printable version | September 2021
On September 8, 2021, various proposals for reforms to the Income Tax Law were presented by the Federal Executive Branch (“Income Tax Law”), Value Added Tax Law (“VAT Law”), Law on the Special Tax on Production and Services (“IEPS Law”), Federal Tax Code (“CFF”) and the Federal Rights Law (“LFD”). Among the proposed reforms, the addition of a simplified trust regime for individuals and corporations stands out, as well as the tightening of measures to combat tax evasion. Below is a brief analysis of the proposed changes.
Income Tax Law
- Revenue
Parameter for determining the exchange gainThe reform proposes to include a minimum parameter to determine the exchange gain, in order to prevent taxpayers, when calculating it, from determining an income lower than that which they would obtain by applying the exchange rate (due to fluctuation of the foreign currency) established by the Bank of Mexico and published in the Official Gazette of the Federation ("DOF”). Currently, the ISR Law only contemplates a maximum amount for exchange losses.
New priority for ISR accreditation. The reform aims to provide legal certainty by clarifying that the priority (order) of the credits that legal entities may credit against their annual ISR must first be applied to the amount of the provisional payments that have been made and, subsequently, the ISR paid abroad.
Backed credits. It is proposed to establish that interest paid without a business reason be considered as secured credits. In general terms, secured credits are those from which interest is paid to related parties, which are recharacterized as dividends under the assumptions provided for in the Income Tax Law.
Determination of provisional payments. It is clarified that the authorization provided for in the Income Tax Law for provisional payments refers to the profit coefficient and not to the reduction of provisional payments derived from said coefficient. Likewise, in the event that the provisional payment was covered with an amount less than that applicable, a supplementary declaration must be submitted to cover the omitted amounts, plus updates and surcharges.
Income accruable in bare ownership and usufruct. The reform proposes to establish that the consolidation of the bare ownership and the usufruct is an accruable income, specifying the manner in which the income should be calculated when only the usufruct or the bare ownership of a property is sold. The owner of the bare ownership will be obliged to carry out the appraisal and accumulate the income. The notaries will inform the Tax Administration Service (“SAT”) when they intervene in these operations.
Business rationale in corporate restructuring. It is expected that the benefit for the transfer at tax cost will only be granted to companies resident in Mexico belonging to the same group, that is, this will no longer be possible for companies resident abroad. In addition, it is proposed to include additional requirements to the existing ones:
- Being right in business.
- Certain “relevant operations” carried out within the 5 years prior to the sale must have been reported to the SAT.
- The accountant's opinion must additionally contain the following:
- The book value of the shares subject to the authorization,
- Organizational chart of the group with the percentage of shareholding,
- Direct and indirect shareholding of the companies that make up the group before and after the restructuring,
- The business segments of the issuing and acquiring companies,
- Certification that it consolidates its financial statements for accounting purposes.
The authorization will be void if an audit determines that the related restructuring lacked a business reason.
Likewise, if within 5 years after the restructuring was carried out a relevant transaction is carried out, the company acquiring the shares must submit the information declaration on relevant transactions provided for in article 31-A of the CFF.
2. Deductions
New requirements for fuel deductions. The reform proposes that the respective tax receipt (“CFDI”), must contain the fuel dealer’s permit number, which must be valid at the time of the operation. Permits may be suspended when an imminent danger to national security, energy security or the national economy is foreseen. This modification would make the deduction dependent on a situation that is not within the taxpayer’s control, which could be unconstitutional.
Technical assistance, technology transfer or royalties. It is expected that in order to deduct payments for such concepts provided by tax residents in Mexico, these must be provided directly by the person providing the service. In the event that the contract provides that these may be provided by third parties, for the services to qualify as deductible they must be specialized and must not form part of the corporate purpose or the predominant economic activity of the beneficiary of the same.
Bad debts. For credits exceeding 30,000 UDIS, one of the requirements for this deduction is that the taxpayer sues the debtor judicially or arbitrally, and it is sufficient to demonstrate that the claim was admitted. The reform proposes establishing as a requirement for the deduction that the taxpayer obtains a definitive resolution in the judicial or arbitration procedure, which demonstrates that the collection efforts have been exhausted or, where appropriate, that the execution of the favorable resolution was impossible.
Thin capitalization. The LISR limits the amount of interest that legal entities can deduct from their foreign related parties. In this sense, only the interest that does not exceed three times the taxpayer's annual equity is deductible. For these purposes, taxpayers can choose to determine the amount of their equity solely by considering the balance of their contribution capital account (“CUCA”) and its net taxable income account (““CUFIN”). The reform proposes that to determine the equity in this case, taxpayers must subtract their pending tax losses.
New expenditures that make up the original investment amount. To deduct investments, legal entities must apply the percentages indicated by law to the “original investment amount” (“MOI”), which includes acquisition costs plus other expenses. The reform proposes to include in the MOI the preparation of the physical site, installation, assembly, handling, delivery, as well as the (expenses) related to the services contracted for the investment to work.
Notice for goods that are no longer useful. The reform proposes that in the event that investments lose their usefulness in generating investments, taxpayers must submit a notice to the SAT, to prevent undue deductions from being made.
Expenses for intangible assets in the pre-operating period. It is proposed to establish that expenditures related to intangible assets that allow the exploitation of public domain assets will not be considered pre-operating expenses but rather deferred expenses, in order to determine their deduction percentage (depreciation).
Mining lot facilities as an investment in fixed assets. The reform considers that, in the mining industry, taxpayers deduct as expenses some constructions carried out in mining lots. Therefore, the reform proposes to expressly consider these constructions as a fixed asset. Fixed assets for installations, additions, repairs, improvements, adaptations, as well as any other construction carried out in a mining lot will be subject to a 5% annual depreciation rate.
Amortization of Usufruct. The acquisition of the right of usufruct over a property will be considered a fixed asset. The usufruct built on a property by legal entities may be depreciated at a rate of 5% per year.
Information to the SAT on bank deposits. Banks must annually inform the SAT when taxpayers receive deposits of more than 15 thousand pesos per month. The reform proposes that this information be presented monthly, which can represent a heavy administrative burden for the financial sector.
Tax losses on spin-off. The reform proposes that tax losses in a company spin-off may only be divided among companies engaged in the same line of business or activity.
Tax losses when there is a change of partners. In some cases of changes in controlling shareholders, companies can only reduce tax losses that arise from the same businesses or activities that generated the loss.
The reform expands the assumptions in which it is considered that there is a change of controlling shareholders of companies for these purposes, in a period of 3 years, including, among others, a change of the holders, directly or indirectly, of more than 51% of the shares or voting interests of the company in question.
There is no consideration of a change in shareholders in cases of inheritance, donation or corporate restructuring, merger or spin-off of companies that are not considered alienation, provided that in the case of restructuring, merger or spin-off, the direct or indirect partners or shareholders who maintained control prior to said acts, maintain it after the same.
Tax regime for individuals in the primary sector is eliminated. The provisions referring to individuals with agricultural, livestock, forestry or fishing activities are eliminated, since these taxpayers will be taxed under the new simplified trust regime.
The tax regime for legal entities under agricultural law is eliminated. This regime is repealed for the same reason as the previous point.
Obligations between related parties. Legal entities must keep documentation showing that transactions with their related parties abroad were carried out at market value, through a transfer pricing study. The reform proposes this same obligation for transactions carried out between Mexican companies that are related parties. May 15 of the year immediately following the end of the fiscal year in question will be the deadline to file the related party declaration.
When a party is required to issue an opinion, or has chosen to issue an opinion, a report must be made available at the Ordinary General Shareholders' Meeting in which it provides information on compliance with the tax obligations incumbent upon it in the fiscal year to which the opinion corresponds.
New notice to the SAT for the transfer of shares of a Mexican company between foreign partners or shareholders. The reform proposes that Mexican companies issuing shares sold to foreign residents subject to taxation in Mexico must notify the SAT of the transaction. The companies must submit this notice within one month after the sale, otherwise the Mexican companies will be jointly responsible for paying the tax of the foreign resident.
PTU is not part of the UFIN calculation. It is expressly clarified that the PTU is not part of the calculation of the net taxable profit for the year, since this concept is included in the tax result, which already includes the subtraction of the PTU for its determination.
RIF is eliminated. The fiscal incorporation regime is eliminated because its taxpayers will pay taxes under the new Simplified Trust Regime.
Electronic accounting and information declaration of individuals. It is proposed to eliminate the obligation to keep accounting records and issue tax receipts for individuals with professional and business activities with income not exceeding 2 million pesos, since with the creation of the new Simplified Trust Regime, said taxpayers would not have this obligation.
Simplified Trust Regime for individuals. This new tax regime is proposed to be established for individuals who carry out business, professional or leasing activities with income of less than 3 million 500 thousand pesos, where they will be able to accumulate their income when the aforementioned income is actually received and paid; that is, when there is cash flow.
Taxpayers in this section will apply a maximum progressive ISR rate of 2.5% per year on their invoiced income, not including VAT and without applying deductions. Individuals who receive income from salaries and wages, or interest, that is taxed under this regime, may continue to apply it as long as they do not exceed the total amount established for taxation under this regime.
Taxpayers under this regime will not be required to keep accounting records or file information returns. They will only have minimal obligations, such as being registered with the RFC, issuing CFDI and having a positive opinion of their tax obligations, among others. Provisional and annual returns will be determined based on the information from their electronic billing.
Legal entities must withhold from these taxpayers only the amount of 1.25% of the corresponding payment.
Those who earn salaries exceeding the threshold of 3.5 million pesos will not be able to pay taxes under this regime, nor will those who fail to comply with their tax obligations.
Market value in transactions between foreigners. The reform proposes establishing that foreigners without a permanent establishment in Mexico with income from a source of wealth in the country will be required to determine their income, profits, gains and, where applicable, deductions derived from operations with related parties, considering the compensation or profit margin that would have been obtained between independent parties.
Income from foreign acquisitions. It is proposed to establish that the Mexican transferor be jointly liable for his foreign purchaser, if the SAT carries out an appraisal that exceeds the value of the consideration in the sale of real estate by 10%.
Alienation of shares with a source of wealth in Mexico. It is proposed to amend article 161 of the Income Tax Law to provide that in a transfer between related parties, the report on the transfer of shares must include supporting documentation proving that the sale price of the shares transferred corresponds to the market value. In addition, the cases in which the shares must be considered "outside the group" for the purposes of their deferral in a multinational restructuring are established.
It is expected that in the case of the sale of shares listed on the Stock Exchange, the SAT will determine through general rules the cases in which tax withholding will not be applicable.
When the tax authorities, in the exercise of their powers of inspection, audit the relevant operations of 5 years prior to and 5 years after the restructuring, and determine that these lacked a business reason, the authorization to defer income tax on the sale of shares between entities of the same group will be void.
When a transaction that qualifies as relevant is carried out in the 5 years following the restructuring, this situation must be reported in accordance with the provisions of the CFF.
Interest withholding rate for foreign residents. Article 166 of the Income Tax Law establishes that the interest withholding rates of 10% and 4.9% are inapplicable when the beneficial owners are related parties that receive more than 5% of the interest. derivatives of the securities in question and are shareholders in more than 10% of the voting shares of the debtor or legal entities with more than 20% of their shares owned by the debtor, in which case they must apply the 35% withholding tax.
Similarly, it is proposed to eliminate the phrase “derivatives of the securities in question” because the authority considers that it gives rise to interpretations that allow taxpayers to consider that this limitation is applicable only to credit instruments.
Income from compensation for damages. The Income Tax Law establishes that compensation for damages is income that can be accumulated by foreigners who receive it from a Mexican source. The reform proposes establishing that the withholding be made even when the judgment or award does not distinguish whether the compensation is for damages (lost assets) or for losses (lost profits). In this case, the resident abroad may demonstrate to the SAT the nature of the compensation, in order to, if applicable, obtain a refund.
Legal representative of the resident abroad. The reform proposes that tax representatives of residents abroad must voluntarily assume joint liability for their clients, and must also have the necessary solvency to respond as jointly liable.
Preferential tax regime income. It is established that when determining the income subject to this regime, the annual adjustment for inflation, or the exchange gains or losses derived from the fluctuation of the foreign currency, will not be considered. Likewise, to determine the calculation of the fiscal result in said regime, the gain or loss or the annual adjustment for inflation should not be considered.
Transfer prices
Related parties. The reform states that, as a general rule, the operations compared in these studies must correspond to the fiscal year analyzed.
Interquartile method. The Regulations of the Income Tax Law establish the “interquartile method” to calculate the price range in comparable transactions within transfer pricing studies. The reform proposes to recognize the application of this method expressly in the Income Tax Law.
Maquiladoras. The possibility for maquiladoras to request a favorable resolution of compliance with their transfer pricing obligations is eliminated, as a mechanism to prevent their related parties from establishing a permanent establishment in Mexico. Therefore, maquiladoras will be able to apply only the method of safe harbour For this purpose.
Simplified regime for legal entities. The reform proposes establishing a new trust regime for legal entities with income of less than 35 million pesos, provided that their partners are exclusively natural persons. Individuals under this regime will accumulate their income at the time it is actually received, that is, they will pay taxes based on their cash flow. Investment deduction rates (depreciation) higher than those of the general regime are also foreseen.
Legal entities whose partners control other companies will not be able to pay taxes under this regime, nor will credit institutions, nor taxpayers who obtain income from trusts or joint ventures, among others.
VAT Law
Rate 0%. The reform proposes that animal feed, as well as sanitary pads, tampons and menstrual cups, be subject to a 0% VAT rate.
Non-object acts. It is proposed to define acts not subject to VAT as those that are not carried out in national territory or that are not defined in the Law, and which are intended to generate income through acts for which VAT is transferred. These activities will have the same treatment as those exempt from VAT, so the VAT transferred to obtain income related to acts not subject to VAT will not be creditable.
Request in the name of the taxpayer. It is proposed that for VAT to be creditable on imports, the request must be in the name of the taxpayer and include the payment of the corresponding VAT, otherwise it will not be creditable.
Notice to inform the SAT of the start of activities. Taxpayers who have creditable VAT in the pre-operating period must calculate the proportion of activities at a 0% rate as of the twelfth month after their start of operations. The reform proposes the obligation of taxpayers to inform the SAT of the month in which they began to carry out operations for these purposes.
Digital services. Currently, residents abroad without establishments in Mexico who provide digital services in Mexico must report to the SAT on a quarterly basis the number of their monthly operations in the country, in accordance with the provisions of the VAT Law. The reform proposes that this obligation must be fulfilled on a monthly basis.
Failure to comply with this obligation for 3 consecutive months will result in temporary blocking of access to the digital service of the digital service provider until such obligation is fulfilled.
Use or enjoyment. The reform proposes to specify that the use or enjoyment of goods takes place in national territory when it is carried out in Mexico, regardless of the place of material delivery of the good or the place of celebration of the legal act.
IEPS Law
Importation of fuels. It is proposed that in cases where fuels are imported with a tariff rate that does not correspond to them, the authority may determine the taxes omitted, without prejudice to any applicable penal or administrative sanctions. The authority will apply the corresponding rate, without any reduction, to sanction this conduct.
Electronic tag. The reform establishes that the label for alcoholic beverages can be electronic. Establishments where alcoholic beverages are consumed must read the QR code on the label in the presence of the consumer.
Registration in the Registry. The obligation for producers, bottlers and importers of denatured alcohol and non-crystallizable honey to register in the Registry of Taxpayers of Alcoholic Beverages is to be eliminated.
Federation fiscal Code
Tax residency. The reform proposes establishing that taxpayers who are in the following situations will not lose their tax residency in Mexico:
- Fail to submit a notice of change of residence to the SAT, no later than 15 days immediately prior to the day in which the change of tax residence occurs.
- If they do not prove their tax residency abroad.
- For 5 years (3 years up to now) when the entity moves to a REFIPRE (tax haven), unless it has signed a broad agreement for the exchange of tax information with Mexico and, additionally, an international treaty that enables mutual administrative assistance in the notification, collection and collection of contributions.
Suspension of deadlines due to force majeure. It is expected to expressly establish that the authority has the power to suspend the deadlines provided for in the law in cases of force majeure.
Merger – New Games. It is proposed to consider that there is alienation in the merger of companies when concepts or items arise as a result of this that did not exist prior to the merger (in the same way that currently occurs in the demerger).
Alienation by merger and/or spin-offIt is established that if the authority notices that a merger or spin-off did not comply with the requirements of article 14-B of the CFF or, if it discovers that these operations lacked a business reason, it must determine the tax on the gain from the sale of the merger or spin-off.
Business reason for the merger and/or spin-off. In order to determine whether a merger and/or spin-off lacks a business reason, the reform states that the authority must consider the “relevant operations” listed therein, within the 5 years prior to or after the operation. These relevant operations are related to the increase or decrease in the value of the shares, the transfer of share rights and the change of tax residence of the partners, among other assumptions.
Informative for relevant operations. If a “relevant operation” of those indicated in the previous point is carried out within 5 years after the merger and/or spin-off, the company must submit the information provided for in article 31-A, first paragraph, subsection d of the CFF.
Financial statements opinion in merger or spin-off. It is proposed to establish that the financial statements of these operations be audited by a public accountant.
