Mexican tax reform 2022 – key topics to review from an international fiscal perspective

By Arturo Treviño Villarreal, Tax Partner, Fratelli Consultores, Monterrey, Mexico

Several amendments and additions to the tax law were introduced as part of Mexico’s 2022 fiscal reform. They are now in full force and effect. Those changes are having significant implications for both domestic taxpayers as well as nonresidents, triggering an array of tax reporting and compliance obligations, which should be properly identified and complied with in due time.

To provide a brief overview of the referred changes, below are some key topics related to local income tax law and the federal fiscal code that could impact cross-border transactions of MNEs operating in Mexico.

Restructuring of Mexican resident legal entities pertaining to the same corporate group – authorization for the sale of shares at fiscal value

There are now new amended rules to be complied with to obtain authorization from the local tax authorities. For example, the registered CPA’s prepared report must contain certain specific information, such as a description of all material transactions that occurred within the last five previous consecutive years, and in connection with the restructuring at hand, etc. Notably, in the context of an audit, it seems that tax authorities will be heavily scrutinizing the business reason or rationale for a restructuring.

For purposes of tax provisions regulating this type of restructuring, material transactions would cover: mechanisms through which (among others,) shares, voting rights or veto rights corresponding to the issuer, acquirer or seller are transferred; in any type of capital decrease, or liquidation, (and at any moment,) rights on assets or profits of the issuer, acquirer or seller are granted; the issuer, acquirer and seller cease to consolidate their financial statements; or the tax residency of the issuer, acquirer or seller is moved; etc.

Fiscal losses   

In the context of a transaction involving a spin-off, tax losses would be divided by and between original corporations and spin-off entities that are performing the same type of business or entrepreneurial activities. Sufficient evidence of these circumstances must be provided to tax authorities during an audit. Such division of tax losses will follow a proportion in which the total value of inventories and account receivables related to commercial activities of the original corporation is, in its turn, divided. This would apply when the original corporation primarily performed commercial activities. Otherwise, the total value of fixed assets must be taken into account. In order to compute the proportion herein referred, it will be necessary to exclude any real estate investments that are not involved in the main or primary activities of the taxpayer.  

Tax compliance and reporting obligations for Mexican resident legal entities

Transfer pricing information and documentation must be produced according to domestic law and submitted in a timely manner to the local tax authorities. Related party transactions will now cover both resident and nonresident related parties. Generally speaking, the deadline for the submission and filing of transfer pricing-related returns has been moved to May 15 of the year immediately following the relevant year that has concluded.

Resident legal entities are obliged to timely prepare and submit returns related to the transfer of shares or securities issued by the taxpayer when those transfers take place by, and between, nonresidents without a permanent establishment in Mexico. Presumably, the obligation covers nonresident individuals and legal entities. The corresponding returns must be submitted to tax authorities during the following month in which the transfer takes place, and they should contain data such as the date of the transfer of shares or securities; name, corporate name, tax ID, and country of tax residency of the nonresidents without a permanent establishment in Mexico; date of payment of the relevant income tax; amount of income tax paid; etc. In cases where the resident legal entity does not prepare and submit the tax returns, the resident legal entity will be deemed liable (joint and several liability) for the computation and payment of taxes corresponding to the nonresident.   

Nonresidents deriving income from Mexican sources

Generally speaking, fiscal provisions are designed to target nonresidents (individuals as well as legal entities) without a permanent establishment in Mexico, or with a non-attributable local permanent establishment in respect to income derived from domestic sources. Under the tax reform, those nonresidents performing transactions with related parties are now mandated to compute their income, profits, gains, as well as deductions according to the arm’s length principle. As the new tax provisions do not specify the nature of the related parties, it seems that both domestic and foreign-related parties must be covered (as long as taxable income is derived from Mexican sources).

 Nonresidents are allowed to appoint legal representatives to comply with local tax reporting and compliance obligations. Those representatives either must be residents or nonresidents with a permanent establishment in Mexico. As part of the reform, the representatives must now voluntarily assume liability (joint and several liability) for taxes corresponding to nonresidents, i.e., when acting for the principal. Additionally, those representatives must own sufficient goods or assets to fulfill their obligations.

Simplified trust system – resident legal entities

There is a brand-new mandatory corporate income tax regime (in Spanish, the so-called Régimen Simplificado de Confianza de Personas Morales) applicable to Mexican resident legal entities whose shareholders or partners are exclusively individuals (either residents or nonresidents), and their total revenue corresponding to the immediately previous financial year does not exceed a threshold of MXN 35 million (approximately USD 1.75 million). In addition, Mexican resident legal entities starting operations, and which are incorporated only by individuals, also will be subject to this new system as long as their estimated total revenue does not exceed the threshold earlier mentioned.

There are certain exclusions covered by the regime, however. For example, legal entities with one or more partners, shareholders or members also investing in other business entities, and retain control of those entities or their administration, will not fall under the new tax regime. Related-party transactions and activities performed through trusts or joint ventures are excluded from the simplified trust system, as well.

The statutory rate of this tax regime is 30% and it focuses on a cash-flow basis. Tax will be levied on taxable income when effectively received. Provisions regulating the system allow specific fiscal deductions, such as investments, net costs, acquisition of raw materials and goods, merchandise, interests, employers’ social security contributions, etc.; however, they will only be operational if certain conditions are met. Payments of estimated tax must be performed monthly (no later than the 17^th day of the month immediately following the month linked to the relevant payment), and it will be necessary to prepare and submit annual tax returns.

Chapter 3.13. of the omnibus tax bill for FY 2022 contains several rules applicable to this new tax regime, and among other things, they indicate that resident legal entities will neither have to send and upload e-accounting nor to submit accounting information on a monthly basis. Additionally, those entities are not obliged to submit information returns corresponding to transactions with third parties (in Spanish, the so-called Declaración Informativa de Operaciones con Terceros). Rules regulating the VAT treatment and implications of the tax system can be found too.

Tax residency, tax neutrality of mergers and spin-off transactions

According to the tax reform already in effect, in certain cases individuals or legal entities will remain assessed as Mexican tax residents for the relevant financial year (in which the tax residency is moved), and for the following five years; however, exceptions may apply, such as when there is an exchange of tax information agreement with Mexico as well as a mutual convention on the notification, collection, and enforcement of taxes.

Domestic tax authorities are now empowered to verify (during a tax review or audit) whether mergers and spin-off transactions that were performed had a business reason or rationale. Authorities will continue to be allowed to confirm if those transactions comply with other legal requisites, which are necessary to achieve tax neutrality. For these purposes, tax officers may scrutinize material transactions related to the merger or spin-off, which may have occurred within the immediately previous five-year period and the ensuing five-year period. Material transactions cover (among other things,) transfers of ownership, use of shares or voting rights or veto rights in decisions of the merging entity, original corporation or spin-off entity or entities; in the context of any capital decrease or liquidation, grants of rights on assets or profits corresponding to the merging entity, original corporation, or spin-off entity or entities; changes of tax residency of relevant partners or shareholders involved in any exchange of shares or social interests; transfers of one or more business units of the merging entity, original corporation, spin-off entity or entities as stated in the corresponding report; etc. Tax authorities must be made aware of any material transaction taking place within the following five years after a merger or spin-off is concluded. Additionally, financial information, such as financial statements, which are to be used for purposes of the merger or spin-off, must be prepared (on a report basis) by a certified CPA.

Joint and several liability

In the context of the acquisition of a business concern or enterprise, tax law attributes this type of liability to the acquirer of the concern. The liability is related to unpaid taxes that hinge on activities performed through the enterprise itself.

It seems that a business concern, for purposes of attribution of joint and several liability, may cover a partial or total business unit comprising goods or assets, rights or obligations. In other words, a branch of activity look-alike. Under the reform, an acquisition of a business concern would be deemed to exist where the transferor and the acquirer of the goods or assets, rights or obligations are involved in cases such as the partial or total transfer of assets or liabilities by, and between, such persons; the partial or total identification of their legal representatives; the partial or total identification of their suppliers; the identification of their tax domicile, or the location of their branches, premises, depots or manufacturing plants; or the partial or total identification of registered employees for social security purposes; etc.

Controlling beneficiaries

Requirements to identify controlling beneficiaries, as well as to maintain information related to them, have been introduced, as well. The tax law provisions target (resident) legal entities, trusts, and any other legal arrangement, including any third-party related to them, and enact an obligation to collect and maintain (as part of accounting ledgers) information of controlling beneficiaries. That information must be provided to tax authorities upon request. Generally speaking, whenever tax authorities request information, it should be provided within a period of 15 business days.

In addition, a notary public participating in the incorporation of any of the SPVs referred to above is also obliged to collect information regarding controlling beneficiaries; to adopt appropriate measures to confirm their identity; and to provide this information to tax authorities. Banks and other financial institutions are obligated to disclose financial accounts as required, as well.

A controlling beneficiary is an individual or group of individuals who meet certain criteria as specified under tax law. Regarding trusts, the settlor(s), the trustee, the beneficiary(ies), and any other person involved in such an agreement having effective control (even contingent) will be assessed as controlling beneficiaries.

As part of these reporting obligations, legal entities, trusts, as well as any other legal arrangement must keep updated information concerning controlling beneficiaries. This will imply additional disclosures to authorities when there are amendments to the identity or participation of controlling beneficiaries. Relevant information should be submitted within the following 15 calendar days from the date in which the amendment took place.

It appears that this new set of provisions aiming to identify controlling beneficiaries in a domestic set-up may somehow resemble those new regulations on shell companies providing information to report to the US Treasury Department, i.e., US ownership transparency rules.

Sham transactions

Tax authorities have been granted additional powers to scrutinize transactions performed by, and between, related parties (individuals and legal entities, residents and nonresidents). As a result, authorities may conclude that a relevant transaction is simulated, and therefore sham in substance, if it exists exclusively for fiscal purposes.

The law clearly refers to related parties, stating that two or more persons will be assessed as related parties when either one participates—directly or indirectly—in the administration, control or capital of the other, or one person or group of persons participate—directly or indirectly—in the administration, control or capital of those persons. In relation to joint ventures, their members, as well as those persons assessed as related parties of a relevant member, will qualify as related parties.

Notably, regarding (domestic) permanent establishments, the head office and other permanent establishments of such a head office, will be considered related parties. Permanent establishments of certain persons would also qualify as related parties.

When applying this new provision brought about by the fiscal 2022 tax reform, one must be extremely careful to properly deal with the interaction with, and corresponding implications of, articles 177 of the income tax law, along with 5-A and 42-B of the federal fiscal code.

• Arturo Treviño Villarreal is a tax partner with Fratelli Consultores in Monterrey, Mexico.