The Mexican tax reform for 2020 includes measures to address tax evasion and to expand the tax base so as to increase tax collection efforts. The legislative process has been completed, and the reform legislation was published 9 December 2019 in the official gazette.
The following discussion focuses on certain provisions that will be relevant for 2020.
The OECD developed the multilateral instrument (MLI) as part of Action 15 of the base erosion and profit shifting (BEPS) initiative to modify existing bilateral treaties to implement BEPS measures. The MLI is intended to streamline the implementation of the tax treaty-related measures without the need to individually renegotiate each treaty.
Mexico signed the MLI, and ratification is pending in the Mexican Senate. Certain provisions of the MLI are inconsistent with measures under Mexico’s income tax law (ISR), so legislative changes were necessary to give effect to the MLI. For instance, the rules concerning the tax transparency in Mexico of foreign entities that, in their country of residence, are not subject to taxes (but their partners or shareholders are subject to tax) are amended effective in 2021. These changes may affect private equity funds that invest in Mexico. Therefore, there are certain stimulus provisions being made available for foreign tax transparent entities that are used in investing private capital in Mexico.
Other measures establish limits on the deduction of interest (to address erosion of the tax base through the use of debt mechanisms). The interest deduction is limited to 30% of the adjusted tax profit. If interest were not deductible in a given year because of this limitation, the interest deduction could be carried forward to following 10 years (provided certain requirements are satisfied). The provision is to apply beginning 2020 regardless of the types of debts that give rise to the interest arising from previous years. Also, there are exceptions provided from this rule for certain debts that finance public infrastructure work projects, real estate construction, and productive governmental enterprises.
Regarding hybrid mechanisms, changes concern payments made abroad. Effective 2020, payments made to related parties or through a structured agreement will not be deductible when the income is subject to “preferential tax regimes.” Further, certain payments made to a resident in a country that has a tax rate of less than 22.5% will not be deductible in Mexico (this will include payments made to parties in the United States).
Thus, while the income tax rate is not increased, the tax base is effectively expanded by limiting the deduction for interest payments made by the taxpayer.
Taxation of the digital economy
A withholding tax (as a type of provisional payment) will be due on the amounts—excluding value added tax (VAT)—for goods or services of individual consumers via a digital platform.
The digital platforms will be responsible for the withholding tax and will be required to file a declaration no later than the 17th day of the month immediately following the month for which the tax was withheld with respect to goods or services digital transactions. The effective date will be June 2020.
As part of the measures to increase the efficiency in the collection of VAT, there is a modification to the VAT treatment applicable to certain digital services provided from abroad (when there is no permanent establishment in Mexico) when the services are provided to recipients in Mexico. VAT is payable by the foreign entity, and that entity must register in Mexico for VAT and withholding tax purposes.
Measures addressing tax evasion
Among the provisions addressing tax evasion is one that impose joint and several liability on management or shareholders, partners, associates, or others in situations when companies that provide invoices for non-existent operations are liquidated.
Also, there are measures that effectively enact an economic substance rule, with a presumption that a series of legal acts lacks a business purpose or reason when the economic benefit pursued could be achieved through the performance of a fewer number of legal acts but the tax effect of these fewer number of acts would have been more burdensome.
Another measure provides rules for the disclosure of reportable schemes, requiring tax advisors to present information to tax authorities regarding certain transactions (similar to the rules in other countries, but with a broader scope in that these rules also apply with regard to domestic transactions).
Read a December 2019 report (Spanish) prepared by the KPMG member firm in Mexico
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