Relevant transactions disclosure
As recently introduced in the 2020 Tax Reform, as of January 2021, taxpayers in certain scenarios and tax advisors will be required to disclose generalised and customisable reportable transactions to the tax authorities.
The schemes to be disclosed will not only be those designed, organised, implemented, or administered as of January 2020, but also those made prior to that date which tax effects continue to materialise in FY 2020 and in future years.
As mentioned before, please see below those cases in which the taxpayer would be required to disclose the reportable transaction:
- When the tax advisor does not provide the client with the identification number of the reportable scheme issued by the Mexican tax authorities or a notice confirming that the transaction is not reportable.
- When the reportable scheme has been designed, organised, implemented, and managed by the taxpayer. In these cases, when the taxpayer is a legal entity, the individuals who are the tax advisors responsible for the reportable scheme who have shares or participations in said taxpayer, or with whom they maintain a subordination relationship, shall be excluded from the obligation to disclose such transaction.
- When the taxpayer obtains tax benefits in Mexico from a reportable scheme that has been designed, marketed, organised, implemented, or managed by a person who is not considered a tax advisor.
- When the tax advisor is a foreign resident without a PE in Mexico, in accordance with the Mexican Income Tax Law, or, when having one, the activities attributable to such PE are not those performed by a tax advisor.
- When there is a legal impediment for the tax advisor to disclose the reportable scheme.
- When there is an agreement between the tax advisor and the taxpayer for the latter to be the party filing the reportable scheme.
The taxpayers required to comply with the reportable scheme provisions are those residents in Mexico and residents abroad having a PE in Mexico based on Mexican Income Tax Law provisions, when their tax returns reflect the tax benefits of the reportable scheme. Such persons are also required to disclose when they engage in transactions with foreign related parties and such schemes generate tax benefits in Mexico for the latter by reason of such transactions.
Cash deposits reporting
Financial institutions are required to report, on a monthly basis, to the Revenue Administration Service (Servicio de Administracion Tributaria or SAT) the information on customers making monthly cash deposits in excess of MXN 15,000.
International Financial Reporting Standards (IFRS) adoption
All companies listed on the Mexican Stock Exchange are required to submit annual consolidated financial statements accompanied by the opinion of a Mexican independent CPA. These financial statements must be prepared in conformity with IFRS and cover three years. Financial institutions and insurance companies must also file audited financial statements with the appropriate regulatory agency.
The elective adoption of IFRS in Mexico for other companies presents great challenges and opportunities. Changing from Mexican Financial Reporting Standards (MFRS) to IFRS requires companies to review their financial reporting procedures and criteria. Major changes in the requirements often have a ripple effect, impacting many aspects of a company's information reporting organisation.
Nevertheless, the benefits to Mexican companies in reporting under IFRS are numerous. Among the greatest of these is the opening up of the Mexican Stock Market to overseas investors. By adopting IFRS, investors are able to compare two companies on different sides of the world with greater ease, and thus it is hoped that the change will encourage investment in Mexican companies.
Adoption of IFRS is not a straightforward process, and it will require time and effort on the part of the adopting entities to be able to ensure a smooth transition from MFRS to IFRS and ensure that the changes and benefits from this transition are duly implemented.
Foreign Account Tax Compliance Act (FATCA) intergovernmental agreement (IGA)
FATCA was enacted in 2010 by the US Congress to target non-compliance by US taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the US Internal Revenue Service (IRS) information about financial accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest.
Mexico signed an IGA with the US Treasury on 19 November 2012 under which Mexican financial institutions are required to report US-owned account information directly to the Mexican tax authority, rather than to the US IRS. The Mexican tax authority will then share that information with the US IRS.
The IGA provides that the United States will reciprocate with the sharing of information.
Mexican tax authorities have issued a set of administrative rules for banks and other financial and related entities to comply with the FATCA IGA.
Common Reporting Standard (CRS)
Mexican legal entities and legal figures that are financial institutions resident in Mexico or abroad with Mexican branches are required to report financial information of their clients since 2016 in line with the CRS, which was introduced at the OECD level on 15 July 2014.
The CRS obligation to financial institutions in Mexico was included in the 2016 Tax Reform to the Mexican Federal Tax Code, which broadly implies identifying the residency of their clients and the reportable accounts and filing such information to the Mexican tax authorities. In this regard, the Mexican tax authorities will exchange that information automatically with the respective jurisdictions participating in the multilateral exchange of information agreement signed on October 2014 by more than 50 countries. Depending on the particular jurisdiction, the exchange of information was set to start with 2016 data; however, with some jurisdictions, the exchange of information was agreed to start with 2017 and 2018 data.
In line with the above, Mexico started exchanging information in 2017 with respect to fiscal year 2016 and effectively received in the latter part of 2017 information of Spain, Germany, Malta, and the Netherlands, among other jurisdictions, as expressly mentioned by the Mexican tax authorities press releases.
Investments in Mexico through foreign transparent vehicles
It is relatively common for investors to use juridical figures and foreign transparent entities to structure their investments in Mexico due to several benefits from a corporate governance perspective, mainly in cases of joint investments that involve non-related parties interested in developing business projects in Mexico.
Currently, those investment vehicles are generally treated as vehicles which revenue is subject to a PTR and are not considered as residents for purposes of treaty benefit application, which results in a burdensome taxation from a Mexican tax perspective. To manage such effects, the Mexican tax authorities, through miscellaneous tax rules, have provided look-through taxation from a Mexican tax perspective in certain circumstances, where the tax effects are determined at the level of the members of such vehicles.
Per the 2020 Tax Reform, as of 1 January 2021, foreign transparent entities and juridical figures (trusts, partnerships, investment funds) will be treated as legal entities for Mexican tax purposes; in other words, the look-through treatment would no longer be available at the level of its members. However, if such legal entities or figures are beneficiaries of a tax treaty, such disposition would prevail.
On the other hand, foreign juridical figures, which are considered transparent from a tax perspective in their jurisdiction of constitution, that manage private equity investments in Mexican legal entities will be allowed the application of look-through rules from a Mexican perspective. In this regard, the members of such figures will be taxed in Mexico based on the respective section of the Mexican Income Tax Law they are subject to. The look-through rule included in the Law would only be applicable in the case of interest revenue, dividends, capital gains, or the revenue derived from the leasing of immovable property to the extent the following requirements are met:
- Registration of the foreign transparent vehicle’s members with the Mexican tax authority.
- The foreign juridical figure must be incorporated under the laws of a country with which Mexico has a broad exchange of information agreement.
- The members of the foreign juridical figure, including the administrator, reside in a country with a broad exchange of information agreement with Mexico; transparency would be granted proportionally in this regard.
- The members of the foreign juridical figure, including the administrator, must be the effective beneficiaries of the revenue received by such figure.
- The Mexican-source revenue that is attributable to the foreign resident members is taxable for them.
- If a member is a Mexican resident, the income is accrued pursuant to the Mexican income tax rules governing controlled non-Mexican resident entities.
In this regard, it is important to analyse on case-by-case basis whether the fund under analysis has a legal personality of its own or not to determine whether transparency may be available.
On 23 April 2021, the Mexican government enacted a reform that prohibits the subcontract of personnel services and aims for each taxpayer to directly employ its labour force without the intermediation of an in-house or outsource service provider. Only specialised services will be allowed for subcontracting, being those that relate to activities that are not part of the core business or main economic activity of the contracting party. All companies rendering specialised services must register and secure a registry number to the labour authority.
As of 1 August 2021, any payment for the subtracting of personnel, other than those registered as specialised, will not be deductible for income tax purposes, and the corresponding VAT will not be creditable for the payer.
Mexican tax authorities will only authorise the transfer of shares at cost basis for business restructurings where the parties are tax residents in Mexico and belong to the same group. There are additional requirements needed before the registered CPA can issue the tax report.
Whenever the Mexican tax authorities detect during a tax audit that the business restructuring lacks a business reason, or that it does not comply with any of the relevant requirements, the authorisation will be void, and the tax corresponding to the transfer of shares must be paid.
Additionally, taxpayers shall include in their authorisation requests all 'relevant transactions' that are related to the restructure subject to the authorisation and that took place during the five years prior to the request.
Finally, when taxpayers perform a 'relevant transaction' within five years after the implementation of the business restructuring, they must file an informative tax return.
'Relevant transactions' include:
- Any transfer of property, enjoyment, or use of the shares or voting rights of the issuing, acquiring, or transferring entity.
- A grant of a right over the assets or profits of the issuing, acquiring, or transferring entity upon a capital redemption or liquidation.
- An increase or decrease in the book value of the shares of the issuing, acquiring, or transferring entity by more than 30% to that determined on the date in which the authorisation is requested.
- An increase or decrease in the equity of the issuing, acquiring, or transferring entity.
- A shareholder increases or decreases its percentage of participation in the capital of the issuing, acquiring, or transferring entity and, as a result, the percentage of participation of another shareholder increases or decreases.
- The tax residency of the shareholders of the issuing, acquiring, or transferring entity changes.
- A transfer of one or various business lines of the issuing entity, or of the acquiring or transferring entity.
In connection with tax-deferral authorisations for cross-border intra-group restructures, the deferred tax will become due whenever the Mexican issuer and the acquirer cease to consolidate their financial statements for accounting purposes.
Moreover, the tax deferral authorisation shall be rendered void when the tax authorities, during a tax audit, ascertain that the restructure or the relevant transactions (see domestic restructuring above) related thereto, performed either five years prior to or five years after the restructure, lack a valid business reason or when the tax authorities detect that the exchange of shares results in income subject to a preferential tax regime.
When a relevant transaction is performed during a five-year period after the restructure, the acquiring entity or its legal representative shall inform the tax authorities.
Finally, the tax report prepared in connection with the restructure shall include the business lines and the economic activity of both the issuing and the acquiring entity, as well as certifying that those entities consolidate their financial statements.
Mergers and spin-offs
If during an audit review the Mexican tax authorities determine that there is a lack of business reasons behind the merger or spin-off or that the taxpayer has not complied with any of the Mexican Federal Tax Code's (MFTC’s) requirements, a taxable transfer of assets will be deemed to have taken place (voiding the tax-neutral effects).
For purposes of the foregoing, the accruable income should be the gain derived from the merger or spin-off.
In connection with the above, the tax authorities may take into account the 'relevant transactions' related to the merger carried out within the five years before or after the merger or spin-off.
In addition, if any of the above-mentioned relevant transactions take place within five years after the execution of the merger, then the surviving entity must report such transaction. The financial statements utilised to carry out the merger or spin-off, as well as the financial statements resulting from the merger or spin-off, should be audited by an independent and authorised CPA. This CPA will prepare a tax report (known as dictamen fiscal in Spanish) that should be filed with the tax authorities.