The Mexican Income Tax Law previously included a chapter that allowed certain holding companies to file a consolidated income tax return with their majority-owned subsidiaries. Tax consolidation was applicable for CIT purposes but not for other taxes (e.g. VAT) or compulsory employee profit sharing.
Companies that, until 2013, consolidated with their subsidiaries for tax purposes were entitled to reduce their deferred tax by crediting against the consolidated tax the tax on dividends paid between members of the group, and to reduce by up to 50% the consolidated tax by applying losses (valued at 15%) incurred by the controlled entities.
The tax consolidation regime was repealed starting in 2014, and a simplified tax consolidation (deferral) regime was introduced.
The main requirements for applying the current tax consolidation (deferral) regime are as follows:
- That the Mexican tax resident holding entity holds, directly or indirectly (through other Mexican entities), 80% or more of the shares of the entities that would form part of the consolidation regime.
- That the Mexican holding entity is not held in more than 80% of other entities, unless such other entities are resident of a jurisdiction having an in-force broad exchange information agreement with Mexico.
Shares that qualify as placed among the general investing public and non-voting shares are not considered for the purposes of determining the proportions described above.
As of December 2019, Albania, Andorra, Anguilla, Argentina, Aruba, Australia, Austria, Azerbaijan, Bahamas, Bahrain, Barbados, Belgium, Belize, Bermuda, Brazil, British Virgin Islands, Bulgaria, Caicos Islands, Cameroon, Canada, Cayman Islands, Chile, China, Colombia, Cook Islands, Costa Rica, Croatia, Curaçao, Cyprus, the Czech Republic, Denmark, Ecuador, Estonia, Finland, France, Georgia, Germany, Ghana, Gibraltar, Greece, Greenland, Guatemala, Guernsey, Hong Kong, Hungary, Iceland, India, Ireland, Isle of Man, Israel, Italy, Jamaica, Japan, Jersey, Kazakhstan, the Republic of Korea, Kuwait, Latvia, Lebanon, Liechtenstein, Lithuania, Luxembourg, Macau, Malaysia, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, the Netherlands, the Netherlands Antilles, New Zealand, Nigeria, Niue, Northern Ireland, Norway, Pakistan, Panama, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saint Kitts and Nevis, Saint Vincent and the Grenadines, Samoa, San Marino, San Martin, Saudi Arabia, Senegal, Seychelles, Singapore, Slovak Republic, Slovenia, South Africa, Spain, St. Lucia, Sweden, Switzerland, Tunisia, Turkey, Turks Islands, Uganda, Ukraine, United Arab Emirates, the United Kingdom, the United States, Uruguay, and Vanuatu are considered to have broad exchange information agreements on tax matters with Mexico; other agreements or tax treaties that might include an information exchange agreement on tax matters are awaiting ratification or being negotiated.
The Mexican Tax Administration must authorise the application of the consolidation regime, and written consent of the legal representative of each of the companies that would be participating must be filed before 15 August of the year prior to the first year of consolidation to request the proper authorisation. Special tax accounts should be kept by each of the companies of the group.
There are some types of entities that would not qualify for the consolidation regime, among others, non-profit entities, credit institutions, insurance corporations, trusts, auxiliary credit institutions, stock exchange entities, foreign exchange houses and capital investment companies, non-resident companies, companies in liquidation, civil or social associations, cooperatives, and maquiladoras.
In general terms, the current consolidation regime allows an individual company to offset losses against profits of other companies in the same group during a three-year deferral period.
The deferred income tax must be paid by each of the entities of the group on the same date on which they are required to file their annual income tax return for the year following that in which the three-year deferral period concludes. The deferred income tax will be paid updated with the accumulated inflation adjustment from the month in which the tax was deferred to the month in which the tax is paid.
The deferral benefit must be paid before the three-year deferral period if:
- a member leaves the consolidated group
- the ownership percentage is reduced, or
- the group is deconsolidated.
Mexican transfer pricing legislation is based on the OECD principles. This has resulted in the implementation of transfer pricing guidelines that are largely in line with the global economy and trade.
In general terms, from a Mexican transfer pricing perspective, all related-party transactions (including certain joint-venture relationships) must be performed at arm's length. Mexican transfer pricing regulations require taxpayers to produce a contemporaneous transfer pricing report to ensure their income and expenses are in line with Mexican Income Tax Law.
Those taxpayers who are required to present an informative return with respect to their tax status (a DISIF for its acronym in Spanish) are also required to present certain information of the transactions carried out with related parties in Mexico and abroad for each fiscal year. The DISIF must be filed, when applicable, as part of the annual corporate tax return of Mexican legal entities.
Local legislation allows the selection of both traditional methods and profit-based methods consistent with the OECD guidelines. However, the legislation provides a strict ordering criteria for the application of a method, starting with the comparable uncontrolled price (CUP) method. Other methods different from the CUP may only be applied if the CUP method is justifiably not applicable based on the specific facts and circumstances of each transaction.
Mexican legislation is generally ‘form over substance’ oriented; consequently, contractual terms remain relevant when defining the economic substance of the transactions subject to the transfer pricing analysis.
Reliable financial information is not always publicly available for Mexican entities. Hence, reliance is often placed on foreign information, which is then adjusted to properly reflect local market conditions and render the transactions in question more comparable.
Country-by-Country (CbC) reporting, Master file, and Local file
In 2016, the Mexican government enacted the requirement to file a master information return (Master file), local information return (Local file), and CbC report on a calendar-year basis, starting in FY 2016 and due every 31 December of the following fiscal year. As from 2022 the local file will be due by May 15th of the following year. The provisions of the Mexican Income Tax Law on this obligation are largely consistent with the OECD’s Base Erosion and Profit Shifting (BEPS) with respect to Action Plan 13: Guidance on the Implementation of Transfer Pricing Documentation and Country by Country Reporting. Note that the filing of Master and Local files is required by Mexican taxpayers exceeding a specific established threshold, while the CbC report is only required for Mexican multinational groups meeting a certain group revenue threshold. However, Mexican tax authorities may also request the filing of a CbC report concerning foreign multinational groups in certain circumstances.
Failure to file the reports is subject to fines and disqualification of the taxpayer from entering into contracts with the Mexican public sector or having their customs permits cancelled.
Interest generated by excess debt lent by a foreign related party to a Mexican resident is non-deductible for CIT purposes. Excess debt is defined as that exceeding three times the value of shareholders’ equity (i.e. a 3:1 debt-to-equity ratio) as per the taxpayer’s Mexican Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) balance sheet.
In principle, all interest-bearing debts are considered in determining the annual average debt for purposes of calculating the ratio and thereby the disallowed interest expense amount. However, certain debts incurred for construction, operation, or maintenance of productive infrastructure associated with Mexico’s strategic areas or to generate electricity may be excluded from the computation.
Taxpayers may also be able to obtain a ruling from the Mexican Tax Administration in order to apply a higher financial leverage (i.e. not the 3:1 debt-to-equity ratio) if they support with the Mexican tax authorities that the particularities of their business activities required a higher leverage. Also, the thin capitalisation rules do not apply to entities that are part of the Mexican financial sector for the realisation of their business activities.
In addition, taxpayers may be entitled to use the sum of the average balances of their capital contributions account (CUCA) and their (CUFIN) to determine the 3:1 debt-to-equity ratio instead of shareholders’ equity. As of January 1, 2022, the initial and ending non-amortized tax losses balances must be taken into consideration for purposes of computing the limit. Taxpayers that opt to apply this alternative for the thin capitalisation computation must continue to use it for at least five years. Note that the alternative computation is mandatory for those taxpayers that do not apply Mexican GAAP. This option will not be available when the result obtained is greater than 20% of the accounting capital in the relevant fiscal year, except in those cases in which taxpayers demonstrate to the tax authorities (during an audit), that the driving elements behind said differences have valid business reasons and that the CUCA, CUFIN and the non-amortized tax losses balances have proper supporting documentation.
Specific provisions dealing with the disallowance of interest expenses for debt financing structured though back-to-back loans should also be closely observed.
Controlled foreign companies (CFCs)
See Foreign income in the Income determination section for a description of the taxation of undistributed profits of foreign subsidiaries.