Tax Reforms 2020

On December 9, 2019, it  was published in the Federal Official Gazette (Diario Oficial de la Federación) a Decree which amends, adds and repeals various provisions of the Income Tax Law (“IT Law”), the Value Added Tax Law (“VAT Law”) and the Federal Tax Code (“Tax Code”). With certain exceptions, the amendments to the Tax Code and the laws mentioned above became effective as of January 1, 2020.

One of the main purposes of the amendments was the implementation of actions to combat tax evasion and avoidance schemes developed by the Organization for Economic Cooperation and Development (OECD) and the Group of Twenty (G20) through the Base Erosion and Profit Shifting Project (BEPS).

Below are the aspects of the above-mentioned decree that we consider most relevant:

1. IT Law:

1.1 Updating of the concept of permanent establishment (PE): The following assumptions were added under which foreign residents will be considered to have a PE in Mexico:

       1.1.1. Dependent agent: When a foreign resident acts in the country through a person other than an independent agent, it will be considered that such person has a PE in Mexico, if such person habitually enters into agreements or habitually plays the main role in entering into agreements by the foreign resident and such agreements are entered into in the name or on behalf of the foreign resident; provide for the transfer of property rights, or the granting of the temporary use or enjoyment of an asset that the foreign resident possesses or over which he has the right of temporary use or enjoyment of an asset that the foreign resident possesses; or pursuant to which the foreign resident shall provide a service.

       1.1.2. Independent agent: On the one hand, the expression “among others” is added to the list of specific cases under which an independent agent is considered not to act in the ordinary framework of his activity, which implies that the tax authorities may consider that an independent agent does not act in the ordinary framework of his activities to cases not expressly foreseen in the law. On the other hand, a new case is added under which a natural or legal person is presumed not to be a self-employed agent, when he acts exclusively or almost exclusively* on behalf of foreign residents who are his related parties.

      1.1.3. Exceptions to the incorporation of PEs: A place of business whose sole purpose is to carry out activities of a preparatory or auxiliary nature with regard to the business activity of the resident abroad shall not be considered to constitute a PE. Furthermore, the activities set forth in Article 3 of the IT Law are exceptions to the incorporation of PEs, provided that they are of a preparatory or auxiliary nature.

       1.1.4. Operations fragmentation: A provision has been added to prevent a foreign resident or a group of related parties from fragmenting a cohesive business operation into various operations to argue that each one has the character of preparatory or auxiliary and, therefore, falls within the exceptions to the constitution of a PE.

       1.2. Income from foreign tax transparent entities and foreign legal entities: Articles 4-A and 205 were added for the purpose of regulating income generated by foreign** tax transparent entities and foreign*** legal entities, which shall come into force as from 1 January 2021. In this regard, it Is provided that these entities will be taxed as legal entities and shall pay income tax on the income they receive.

 The above mentioned will not be applicable to foreign transparent tax entities and foreign legal entities domiciled and/or located in a country with which Mexico has entered into a treaty to avoid double taxation, in which case, the provisions contained therein will be applicable.

On the other hand, tax transparency will be acknowledged to foreign legal entities that manage private capital investments made in legal entities resident in Mexico, which are considered transparent for tax purposes in the country or jurisdiction where they are incorporated, only for the income obtained from interest, dividends, capital gains or real estate leases, provided that they comply with the requirements of article 205 of the IT Law.

       1.3. Income obtained by residents in Mexico or PEs in Mexico, through foreign transparent entities and foreign legal entities: Article 4-B was added, setting forth the obligation of residents in Mexico and residents abroad with PEs to pay the corresponding income tax on the income obtained by them through foreign transparent entities and foreign legal entities in which they participate directly (or indirectly involving other foreign transparent entities and foreign legal entities) in the proportion corresponding to their participation in them.

       1.4. Fighting hybrid mechanisms: Various provisions are included to fight the erosion of tax bases in Mexico and preventing the transfer of profits abroad to reduce the payment of income tax in Mexico. In this sense, a last paragraph was added to Article 5 of the IT Law to determine that no credit for income tax will be granted: (i) that the taxpayer paid abroad for income from sources located abroad, when such tax is also creditable in another country; and (ii) in the case of income from dividends or profits distributed by companies resident abroad to legal entities resident in Mexico, unless the income on which such tax was paid has also accrued in the other country or jurisdiction and when the dividend or profit distributed represents a deduction or an equivalent reduction for the legal entity resident abroad making such payment or distribution.

       1.5. Profit sharing (PTU): The possibility of crediting in provisional payments the PTU paid in the same year was included.

       1.6. Payments to related parties: Amendments were approved to the applicable provisions regarding deductions of payments made to related parties, or through structured agreements when the corresponding income is made to related parties subject to preferential tax regimes, whether these payments are made directly or indirectly through structured agreements.

This provision will not apply, among other cases, when the respective payment derives from substantial business activities of the recipient of the payment, provided that it has its effective place of management and is incorporated in a country with which Mexico has a comprehensive information exchange agreement. This exception will not apply when the payment is considered as income subject to a preferential tax regime due to the use of a hybrid mechanism.

Furthermore, it was approved that payments made by a taxpayer are not deductible when they are also deductible for another member of the group or for the same taxpayer in another jurisdiction, unless the member of the same group or the resident abroad accumulates the income generated by the taxpayer in proportion to its share. In the event that the taxpayer is also considered a tax resident in another country or jurisdiction, the above will not apply as long as the income taxed in Mexico is also accumulated in the other country or jurisdiction.

As a consequence of the above, it was approved to repeal section XXXI of Article 28 that denied the deduction of payments to related parties for interest, royalties or technical assistance, when made to transparent entities, non-existent for tax purposes abroad or when they do not constitute cumulative income in the respective country.

       1.7. Outsourcing: Sections V and VI of Article 27 were amended to set forth as a requirement for deductions, compliance with the obligations to withhold and pay in full taxes provided in the tax provisions, including the obligation of contractors of outsourcing services to calculate, withhold and pay 6% of the value of the consideration for value added tax (VAT) caused by such operations. It should be noted that, apparently, the withholding case covers not only labor outsourcing operations, but any provision of services in which personnel are made available to the contracting party.

Consistent with the foregoing, the obligation of the contracting party to obtain from the contractor the tax vouchers for the payment of salaries of the employees who provided the outsourced service, the acknowledgments of receipt and the declaration of the entirety of the tax withholdings made from such employees and the payment of the employee-employer contributions to the Mexican Social Security Institute (Instituto Mexicano de Seguro Social) was eliminated.

        1.8. Controlled Foreign Entities subject to Preferential Tax Regimes: Several amendments were made to Chapter I, Title VI of the Law, in order to clarify certain provisions that have generated problems. Previously, it was considered as effective control the average participation per day in foreign entities that allowed the taxpayer to have effective control of them or the control of their administration, to such a degree that they could decide the moment of distribution of income, utilities or dividends, by themselves or by an intermediary. Currently, after the relevant amendments, effective control is understood as an average daily participation of the taxpayer over the foreign entity that allows the latter to have, directly or indirectly, more than 50% of the total voting rights in the entity, veto right or need of its vote for decision making or if such participation corresponds to more than 50% of the total value of the shares issued by the entity. Furthermore, the taxpayer is deemed to exercise effective control when the relevant rights are exercised in respect of each of the intermediate foreign entities that separate it from the foreign entity or over 50% or more of the assets or profits of such intermediate entities.

The above does not apply to income through transparent foreign entities or legal entities whose participation is direct.

Furthermore, it was clarified that, in order to determine whether the income of a foreign entity is subject to a preferential tax regime, all income taxes paid by the foreign entity will be considered, regardless of whether they are paid in a country or jurisdiction other than that of its residence or at different levels of government.

       1.9. Limitation to the interest deduction: Section XXXII of Article 28 was added in order to set forth a limitation to the interest deduction applicable only when the amount determined on the basis of section XXVII of said article is exceeded. This amount will be applied jointly to all corporations subject to Title II of the IT Law and PE of residents abroad that belong to the same group or that are related parties, and will be distributed among the members of the group or related parties, in the proportion of the cumulative income generated during the previous fiscal year by the taxpayers to whom the relevant fraction applies.

It will not be applicable to the interest derived from debts contracted to finance public infrastructure works, and to finance constructions, including for the acquisition of land where they will be carried out, located in national territory; to finance projects for the exploration, extraction, transport, storage or distribution of oil and solid, liquid or gaseous hydrocarbons and for other projects of the extractive industry and for the generation, transmission or storage of electricity or water, among others.

       1.10. Income from the provision of services or sale of goods through the Internet: Section III was added to Chapter II, Title IV, which includes obligations for persons who sell goods or provide services through the Internet, by means of technological platforms, computer applications and similar. These provisions will enter into force from June 1, 2020.

Among other obligations, the provisional payment of income tax was added, which will be paid through a withholding that will be made by legal entities resident in Mexico or resident abroad with or without a PE in the country and foreign entities or figures. Withholdings may be considered as definitive payments when the income of individuals for the concepts mentioned does not exceed 300,000 pesos in the immediately preceding fiscal year, or in the case of individuals who also obtain income from salaries and the sale of goods.

       1.11. Collection of ISR from rental income: Article 118 was added in order to establish that in civil judgments in which the lessee is condemned to pay past due rent, the judicial authority shall require the creditor to prove that it has issued tax vouchers and, if the issuance of such vouchers is not proven, the judicial authority must inform the Tax Administration Service (SAT) of the omission.

       1.12. Royalties: The provisions of Article 158 were eliminated with respect to income obtained by residents abroad from the lease for the temporary use or enjoyment of industrial, commercial or scientific equipment, such as containers, trailers or semi-trailers, aircraft and vessels, in order to clearly establish that such income must be considered as a royalty in terms of Article 167 and not as income from the lease of goods.

       1.13. Elimination of private FIBRAS: Section V of Article 187 was amended in order to eliminate tax incentives related to Infrastructure and Real Estate Trusts whose certificates of participation are not placed among the general investing public (private FIBRAS).

In the transitory provision applicable to this amendment, a period is granted for the trustors to accumulate the profit of the contributed real estate, stating that if by December 31, 2021, they have not accumulated, they will be accumulated in the annual return corresponding to the 2021 fiscal year, considering the updating of the tax from the contribution until the presentation of the return.

       2. VAT Law:

       2.1. Provision of digital services in Mexico by foreign residents: Chapter III Bis “On the provision of digital services by residents abroad without a permanent establishment in Mexico” is added, which states that the following services will be subject to VAT (i) Downloading or access to images, movies, text, information, video, audio, music, games (including gambling), multiplayer environments, ringtones, news display, traffic information, weather forecasts and statistics; (ii) Intermediation between third parties that are suppliers of goods or services; (iii) Online clubs and dating sites; and (iv) Distance learning or test or exercise sites.

According to the modification, the service is considered to be provided in national territory when the recipient of the service is in it and according to the cases of Article 18-C of the VAT Law. No VAT will be levied on the downloading of books and newspapers.

       2.2. Outsourcing: Section IV is added to article 1o.-A. in order to include the obligation to withhold the tax that is transferred to the legal entities or individuals with business activities, who receive services through which personnel who carry out their functions in the facilities of the contracting party or a related part of the same, or even outside these, are made available to the contracting party or a related part of the same, whether or not they are under the direction, supervision, coordination or dependence of the contracting party, regardless of the name given to the contractual obligation. Such retention shall be made for 6% of the value of the consideration actually paid.

       2.3. Real Estate Lease: Article 33 is added in order to establish that in the resolutions in which the lessee is ordered to pay the rent that is due, the judicial authority shall require the creditor to prove that he has issued tax vouchers and, if the issuance of such receipts is not proven, the judicial authority shall inform the SAT of the aforementioned omission.

• 2.4. 50% VAT withholding on digital platforms -transport and housing: For providers of intermediation services of third parties, both those located abroad and those established in Mexico, it is set forth as an additional obligation, in case that through the digital platform they also process payments or collect on behalf of the seller/provider of the service, to report to SAT the prices and withhold 50% of the VAT of the transactions carried out in Mexico. Third party intermediation service providers must register with the RFC as VAT withholders.

       3. Tax Code:

       3.1. Fight against companies that issue, market and use tax vouchers for non-existent operations: In order to provide the SAT with tools to help detect and sanction subjects involved in invoicing, marketing and deduction schemes of tax vouchers that cover non-existent operations, the following presumptions were established that admit evidence to the contrary:

       3.1.1. Electronic signature: The fifth paragraph of Article 17-D of the Tax Code is amended to include the authorization for the SAT to deny the granting of the advanced electronic signature, when taxpayers do not provide sufficient information to validate their identity, domicile and, if applicable, their tax status, in terms of Article 27 of the Tax Code, through the procedure provided for home visits, without this being considered the exercise of verification powers.

       3.1.2. Digital seal certificates: Article 17-H is added with the aim of setting forth that the certificates issued by the SAT will not have any effect when the procedure provided for in Article 17-H Bis has been exhausted and the irregularities detected have not been corrected or the causes that led to the temporary restriction of the certificate have not been removed. The new procedure provided for in Article 17-Ha establishes that prior to the cancellation of digital stamp certificates, their use will be temporarily restricted, and taxpayers may submit a request to continue using them until the clarification procedure is concluded.

       3.2. Tax Mailbox: Article 17-K of the Tax Code is added with the purpose of establishing the obligation of taxpayers to enable their tax mailbox and register and keep their means of contact updated. In the event of non-compliance with this obligation or when the taxpayer indicates erroneous or non-existent means of contact, or does not keep them updated, it shall be understood that the taxpayer objects to the notification and the authority may notify him by letter.

       3.3. Joint and several liability: Various parts of Article 26 relating to the joint and several liability of various persons in relation to taxpayers are amended, such as:

       3.1.1 Liquidators and trustees: The release of liquidators and trustees from joint and several liability is eliminated when the company in liquidation complies with the obligations to file notices and provide the reports referred to in the Tax Code and its Regulations.

       3.3.2. General Directors, General Managers or Sole Administrators/Partners or Shareholders: Several paragraphs are added regarding the cases under which General Directors, General Managers or Sole Administrators of legal entities and their partners or shareholders are considered jointly and severally liable for the contributions caused or not retained by such legal entities. By virtue of the foregoing, in addition to the paragraphs that existed previously, the aforementioned persons will be considered jointly and severally liable for the contributions caused or not withheld by said legal entities, when the latter incur in any of the following cases (i) Is not located in the tax domicile registered before the RFC; (ii) Fails to inform the tax authorities of the amounts that it has withheld or collected for contributions; (iii) Is on the list referred to in Article 69-B, fourth paragraph of the Tax Code; (iv) Is on the list referred to in Article 69-B, eighth paragraph of the Tax Code; (v) Is on the list referred to in Article 69-B Bis, eighth paragraph of the Tax Code; (vi) Has changed its domicile without the relevant notice; (vii) Does not keep accounting records; (viii) Vacate the premises of the tax domicile without notice; and (ix) Is not locates in the tax domicile registered in the RFC.

       3.4. Registration in the RFC: In addition to the information requested for registration in the RFC, the taxpayer must provide an e-mail address and telephone number or the means of contact of the taxpayer to be registered, as determined by the SAT through general rules. On the other hand, the exception for members of non-profit entities to apply for registration in the RFC is eliminated.

In addition to the above, Article 27 of the Tax Code was modified with respect to the obligations related to the RFC. In this sense, section VI of section B of said Article establishes a new obligation for legal entities, consisting on the presentation of a notice in the RFC each time a modification or incorporation of partners or shareholders is made, through which they must inform the name and tax identification code of the new partner or shareholder.

The new rule 2.4.19. of the Annual Temporary Tax Regulations for 2020 (RMF), published in the DOF on December 28, 2019, sets forth that said notice must be filed within 30 business days following the date on which the corresponding case is updated according to form 295/Tax Code of Exhibit 1-A of the RMF.

This form states that the notice shall be submitted through the SAT’s electronic portal with the taxpayer’s RFC and password. For this purpose, the electronic format “Clarification Service” must be filled out and the corresponding scanned documents must be attached. It is important to note that the form states that in order to present the notice, a notarized and digitalized document must be available, in which the incorporation of the partner or shareholder is recorded. However, it will be important to wait for the criteria of the tax authority in this regard, since not all acts that have the effect of incorporating a new partner or shareholder must be recorded in a notarized document in terms of applicable laws in Mexico. With the filing of the notice, the taxpayer will obtain an acknowledgement of receipt that will contain a page number that, after 7 working days, will be available on the SAT website.

It is important to consider that the transitory article forty-six of the RMF sets forth that those legal entities that do not have updated information on their partners or shareholders before the RFC, must present the aforementioned notice with the information corresponding to the structure they are with at that time, on a single occasion, no later than June 30th of the current year.

       3.5. Authority’s Powers: Through the procedure established for home visits, the SAT may verify the data provided in the RFC, those indicated in the CFDIs, declarations, files, documents or databases in its possession, without this being understood as exercising verification powers. The authority may also request clarification, information or documentation from the public notaries regarding the documents notarized before them, for the purposes of registration or updating in the RFC.

       3.6. Disclosure of Reportable Schemes: A new Title VI was included to regulate the disclosure of reportable schemes by tax advisors or, by exception, by taxpayers. A reportable scheme is defined as any scheme that may generate, directly or indirectly, a tax benefit in Mexico and has any of the characteristics listed in article 199 of the Tax Code.

In order to determine when the scheme must be reported to the SAT by means of an information return, it must be analyzed whether it is a generalized**** reportable scheme or a personalized***** reportable scheme. Generalized reportable schemes must be disclosed at the latest within 30 days following the day on which the first contact is made for marketing, while personalized reportable schemes must be disclosed at the latest within 30 days following the day on which the scheme is available for implementation, or the first event or legal act that is part of the scheme takes place.

Taxpayers will be required to disclose reportable schemes in certain cases, such as when the tax advisor does not provide the identification number of the scheme issued by the SAT, does not provide a certificate indicating that the scheme is not reportable, or has agreed with the advisor that the taxpayer will report the scheme.

This measure shall be complied with as of January 1, 2021, and schemes that have tax effects as of January 1, 2020 shall be reported. With respect to this exercise, taxpayers shall report the schemes.

In case the obligation to disclose reportable schemes is not complied with, it will be considered a violation, whose sanctions could amount to $20’000,000.00 for tax advisors, and up to $2’000,000.00 for taxpayers, or the loss of the beneficial tax effect derived from the scheme.

       3.7. General anti-abuse rule: Article 5-A is added with the purpose of authorizing the tax authority, in the exercise of its verification powers, to redefine the legal acts of the taxpayer that lack a business reason and that generate a direct or indirect tax benefit, with the purpose of attributing to them the tax effects that correspond to those that would have been made to obtain the economic benefit reasonably expected by the taxpayer, and thus determine the taxes to be paid.

The tax authorities must obtain a favorable opinion from a Committee made up of members of the Ministry of Finance and Public Credit and SAT, in order to apply this general rule, which shall be done before issuing the last partial minute, the observations letter or the provisional resolution, in the case of home visits, cabinet reviews, or electronic reviews, respectively. If the favorable opinion is not obtained within 2 months, the application of the general rule will be considered unauthorized.

       4. Universal compensation. The limitation to carry out universal compensation is transferred to the Tax Code and the impossibility for taxpayers to compensate the amounts in their favor against those they are obliged to pay, when they are different taxes and are not their own taxes, is maintained.

 We remain at your disposal for any questions or comments regarding the information contained herein.

*The reform does not specify what is meant by the expression “almost exclusively”, when the BEPS states that it consists of more than 90% of all agreements entered into by the agent.

 **Companies and other entities incorporated under foreign law, provided they have their own legal personality and legal entities incorporated under Mexican laws that are resident abroad.

 ***Trusts, associations, investment funds and any other similar legal figure under foreign national law, provided that these are not tax residents for income tax purposes, in the country or jurisdiction where they are incorporated or where they have their principal place of business or effective place of management, and their income is attributed to their members, partners, shareholders or beneficiaries, they will be considered tax transparent.

****The one that seek to be used massively with all types of taxpayers or with a specific group of them, even if they require minimal or no adaptation to suit the specific circumstances of the taxpayer, the way to obtain the tax benefit is the same.

 *****The one that is designed, organized, implemented or managed to suit the circumstances of a specific taxpayer.