Obligations for taxpayers and advisors under Mexico’s mandatory disclosure rules (MDRs) are in effect. This alert reviews these new obligations, which Israeli companies that have offices in Mexico need to familiarize themselves with.
Looking to action 12 of the OECD’s Base Erosion and Profit Shifting framework, in December 2019 Mexico enacted a new chapter of its Federal Tax Code focusing on MDRs. This chapter regulates the Mexican MDR obligations, the esquemas reportables, or Informative Return for Reportable Transactions.
Under the new rules, tax advisors must disclose “generalized” and “customized” (or “personalized”) reportable transactions. Generalized transactions are those that (a) seek to be traded broadly to all kinds of taxpayers or to a specific group thereof; moreover, (b) even if these transactions require minimal or no adaptation to a taxpayer’s specific circumstances, the way of obtaining a tax benefit is the same. Personalized reportable structures are those that are designed, traded, organized, implemented or managed to adapt to a specific taxpayer’s particular circumstances.
Tax advisors covered
According to the provisions, a tax advisor is any individual or legal entity that in the ordinary course of activities performs tax advisory activities and is responsible for or is involved in designing, commercializing/trading, organizing, implementing or managing the totality of a reportable arrangement; or makes available the totality of a reportable structure for implementation by a third party. The obligation to disclose reportable structures exists regardless of the tax residence of taxpayers, provided that the arrangement provides a tax benefit in Mexico.
Tax advisors falling within the scope of the provisions are those who are considered Mexican residents. Nonresident advisors generally do not fall under the scope of the provisions, but if these nonresident advisors have a permanent establishment in Mexico or a related party in Mexico or if a third-party Mexican resident offers advisory services under a company’s brand or trade name, then those parties will be treated as though they provided the tax advice.
Taxpayers subject to disclosure of arrangements are Mexican residents and foreign residents with a permanent establishment in Mexico, whenever their tax returns indicate a tax benefit from a reportable structure and whenever they enter into transactions with foreign resident related parties and such structures generate tax benefits in Mexico.
Tax benefits are deemed to include the monetary value of any reduction, elimination or temporary deferral of a tax. These benefits include amounts achieved through deductions, exemptions, non-recognition of gain or income, adjustments or no adjustments of the taxable base, tax credits, the re-characterization of a payment or activity and a change of tax regime, among others.
Taxpayers are obligated to disclose reportable transactions when:
- a tax advisor fails to provide the evidence that the arrangement was reported, or the tax advisor delivers an opinion attesting that the structure is not subject to disclosure
- a reportable structure is designed, organized, implemented, and managed by a taxpayer
- a taxpayer obtains tax benefits in Mexico from a reportable structure designed, traded, organized, implemented, or managed by a person that is not considered a tax advisor
- a tax advisor is a foreign resident having no permanent establishment in Mexico; or while having it, the activities attributable to such permanent establishment are not those performed by a tax advisor
- there is a legal impediment for a tax advisor to disclose a reportable structure
- there is an agreement between a tax advisor and a taxpayer, so that the latter is the one compelled to disclose a reportable structure.
Mexican resident taxpayers are also required to disclose reportable transactions when they perform activities with nonresident related parties and the transactions generate Mexican tax benefits for the nonresident.
A reportable arrangement shall be deemed to be any that generates or may generate, either directly or indirectly, a tax benefit in Mexico, and has any of the following hallmarks:
- It avoids exchanging tax or financial information with foreign authorities.
- It avoids the application of art. 4-B of MITL (tax transparency) and avoids the application of Chapter I of Title VI, Mexican CFC (REFIPRES).
- It consists of one or more legal acts allowing the transfer of tax losses pending to be amortized, to other companies / individuals different than those who generated them.
- It consists of a series of interconnected payments or operations that return all or part of the first payment amount that is part of such series, to the company / individual who paid it or to any of its partners, shareholders or related parties.
- It involves application of double tax treaties by foreign residents (concerning, for instance, reduced WHT rates, exemptions, or capital gains on net basis).
- It Involves activities between related parties with the following characteristics:
- transfer of intangible assets which are difficult to value
- The transfer or the temporary use or enjoyment of goods and rights granted without consideration
- No reliable comparables
- When a unilateral protection regime is used, in accordance with the Transfer Pricing Guidelines for Multinational Enterprises and Fiscal Administrations, approved by the Council of the Organization for Economic Cooperation and Development in 1995, or those guidelines that replace them.
- It avoids a PE.
- It involves the transfer of a depreciated asset.
- It involves a hybrid mechanism.
- It avoids identifying the beneficial owners.
- When there are tax losses whose deadline for amortization is about to end according to the Income Tax Law and some operations are carried out to obtain tax profits to which said tax losses could be amortized, and these operations generate an authorized deduction to the taxpayer that generated the losses or to a related party thereof.
- It avoids applying the additional 10 percent rate to dividends.
- It concerns a sale and leaseback.
- It involves operations whose accounting and tax records present differences greater than 20 percent.
- The obligation to disclose reportable structures exists regardless of the tax residence of taxpayers, provided that the arrangement offered a tax benefit in Mexico.
Mexico’s tax authorities have set a threshold for reporting customized transactions with an aggregate tax benefit of more than $100 million Mexican pesos (US$5 million). The threshold does not apply to generic transactions or to those transactions that meet the hallmark for avoiding the exchange of information with foreign authorities.
To determine whether the threshold is met, taxpayers or tax advisors must aggregate the tax benefit for all transactions that have a tax benefit in Mexico that meet a hallmark for reporting and have at least one tax year in common.
Information to be included in the report
Taxpayers and tax advisors information to be reported includes, among others: i) complete legal name of the person reporting and the tax ID number; ii) complete name of the legal representative of the tax advisor and the taxpayer; iii) description of the reportable transaction and tax benefit obtained or expected; iv) tax year in which the reportable transaction was implemented; v) as well as additional information described on chapter 2.21 of the General Miscellaneous Rule.
Taxpayers must analyze the transactions performed in the past (before 2020), to the extent that a transaction still generates a tax effect in Mexico in 2020 or thereafter. In those cases, the taxpayer must report the transactions, whether or not a tax advisor participated in the transaction. Reportable transactions performed before and during 2020 must have been reported within 30 business days of January 1, 2021, which means taxpayers and tax advisors should have reported those transactions on or before February 15, 2021.
Transaction plans and/or transactions to be implemented during 2021 and onwards must be disclosed no later than 30 business days after they have been made available to the taxpayers or when the first step or legal act of the transaction plan is performed, whichever comes first.
Not complying with the reporting obligation could be costly; failing to report or incorrectly reporting may lead to i) loss of the tax benefits over a tax audit; and ii) economic penalties for taxpayers ranging from 50 percent to 75 percent of the tax benefit. Tax advisors may be subject to a penalty of MXN$20 million (US$1 million) per reportable transaction not disclosed to the Mexican tax authorities.
Taxpayers who were not able to timely file the reportable transactions return by February 15 would be fulfilling their tax obligations spontaneously in so far as they submit the above-mentioned return without the authority’s request; in such cases, the imposition of fines would not be appropriate.
Annual disclosure for tax advisors
Finally, tax advisors must file an informative return annually in February. The return shall include the names or corporate names, as well as tax identification numbers of taxpayers that received tax advice in connection with reportable structures.
Learn more about these mandatory disclosure rules by contacting the author.