On 9 December 2019, Mexico has published a decree to implement economic package 2020 which was approved by Mexican Congress on 30 October 2019. This Decree will enter into force on January 1, 2020. The economic package consists of the following tax reform measures:
Permanent establishment (PE)
The economic package extends the definition of Permanent Establishment (PE) in which a foreign resident constitutes a permanent establishment, in accordance with the recommendations of the Project to tackle Base Erosion and Profit Shifting (the “BEPS Project”) of the OECD. A Mexican resident is not an independent agent when such person acts almost exclusively on behalf of nonresident related parties. The definition of an independent agent would be expanded, in which an independent agent acts exclusively or almost exclusively on behalf of a nonresident related party. Instead, a permanent establishment is not created if these activities are auxiliary. If the activities are a complement to a single business structured transaction, then the activities will create a permanent establishment.
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.
Transparent Entities
International companies doing businesses particularly affected by the reform include those that receive payments from Mexico, such as interest; companies making payments to controlled foreign corporations; and structures that use tax-transparent entities.
Payments to low tax jurisdictions and anti-hybrid rules
The economic 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 economic package 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.
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.
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.
Moreover, the economic package has modified the value added tax (VAT).
