On September 8, President Enrique Peña Nieto submitted his economic package to the Mexican Congress for 2016, including proposed amendments to various tax laws. While the president kept his word to not propose new taxes, the proposal falls short of the business community’s expectations and demands.
Opposition parties, primarily the PAN and PRD but also, more timidly, Morena, are talking about creating a bloc to ensure that the legislative review and discussion of the executive bill will bring about more substantive reform to foster economic growth.
Major shortfalls against expectations for the reform include:
- Full deduction of exempt benefits for workers.
- A more generally applicable immediate deduction (accelerated depreciation) of investments in fixed assets.
- Reduced corporate and individual income tax rates.
- Elimination of the ceiling on personal deductions.
- Elimination of the transfer pricing best method rule.
- Addition of a paragraph to Article 183 for shelter companies.
We would not be surprised if the legislative process brings about new amendments.
The key reforms proposed in the bill, and their implications, are briefly discussed below.
I. INCOME TAX LAW
1. Deduction of payments to farm companies
Corporate taxpayers engaged exclusively in agricultural and stockbreeding activities recognize their income on a cash basis, and not on the accrual basis generally applicable to entities. However, enterprises that acquire goods or services from these companies are not limited to taking deductions on an as-paid basis. In our opinion, the 2014 tax amendments failed to include this situation in the general rule, indicating that the deduction of expenses, purchases and investments with companies in the simplified farm regime cannot take deductions until they are actually paid.
The proposal provides for an addition to Article 27, section VIII to clearly indicate that purchases from companies in the farm sector, taxed in the simplified regime, are not deductible until actually paid.
The proposal does not include a transitional provision contemplating the deduction of purchases made in 2015 and paid starting in 2016.
2. Social welfare; elimination of limitations on deduction of expenses paid to nonunion workers
The Income Tax Law in effect from January 1, 2014 sets limitations on the deduction of social welfare expenses provided in the prior Law. To deduct social welfare expenses for nonunion workers, the benefits must be given generally for their benefit, i.e., the benefits must be the same for all nonunion workers. Such benefits are also deemed general when the calculation of the arithmetical average of such benefits for each nonunion worker is equal to or less than the arithmetical average benefits for unionized workers; if there are no union workers, the deduction of social welfare benefits paid to nonunion workers cannot exceed 10 times the yearly minimum salary for the worker’s geographical area.
In this regard, the draft amendments to the Income Tax Law propose to eliminate the concept of generality as it applies to social welfare expenses paid to nonunion workers, as well as the ceiling of 10 times the minimum salary.
With the elimination of the reference to the same benefits for all workers and the calculation of arithmetical averages, the scope of “generality” for nonunion workers needs to be defined to allow the deduction of social welfare benefits.
In this sense, the courts have ruled on the scope of the term “generality” in light of the Income Tax Law in effect, and if this reform is enacted, the concept will have to be revisited. In this regard, the Dictionary of the Royal Academy of the Spanish Language defines general as “common to all individuals in a whole,” while universal means “includes or is common to all of one kind, without exception.”
3. Electrical power generation; non-inclusion of thin-cap debts
The Income Tax Law provides that debts contracted for the construction, operation or maintenance of production infrastructure associated with the country’s strategic areas will not be included to determine the 3-to-1 thin capitalization ratio, which affords an interest deduction benefit for loans obtained from nonresident related parties.
Under the constitutional reform on energy matters, electrical power generation is no longer regarded as a strategic area for the Mexican State, and the above benefit ceased to apply accordingly. However, given the nature of the investments in these projects, they require higher levels of indebtedness.
Recognizing this fact, the bill proposes to amend Article 28, section XXVII, sixth paragraph of the Income Tax Law to provide that debts contracted by enterprises engaged in the generation of electrical energy, directly allocated to the investment in the electrical power generation infrastructure, are not included as such in the debt-to-capital ratio.
Under the energy reform laws, the electrical industry is divided into the four stages: generation, transmission, distribution and marketing of electrical power. This rule appears to apply solely to generation activities.
This addition may be unfair for taxpayers that invest in other sectors, which may have the same debt requirements to support their investments. It may be worthwhile to review this issue in detail if the bill is enacted as currently written.
4. Ground transportation of freight and passengers
Entities engaged in the ground transportation of freight or passengers are subject to the so-called Coordination Regime, with certain administrative and tax benefits.
In this sense, the bill proposes to amend Article 72 to provide that, in order to apply the Coordination Regime, entities must be engaged exclusively in the ground transportation of freight or passengers, including a definition of the term “exclusively”. If the reform is enacted, taxpayers will be deemed to be exclusively engaged in such activities when at least 90% of their income is derived from that activity.
The proposal would also include a limitation on the application of the Coordination Regime for companies that primarily render their transportation services to other, related entities. The bill does not define the term “primarily”.
This limitation would affect business groups that have transportation enterprises that service other companies in the group.
5. Farm sector; communal farms and communities
Under the Income Tax Law, entities engaged exclusively in agricultural, stockbreeding, forestry or fishing activities are entitled to an income tax exemption of up to 20 times to the yearly general minimum salary for each member. The total exemption cannot exceed 200 times the yearly general minimum salary.
A provision is proposed to exclude the ceiling of 200 times the yearly general minimum salary in the case of communal farms and indigenous communities, which would be entitled to an exemption of 20 times the yearly general minimum salary per member, with no limit on the number of members. The intent is to remove limitations on communal and community farmers engaged in production.
However, the issues faced by formal enterprises engaged in activities with communal and community farmers are still overlooked and unregulated.
6. New transfer pricing information returns
As expressly requested by the G20, the Organization for Economic Cooperation and Development (OECD) has designed an action plan against base erosion and profit shifting (BEPS). Mexico, as a member of both organizations, and to prevent international tax strategies to avoid income taxes at the source, proposes to add Article 76-A to the Income Tax Law in line with the new documentation and reporting standards issued for transfer pricing matters. This new obligation will be a key audit planning tool for the authority, without excluding or limiting the existing transfer pricing obligations.
In this sense, taxpayers that form part of a multinational group that carries out related-party transactions are subject to new reporting obligations if they: (i) derive taxable income above $645 million pesos; (ii) are publicly traded; (iii) are companies under the optional regime for corporate groups; (iv) are state-owned entities; or (v) are nonresidents with a permanent establishment in the country.
Taxpayer that fall under these provisions must file the following returns, no later than December 31 of each year:
i) Master information return on related parties (Master File) of the multinational business group, containing:
- Organizational structure;
- Description of the activity, its intangibles, and financial activities with related parties;
- Financial and tax position.
ii) Local information return on related parties containing information on:
- Description of the organizational structure, strategic and business activities, and related-party transactions;
- Financial information on the reporting taxpayer and on the transactions or companies used as comparables in its analysis.
Multinational enterprises that generate consolidated annual income of 750 million euros ($12,000 million pesos) or more must also file:
iii) Country-by-country information return containing:
- Information at the tax jurisdiction level on the worldwide apportionment of income and taxes paid;
- Location indicators of the economic activities in the tax jurisdictions where the multinational group of enterprises operates in the corresponding tax year, including the tax jurisdiction, total income broken down by related and unrelated parties, earnings or losses before taxes, income tax actually paid and incurred in the year, equity accounts, accrued earnings or losses, number of employees, fixed assets and merchandise.
- A list of all entities in the multinational group and their permanent establishments, including the main economic activities of each entity in the multinational group; jurisdiction of incorporation or organization of the entity, if other than the tax residence; and all additional information that may enable an understanding of the above information.
This return may be automatically exchanged with foreign tax authorities with which Mexico has a broad information exchange agreement in effect.
Note that this country-by-country report only applies to taxpayers that are:
- Multinational holding companies that (i) are residents in Mexico, (ii) have subsidiaries as defined in the financial reporting standards or permanent establishments that reside or are located abroad, as the case may be; iii) are not subsidiaries of another nonresident enterprise; iv) are required to prepare, present and disclose consolidated financial statements under the financial reporting standards; v) report consolidated earnings with entities residing in one or more other countries or jurisdictions, on their financial statements; and vi) have derived consolidated book income in the immediately preceding tax year, equal to or greater than 12 billion pesos.
- Residents or nonresidents with a permanent establishment in the country, that have been designated by the nonresident holding company in the multinational group a responsible for providing the country-by-country information return referenced in this section.
The SAT will prescribe general rules for the filing of these returns. It is also authorized to request additional information or the country-by-country return from residents that are subsidiaries of a nonresident, when the authority cannot obtain the information on the return through the information exchange mechanisms under the international treaties Mexico has in effect. The taxpayer will have 120 business days to provide the return.
Penalties for noncompliance
Amendments are proposed to section IV of Article 32-D of the Code, establishing limits on doing business with the Federal Public Administration and the Office of the Federal Attorney General, when the taxpayer has not filed transfer pricing information returns under Article 76-A of the Income Tax Law. This failure to file may also have implications regarding the VAT certification.
Penalties ranging from $140,540.00 to $200,090.00 pesos are also levied on the failure to provide the information referenced in Article 76-A of the Income Tax Law, or providing incomplete or erroneous information, inconsistencies or other than as provided in the tax provisions.
The bill did not eliminate the transfer pricing best method rule under the OECD Guidelines published in July 2010, and other changes to such rules.
Provisions providing legal certainty to IMMEX shelter companies were also left out.
7. Special CUFIN for renewable energy
To foster the energy sector, the Income Tax Law in effect allows the 100% deduction of investments made by taxpayers in renewable energy generation machinery and equipment, in a single tax year. These projects may practically consider such investments as an expense for the year for tax purposes, while it is booked as a depreciable asset. This translates into tax losses during the year of the investment, while leaving book profits that may be distributed.
Therefore, to ensure that the impact of the 100% deduction on renewable energy projects is not diminished by the tax on dividend deductions, the executive bill proposes the creation of a Renewable Energy Investment Profit Account (known as the CUIER account) for taxpayers whose income from renewable power generation or cogeneration systems represents at least 90% of their total income, not including the sale of fixed assets and land.
The CUIER follows the same rules as the after-tax profits or CUFIN account. However, rather than adding the year’s net taxable profit, the account is increased by profits from the investment in renewable energy during the year. For this purpose, the taxpayer must determine the following:
- Adjusted taxable earnings, by replacing the 100% deduction that would apply to renewable energy investments with a 5% deduction.
- Adjusted income tax, or the income tax that results from applying the rate in Article 9 to the adjusted taxable earnings.
CUIER profits are determined by decreasing the adjusted taxable profits by the adjusted income tax and nondeductible items.
No tax is owed on dividends paid out of the balance of this account, except for the 10% withholding when applicable, and a record of dividends paid out of this account must be kept. As from the first tax year in which after-tax profits are determined, the record balance must be subtracted from such profits and from any profits generated in subsequent years, until the entire dividend record has been subtracted.
Lastly, once the CUFIN balance is generated, the undistributed remainder cannot be distributed out of CUIER profits. The amendment does not specify whether the benefit derived from this account may be recognized in a holding company structure.
8. Personal deductions
Starting January 1, 2014, individuals’ personal deductions were limited to the four times the yearly minimum salary or 10% taxable income, whichever is less. With the amendments, and to encourage internal savings, deposits, payments or acquisitions in personal savings accounts, insurance premiums and investment fund shares would not fall under the limitation. The deduction ceiling also excludes complementary retirement contributions made directly to the complementary contribution subaccount under the Retirement Savings System Law or personal retirement accounts, which would be subject to the deduction limitation provided in the law for these particular types of contributions.
9. Withholding on foreign interest payments
The 4.9% tax rate continues to apply to the interest paid to nonresident banks, provided that the beneficial owner resides in a country with which Mexico has a double tax treaty in effect and the requirements set forth in the treaty are met.
While this proposal clarifies and simplifies the withholding requirement, the issue of verifying that the receiving bank is the beneficial owner remains.
10. Term for venture capital trusts
In the framework of the constitutional energy reform published in the Federal Official Gazette on December 20, 2013, the Federal Executive Branch presented the secondary legislative package published on August 11, 2014. The Statement of Legislative Intent to the constitutional reform stated that it implies an in-depth transformation and modernization of the national energy model and the expansion of the legal tools available to the Mexican State to take advantage of the resources and transform them into wealth, to bring about better social and economic conditions for Mexicans.
In President Peña Nieto’s third annual address, he announced 10 measures to spur economic growth, among other things, including the accelerated development of national infrastructure, specifically in the energy sector. The Executive specifically establishes, in the Statement of Legislative Intent of the income tax amendments, that it is necessary for the energy sector to leverage its projects by issuing participation certificates to secure the capital needed to carry out activities in the sector. He further states that one of the ways to achieve such capitalization is by creating venture capital investment trusts in the country.
However, section V of Article 192 of the Income Tax Law currently provides that such trusts may have a maximum duration of only 10 years, which is far below the term in which an energy sector project may be economically viable. Therefore, a proposed amendment to section V of Article 192 of the Income Tax Law eliminates the 10-year requirement for these trusts.
11. Tax consolidation
- Credit for tax loss carryforwards
The tax consolidation regime was repealed under the 2014 tax reform. The proposed tax reform for 2016 provides for a tax credit applicable against 50% of the deferred consolidated income tax pending payment as of January 1, 2016, corresponding to tax losses. The amount of the credit will be determined by multiplying the factor of 0.15 by the amount of revalued individual tax losses considered in the income tax arising from deconsolidation, which is pending application as of January 1, 2016 by the company that sustained them. The legislative intent behind this tax credit is to avoid possible tax schemes whereby tax losses used in the consolidation regime would “return” to the group companies that generated them, using such losses to decrease future taxes. In this sense, one of the requirements provided to apply the credit is that tax loss carryforwards pending as of January 1, 2016, giving rise to the deferred consolidated tax, cannot be amortized in subsequent tax years by any entity. The tax credit is subject to the following requirements:
- As of the date the credit is taken, the holding company must maintain a consolidation share in the controlled company equal to or greater than its share at the time of deconsolidation.
- The tax loss carryforward must be considered in the consolidated share used at the time of deconsolidation.
- Stock losses are not considered for this credit.
- The tax losses cannot be applied against tax profits from 2016 and subsequent years.
- The 50% remainder of the deferred income must continue to be paid according to the payment arrangement elected by the holding company.
- The holding company must file a notice of its election to take the credit.
- The holding company or any company must have paid the deferred income tax on losses derived from mergers, corporation divisions or liquidations.
- The former holding and controlled companies must be current in their tax compliance, as taxpayers and withholding agents, as of January 1, 2016.
- During a mandatory five-year period, the companies that made up the consolidated group as of December 31, 2013 must work in collaboration with the authority, participating in the real-time audit program implemented by the SAT’s General Large-Taxpayer Administration.
- They cannot participate in the optional regime for corporate groups.
- They must withdraw any challenges filed against the tax consolidation amendments.
- The holding company must have considered, in determining the deferred tax for the tax years from 2008 to 2013, losses on the sale of stock, subtracted in the determination of its consolidated taxable profits or losses, corresponding to those years, or correct its tax situation regarding the nonpayment of the deferred income tax on such stock losses, as detailed below.
- The holding company and companies regarded as controlled companies, whose tax losses were considered to determine the tax credit, must file amended annual returns for 2015, in which they decrease the balance of tax loss carryforwards by the amount of losses used to determine the credit. The holding company must also cancel the deferred income tax in its accounting records of the tax losses used to pay it.
This means that the tax authorities are granting a 15% discount on the amount of tax loss carryforwards pending amortization as of January 1, 2016, used in the consolidated regime to determined consolidated taxable profits or losses. The credit may be applied against 50% of the deferred consolidated income tax generated on said losses, outstanding as of January 1, 2016. For these purposes, the aforesaid tax losses cannot be carried forward against the future profits of any company.
- Payment of income tax on losses in stock sales
Holding companies that have subtracted tax losses on the sale of shares in their controlled companies, in the determination of consolidated taxable profits or losses in any of the tax years from 2008 to 2013, and which did not consider such losses in the determination of the income tax deferral by reason of the deconsolidation, may correct this situation and elect to pay the deferred tax due in 10 annual payments under the scheme provided in the transitional provision. Any tax differences owed must be reported in an amended return for the corresponding year, to be filed no later than March 2016. The above payment scheme may also be applied by holding companies with respect to the balance of the deferred income tax generated by stock losses, pending payment as of January 1, 2016. The deadlines for such payments must be adjusted accordingly. The application of this payment scheme is contingent on the holding company having properly determined the average cost per share pursuant to the Income Tax Law in effect through December 31, 2013, or otherwise correcting its tax situation before applying the payment scheme. It must also withdraw any challenges filed against the tax consolidation amendments. Lastly, if the holding company subtracts the loss on the sale of stock in any year post-2015, it must settle the entire deferred tax pending payment on the date it is required to make the immediately preceding installment payment.
- Income tax credit of book dividends
Holding companies may credit the income tax incurred on dividends or profits in cash or property not paid out of the CUFIN or CUFINRE accounts, against the deferred tax incurred and outstanding as of January 1, 2016, up to the amount of the latter. The credit will not give rise to a refund or offset, and the receiving the dividend or profit should not increase its CUFIN by the amount of such dividends or profits. Holding companies should not increase the balance of consolidated after-tax profits as of December 31, 2013.
12. Capital repatriation
The bill contemplates a capital repatriation scheme effective from January to June 2016, whereby both individuals and entities, and nonresidents with a permanent establishment in Mexico, may elect to pay only the corresponding income tax plus the respective revaluations, with respect to income derived from direct and indirect investments held abroad through December 31, 2014, including income from preferential tax regimes.
If the amendments are enacted, the economic benefits of this regime will be the 100% abatement of surcharges and fines and the possibility of crediting the foreign income tax paid on the income pursuant to Article 5 of the Income Tax Law, i.e., the credit rules do not apply to preferential tax regimes.
An additional benefit is that formal tax obligations are deemed met, which may be an opportunity in those cases in which the information returns on tax haven investments have not been filed, thus avoiding the applicable criminal penalties. The requirements to apply these benefits include the following:
- The income and investments maintained abroad must be returned to Mexico in a period of not more than six months, and the resources must be allocated to the purposes expressly set forth in said provisions. In the case of individuals and nonresidents with a permanent establishment in Mexico, the resources must be invested in: i) financial instruments issued by Mexican residents or shares issued by resident entities, maintaining these investments for a period of at least three years, ii) fixed assets, which cannot be sold or disposed of for a period of three years, or iii) technological research and development.
In the case of entities, the resources must be invested in: i) fixed assets that cannot be sold or disposed of for a period of three years, ii) technological research and development, or iii) the payment of liabilities with unrelated parties, contracted before the reform entered into force, provided that the participants’ identities are disclosed.
- The income tax payment and corresponding revaluation must be made within 15 days following the date the foreign source resources are returned to the country.
- Taxpayers that have not raised a defense measure, or that waive any defense measures filed, may apply this benefit. However, it does not apply to taxpayers undergoing an inspection by the authority.
- The application of the benefit is limited when the income corresponds to items deducted by a resident or by a nonresident with a permanent establishment in Mexico.
The limitation described in subsection c) should be evaluated, since in principle there is no apparent reason to provide different for taxpayers assessed by the tax authorities or that have raised a defense measure against an inspection.
As regards the limitation in subsection d), while Mexico is likely to work toward a BEPS framework, namely action 2 on hybrids, it might be convenient to foresee collateral effects to avoid restrictions on investments whose repatriation is being incentivized.
13. Immediate deduction for the purchase of fixed assets
under Article 3 of the Temporarily Effective Provisions of the Income Tax Law, a tax incentive allowing the immediate deduction of new fixed assets is allowed, deducting in the tax year of the acquisition the result of the original investment amount times the maximum percentages set forth in a depreciation table during 2016 and 2017, in lieu of those provided in Articles 34 and 35 of the Income Tax Law. This incentives is available to:
- Entities and individuals with business and professional activities with reported income in the immediately preceding tax year of up to 50 million pesos, and taxpayers starting activities who estimate that their income will not exceed 50 million pesos. The proposed reform clarifies that if, at the end of the tax year, the 50 million pesos income ceiling is surpassed, the tax difference must be covered by applying the depreciation rates set forth in Articles 34 and 35 of the Income Tax Law, in lieu of the rates under this article;
- Taxpayers that invest in the construction and expansion of the transportation infrastructure, such as highways, roads and bridges; and
- Taxpayers that invest in oil treatment, refining, sale, marketing, transportation and storage; natural gas processing, compression, liquefaction, decompression and regasification, transportation, storage, distribution, marketing and public sale; petroleum byproduct transportation, storage, distribution, marketing and public sale; and the pipeline transportation and storage of petrochemicals, pursuant to the Hydrocarbons Law, as well as equipment for the generation, transportation, distribution and supply of energy.
The incentive will apply to taxpayers engaged in two or more listed activities, applying the percentage that corresponds to the activity contributing the highest income. This incentive only applies to new assets, i.e., those used for the first time in the country.
There is an obligation to keep a specific record of investments for which the immediate deduction was taken under this article, entering the data from the supporting documentation and describing the type of asset, the percentage applies and the tax year in which the incentive is taken.
Taxpayers may apply the immediate deduction to investments made between September and December 31, 2015, as provided for the 2016 tax year, upon filing the 2015 annual return. For purposes of the estimated payments for 2018, taxpayers who apply the immediate deduction in 2017 must calculate the profit coefficient by adding to the profit or reducing the deduction.
14. Profit reinvestment incentive for publicly traded companies
A tax credit is proposed for individuals who receive dividends or profits generated by companies whose stock is traded on a stock exchange concessioned under the Securities Market Law, during the 2014, 2015 and 2016 tax years, provided that they meet the identification requirements and inform the SAT. The benefit would only apply when the dividends or distributed profits are reinvested by the issuer.
The proposed credit is 1% of the dividend distributed in 2017, 2% for 2018, and 5% for 2019 and subsequent years.
As with the CUFIN, for purposes of this incentive issuers must identify the profits out of which dividends are paid, which may lead to confusion when distributing the dividend and applying the credit, if the issuer does not have adequate controls.
II. SPECIAL PRODUCTION AND SERVICES TAX LAW
The tax reform bill contemplates amendments to the Special Production and Services Tax Law, including the application of a fixed rate on automotive fuels, the methodology to convert the fee from unit of weight to unit of volume for “other fossil fuels”, the implementation of the 0% rate for exported high-calorie foods, and obligations of alcoholic beverage producers in the tax incorporation regime.
1. Automotive fuels
Proposed amendments to the tax on gasoline and diesel state that the specifically taxable event is the importation and sale of automotive fuels (fossil and non-fossil fuels meeting the specifications for use in internal combustion engines), applied a per-liter levy. However, there are still two taxes on the sale of gasoline and diesel (the tax in Article 2, section I, subsection D and the tax in Article 2-A), with the difference that the tax levied in Article 2-A is allocated to the states, municipalities and territorial demarcations pursuant to the Tax Coordination Law.
To avoid a cumulative effect of the tax, amendments to the second and fourth paragraphs, section II of Article 4 of the Law would allow automotive fuel manufacturers or producers, which use non-fossil fuels for which they have paid the tax or to which the tax has been shifted, to recover the tax via a credit against the Special Production and Services Tax due.
Amendments to Article 19, section II would establish the obligation to shift the excise tax expressly and separately on the receipts issued on the sale of automotive fuels, provided that the buyer is a taxpayer for purposes of this tax. However, taxpayers must shift the tax to any consumer acquiring the fuel, but not expressly or separately. This provision is confusing, since under the proposed amendment to Article 8, section I, subsection c) of the Law, only manufacturers, producers or importers are taxpayers for such purposes.
Taxpayers for purposes of the automotive fuel tax must also file information on the liters of gasoline and diesel sold, as well as a semiannual return reporting the volumes and types of automotive fuels sold.
We believe that this measure, applying fees in lieu of variable rates, is consistent with the energy reform, and allows Mexico to compete with other markets.
It also seeks to clarify that only manufacturers, producers or importers are taxpayers for automotive fuel tax purposes. However, under the tax shifting rules, it would appear that a marketer authorized to sell the fuels to the end consumer is also a taxpayer.
Lastly, we still question why the Law establishes two different levies on the same taxable item. Taxpayers should analyze and challenge, as appropriate, the constitutionality of this new automotive fuel scheme.
2. Fossil fuels
The proposal adds an Article 2-D to establish a methodology to convert the fee provided in Article 2, section I, subsection H), numeral 10, currently applied by ton of carbon, to a fee per liter of fuel. Thus, all fossil fuels will be taxed according to a per-liter fee.
It also proposes an Article 2-E to establish that oils and gases are products not intended for a combustion process, and are not subject to the Special Production and Services Tax accordingly.
We believe that this modification brings about uniformity in the taxation of fossil fuels. However, it may violate the principle of fair taxation, when an oil or gas is used in a combustion process or in similar production processes.
3. Export of non-basic, high-calorie foods
The proposed amendments would provide that exporters of foods with high caloric content are not exempt from the tax, but rather are taxed at the 0% rate. This would allow such exporters to credit the Special Production and Services Tax shifted on the acquisition of goods of the same kind, or paid on the importation, and offset such favorable balances against the tax due in subsequent monthly payments, until depleted or recovered through the universal offset.
The bill proposes that favorable balances may be offset against the excise tax due in subsequent months, while producers that export at least 90% of the total value of their activities in the month may offset said balances in favor against other taxes, pursuant to Article 23 of the Federal Tax Code.
In our opinion, this measure is generally beneficial, as it allows taxpayers that export high-calorie foods to offset the favorable balances in the Special Production and Services Tax arising from the taxes shifted to them.
However, the fact that only producers that export at least 90% of the total value of their activities in a month may offset such favorable balances against other taxes, while other taxpayers may only offset the tax against the same excise tax, violates the principle of fair taxation, as it creates a differentiation between like taxpayers that, in our opinion, is unjustified.
4. Obligations of alcoholic beverage producers in the tax incorporation regime
The bill proposes to add an obligation for taxpayers under the tax incorporation regime to report the characteristics of the equipment they use to produce, distill, bottle and store beverages with high alcoholic content. They must also report the characteristics of the containers to store such goods other than the equipment, among other aspects.
The bill also proposes to include the obligation to submit a bimonthly report on the folio numbers of the labels or straps obtained, used, destroyed or rendered unusable immediately preceding quarter, as well as providing the necessary information or documentation to demonstrate the adequate use of labels or straps supplied. Thus, the bill proposes to amend the last paragraph of Article 5-D.
We believe that these measures are intended to better control the alcoholic beverages produced and marketed in the country, seeking to eliminate the informal trade by establishing safety measures for the good of consumers.
III. FEDERAL TAX CODE
1. Tax receipts (Article 29-A, section VII, subsection a of the Code)
The bill proposes, for purposes of the sale of automotive fuel, that the corresponding tax receipt expressly and separately shift the Special Production and Services Tax, provided that the person acquiring the fuel pays that tax and so requests.
This amendment is in accordance with the obligation to expressly and separately shift the tax, pursuant to the proposed amendments to the Special Production and Services Tax Law.
We believe that this modification is appropriate, since the express and separate shifting of the tax may bring about benefits such as the generation of favorable balances of the tax, which will be easier to support with these new tax receipts.
2. Automatic information exchange (Article 32-B-Bis of the Code)
With regard to the international information exchange commitments assumed by Mexico, a new Article (32-B Bis) is proposed for the Code, whereby entities and legal figures regarded as Mexican resident financial institutions or foreign institutions with branches in Mexico would be required to comply with the Standard for Automatic Exchange of Financial Account Information.
This obligation generally means that such institutions must report and monitor accounts of individuals and entities regarded as “higher value accounts” according to the Standard. The intent is to combat tax evasion and avoidance practices, in addition to providing the tax authorities with information relevant to their inspection endeavors.
Different offenses (fines) are established for the failure to file the information and documentation prescribed by the various sections of the article.
In our opinion, this new provision will give the tax authorities a new tool to obtain all financial information on individuals and entities, to enforce their tax reporting and payment obligations.
3. Tax lottery (Article 33-B of the Code)
A new Article 33-B would be added to the Code, authorizing the Tax Administration Service (“SAT”) to issue general rules for tax lottery drawings, in which individuals not engaged in business activities, who make electronic payments to acquire certain goods and services, provided that they are registered in the Federal Taxpayer Registry (“RFC”) and obtain digital tax receipts via Internet corresponding to such acquisitions.
Under the tax lottery, monetary prizes or awards in kind are randomly given to taxpayers who make electronic payments and have the corresponding digital tax receipt.
This measure is intended to facilitate inspections where this task is difficult, such as the performance of professional services, since the electronic payments and tax receipts will record transactions and enable the authorities to determine taxpayers’ income.
It also seeks to promote tax compliance and ensure higher and fairer tax collection.
In our opinion, this is a positive measure for Mexican tax collections, as it fosters a culture of tax payment in sectors that primarily do business in cash, often in the informal economy.
4. Electronic inspection (Article 53-B of the Code)
A proposed amendment to Article 53-B expressly states that there must first by a notice by the authority to the taxpayer, stating the facts and omissions found by reason of the electronic inspection. In certain cases, this ruling may be accompanied by another document consisting of a preliminary assessment, on the basis of which the taxpayer may regularize its tax situation.
It also proposes to more clearly state that the preliminary assessment will be final only if the taxpayer agrees to pay the tax deficiency determined therein, when it cannot disprove the inspection authority’s observations pursuant to section II of Article 53-B or does not challenge them.
We believe that the article is being amended solely to correct the current wording of Article 53-B of the Code, which does not specify that two different documents are involved (provisional ruling and preliminary assessment), to notify the taxpayer that an electronic inspection proceeding has begun.
However, the fact that this wording is amended does not remedy the article’s unconstitutionality, precisely due to the lack of a prior written order from a competent authority indicating that its inspection powers have begun; the amendment only distinguishes between the two documents, without either constituting a prior notice of an inspection or informing the taxpayer of the period and taxes to be audited.
5. Small business lending program (Transitional Article 7 of the Code)
The amendments propose to give small and medium-sized businesses access to bank loans through a system to be created and managed by the Nacional Financiera development bank, creating a credit rating system and authorizing loan guarantees for such taxpayers.
To this end, the SAT would provide Nacional Financiera with the small business information and documentation to create a credit rating, to be provided by Nacional Financiera to the credit institutions.
The information and documentation supplied will not be subject to the tax secrecy referenced in Article 69 of the Code, since it must be given upon prior authorization of the businesses, and will be transferred solely to Nacional Financiera.
We believe this measure is a way for small and medium-sized businesses to access bank financing, and the information provided will provide Nacional Financiera with sufficient support to secure loans.
IV. FEDERAL REVENUE LAW
1. Tax benefits to comply with international rulings
The bill proposes to maintain for 2016 the authority of the Federal Executive Branch to grant tax benefits as necessary to comply with rulings derived from the application of international dispute resolution mechanisms that determine that an international treaty has been violated.
2. Maximum L.P. gas price
To avoid disproportionate increases in the final price of L.P. gas, Article 1 of a proposed law would authorize the Federal Executive Branch to set maximum prices to the end user and the first-hand sale of gas.
3. Hold on state oil dividends and modified monthly payments
The reform package proposes that the State cannot charge a dividend from PEMEX and/or its subsidiaries due to the fall in international oil and gas prices seen since late 2014, which has significantly reduced PEMEX’s revenues and led it to adjust its spending. However, Transitional Article 14 of the Law of Petróleos Mexicanos provides that the state dividend for 2016 will be at least 30% of its earnings after taxes, provided that if a state dividend on revenue is applied without considering costs, less taxes and fees, the company would be paying funds not according to its profits, which would be contrary to the nature of a dividend.
In addition, to continue with the implementation of the Energy Reform, the bill proposes to eliminate the monthly payments associated with the shared profit and income tax on hydrocarbon exploration and extraction activities owed by PEMEX, starting in 2016. In lieu of this payment, estimated monthly payments of the shared profit fee would be payable to the Mexican Petroleum Fund for Stabilization and Development.
4. Surcharge rate for payment extensions
The surcharge rates applicable to payment extensions for tax deficiencies would continue at 1% per month in the case of installment payment terms of up to 12 months, 1.25% per month in the case of installment payments for terms of more than 12 months and up to 24 months, and 1.5% per month when the installments are paid in periods of more than 24 months. \
5. Revaluation of proceeds and fees
The proposed reform would continue with the revaluation of proceeds and fees charged on a regular basis, using a factor to apply from the last modification to the issuance of the respective authorization.
6. Tax incentives
The bill proposes to maintain the tax incentives granted in prior years, for the 2016 tax year:
- The incentive aimed at various taxpayer sectors that acquire diesel for final consumption, such as the agricultural, stockbreeding and fishing sector, and public and private ground transportation for passengers, freight and tourism, allowing a credit of the Special Production and Services Tax incurred on the sale of the diesel.
- Income Tax incentives for taxpayers that employ persons with motor disabilities, who require the permanent use of prosthetics, crutches or wheelchairs, as well as persons with hearing or language impairment of 80% or more of normal capacity, persons with mental disabilities or the blind.
As with prior years, the amendments propose to continue offering the following exemptions:
- New Automobile Tax exemption for individuals or entities that sell electric or hybrid cars to the general public or import them on a definitive basis, pursuant to the customs laws.
- Customs Processing Fee exemption for persons who import natural gas.
The draft amendments further propose to allow corporate taxpayers to decrease their estimated income tax payments for the months from May to December in the tax year, by the amount of employee profit sharing paid in the same year.
The bill further proposes to repeal all provisions that contain total or partial exemptions or deem certain persons to not be subject to federal tax, or grant preferential or differential federal tax treatment other than as established by the tax laws. These provisions include the Hydrocarbons Revenue Law, laws on decentralized federal agencies that provide social security services, presidential decrees and international treaties.
7. Modification to the withholding rate on financial interest
A proposed change to the withholding rate on financial interest would replace the current fixed rate of 0.60% on capital mechanism to determinate the withholding rate applicable to interest paid by the financial system on an annual basis, considering the representative yields seen in the economy. The aim is to make withholding consistent with financial markets as they evolve.
For the 2016 tax year, based on the proposed mechanism, the withholding rate would be 0.53% on capital. This amendment seeks to encourage taxpayers to increase savings and foster a more dynamic economy.