TAX REFORM BILL PROPOSAL FOR FISCAL YEAR 2020
FEDERAL REVENUE LAW
Annual withholding tax rate on interest paid by the financial system
During the fiscal year 2020, the annual withholding tax rate applicable to interests paid by entities that are part of the financial system to individuals and companies residents in Mexico has been increased from 1.04% to 1.45%.
Tax incentives applicable to the STPS or excise tax, against annual corporate income tax applied by taxpayers of different sectors, remain the same (as in 2019) and shall continue in effect for fiscal year 2020, upon compliance with the specific tax requirements, as provided for in the RLF.
Derived from the recommendations of the BEPS (Base Erosion and Profit Shifting) project, based on the adoption of Action 7, it is proposed that the scope of permanent establishment is broaden in the Mexican ITL.
A permanent establishment is deemed to exist when a foreign resident acts through a person other than an independent agent, and such person closes the deal or habitually performs the main role that leads to the conclusion of contracts entered into by the resident abroad.
Moreover, it is specified that an individual or company cannot be considered an independent agent if acts exclusively or almost (concept not defined) exclusively for foreign residents whom are their related parties.
A permanent establishment shall not be considered in Mexico provided that the activities carried out by such establishment comply with a preparatory or auxiliary character.
The above would not apply when the foreign resident or a related party carry out functions or activities in one or more places of business in Mexico that are complementary as a part of a cohesive business operation.
Fiscally transparent entities and foreign legal figures
New rules are introduced in connection with fiscally transparent entities and foreign legal figures in order to combat transactions where such transparent entities participate in low tax jurisdictions with the purpose to erode the taxable base, based on OECD recommendations for best fiscal practices.
Accordingly, individuals and companies residents in Mexico and foreign residents with a permanent establishment in the country, who participate as members or partners of nonresident fiscally transparent entities and legal figures, shall be liable to income tax in Mexico as if such entities and figures were Mexican residents.
Moreover, fiscally transparent entities and foreign legal figures shall not be treated under the preferential tax regime (REFIPRES as per the acronym in Spanish) or low tax jurisdictions.
Also, revenues shall be taxable and payable in the same calendar year in which such income is generated.
Limitation of interest deduction
It is proposed to limit the deduction of interest expense incurred by Mexican resident taxpayers, through a new mechanism, when “net interests” each year exceed 30% of the “adjusted net profit” (EBITDA of the fiscal year concern).
Net interest of the fiscal year is the amount resulting from the total interest accruable minus the total interests payable (for more than MXP $20 million) provided that the latter is higher.
Withholding tax on salespersons through catalogue
Per the proposal, individuals who carry out business activities through catalogue sales to the general public will be subject to tax withholding thereof, which consists of the difference between the catalogue sale price and the purchase price for salespersons. The withholding tax must be made and paid by the catalogue company to the tax authorities (provided that the business model established by the company may allow such procedure).
Leasing of industrial, commercial or scientific equipment
It is specify that revenues obtained by foreign residents derived from granting the temporary use or enjoyment of movable property used for commercial and industrial activities shall be taxed as royalties.
Elimination of private FIBRAS
The private infrastructure and real estate trust (FIBRAS as per its acronym in Spanish) tax incentives are being eliminated; therefore, those taxpayers who have applied such tax regime must now pay the respective deferred income tax within a maximum period of two years from the entry into force of this provision.
VALUE ADDED TAX LAW
Provision of digital services
It is proposed that digital services provided by foreign resident entities without a permanent establishment in Mexico by technological or digital platforms or applications through the Internet will be subject to payment of VAT; accordingly, the tax must be charged to the user (or final consumer); in which case, VAT taxpayers, as recipients of such services, may credit such input VAT.
Under this assumption, the digital services are considered to be provided in Mexican national territory when the recipient: (i) has established a domicile located in Mexico; (ii) makes payments through an intermediary located in the national territory; and (iii) has an IP address located in Mexican territory.
There is an administrative burden that will fall on the foreign resident providers of digital services who are required to fulfill, among others, the following obligations: (i) enrollment in the Federal Taxpayers’ Registry; (ii) to charge VAT expressly and separately to the users; (iii) to calculate, collect and remit the VAT to the tax authorities on a monthly basis; (iv) to keep a record of customers located in the Mexican territory; (v) to provide monthly the number of transactions classified by type and price; (vi) to appoint a legal representative and have a tax domicile for tax compliance obligations and notification purposes.
In case of incompliance of the aforementioned obligations, the tax authority will request the concessionaires of public telecommunications networks to suspend the service connection.
It is worth mentioning that compliance of the above-mentioned obligations will not give rise to creating a permanent establishment in Mexico for the nonresident companies as providers of digital services in Mexican territory.
The above tax treatment applicable to the provision of technological or digital services for VAT purposes will come into effect as of April 1, 2020.
Effective January 1, 2020, Mexican resident companies and individuals with business activities must withhold the VAT when outsourcing services are rendered, and remit the tax charged from such activities to the tax authorities.
Additionally, compliance with formal requirements for income tax deduction and creditable VAT purposes in related to the provision of outsourcing services are eliminated.
Input VAT for non-taxable activities
Per the proposal, the definition or scope of activities which are non-taxable for VAT purposes (other than exempt activities) is included in the law; therefore, input VAT of investments and expenses related to such activities will not be credited in any case; the above will impact the calculation or ratio of creditable VAT when taxpayers carry out taxable, exempt and non-taxable activities, in the same period.
FEDERAL TAX CODE
Cancellation of digital stamping on electronic invoices
It is proposed that under nine specific cases, taxpayer may be affected by the cancellation of their digital stamping on electronic invoices by the tax authorities; for instance: when taxpayers deduct and credit electronic invoices for income tax and VAT purposes which were issued by companies that simulate transactions, that is, companies with no assets that do not actually sell goods or render services.
Business purpose rule
An anti-tax avoidance rule is introduced which grants the power to the Mexican tax authorities to determine if there is a “business purpose” in the acts or transactions carried out by taxpayers.
Under this assumption, it is considered that there is no “business purpose” when the economic benefit (present, future and quantifiable) is lower than the tax benefit, which is derived from any reduction, elimination or deferral of the respective tax.
Additionally, a series of legal transactions may be deemed to lack “business purpose” when the economic benefit could have been obtained by a less number of transactions or acts performed, and the respective tax payable would have resulted in a greater tax.
According to the above, as a result of the analysis, transactions and legal acts lacking of “business purpose” may be disallowed and re-characterized by the tax authorities with a different tax treatment and a greater tax effect thereof, or even determining its nonexistence solely for tax purposes.
Parties jointly and severally liable for tax purposes
Directors and managers, as persons whom the general or sole management of a company or legal entity is entrusted shall be jointly and severally liable for the taxes incurred or not withheld by said entity under their management, as well as for those that should have been paid or settled during such management.
Partners and shareholders stockholders shall be jointly and severally liable for the taxes incurred with respect to the activities in which the company or legal entity was engaged while they acted as such, up to the amount of their ownership interest in the capital of the said entity.
Disclosure of reportable transactions
Per the proposal, a new tax requirement is introduced for tax advisors and taxpayers who will have to disclose to the tax authorities tax planning schemes and advisory, regarded as “reportable transactions” (included in a list of 30 items or situations), which may derive or generate, directly or indirectly, a tax benefit in Mexico.
Failure to comply with said mandatory requirement will give rise to the imposition of fines to tax advisors that ranges from MXP$15,000.00 to MXP$ 20,000,000.00; and to taxpayers from MXP$50,000.00 to MXP$ 5,000,000.00, or an amount between 50% and 75% of the tax benefit from the reportable transaction.
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