On 30 October 2019, Mexico’s Congress has approved the tax reform for 2020 which was presented by President Andrés Manuel López Obrador’s on September 8, 2019. The Reform incorporates fundamentals of the Base Erosion and Profit Shifting (BEPS) initiative of the Organisation for Economic Cooperation and Development (OECD). The changes to the Mexican tax system will have a profound impact on Mexican taxpayers. The main measures of the package are as follows:
Interest expense deduction limitation
Taxpayers with a net interest cost of more than MXN 20 million per year would therefore be subject to a net interest deduction limit of 30% of adjusted net taxable income, as defined similarly to EBITDA. Non-deductible interest may be carried forward for the next 10 years.
Permanent establishment
The tax reform package extended the definition of a PE in line with the recommendations (Action 7) of the OECD BEPS project. Accordingly, the Mexican Income Tax Act will provide for a more comprehensive definition of PE that will cover independent agents when they act mostly on an exclusive basis for a non-resident related party. A PE would also be deemed to exist in the case of dependent agents when carrying out activities that, in the aggregate, would not be considered to be of a preparatory or auxiliary nature.
Controlled foreign company (CFC) rules
The Reform changes CFC rules and extended the definition of control. CFC rules will be applied to the Mexican taxpayer must control the foreign entity which will be deemed to exist if the resident has more than 50% of the investment’s vote or value, or has a right to more than 50% of the distributions or assets, or has more than 50% interest in the entity’s combined assets and profits.
Payments to low tax jurisdictions and anti-hybrid rules
The tax reform package amends the deductibility of payments made under “hybrid mechanisms,” as well as “structured agreements,” which would be deemed to exist in cases where an unrelated party is interrupted as part of related party transactions. Payments to low tax jurisdictions could be exempted from limitations where the foreign resident carries out the business activities with its own resources. A low-tax jurisdiction is defined if income of a jurisdiction is subject to an income tax rate that is lower than 75% of the Mexican income tax rate, which would be at least a rate of 22.5%.
General anti-avoidance rules (GAAR)
The tax reform introduces GAAR, through which the Mexican tax authorities will be re-characterize or disregard a transaction for tax purposes, if the transaction lacked a business purpose. The business purpose requirement would not be met if reasonable economic benefit is lower than the tax benefit, or if the economic benefit could have been obtained through fewer transactions.
Reportable transactions
Taxpayers and tax advisors will be obliged to disclose “reportable transactions” to the Mexican Tax Authorities from 1 January 2021. Reportable transactions will be defined as activities that generate or may generate, directly or indirectly, a tax benefit in Mexico. The tax reform prescribes information relating to a reportable transaction will have to be disclosed.
Digital services
A new chapter has been added to the income tax law with the purpose of regulating the digital economy and e-commerce activities. These changes would require that, in certain cases, foreign residents that carry out business in Mexico through digital platforms to collect and remit the VAT.
Most of the tax reform measures will be effective from 1 January 2020.
