Any tax modification related to the economic package should be approved no later than October 31, 2019 and enter into force, in general terms, on January 1, 2020.
For more information, please contact:
Tel: +52 (55) 4748-0617
Tel: +52 (55) 4748-0665
Tel: +52 (55) 4748-0625
Tel: +52 (55) 4748-0677
Mexico City, September 13, 2019.