By Jorge Velázquez. Tax and Patrimonial Partner.
The 2020 tax reform is perhaps the most aggressive reform against taxpayers for at least the last 30 years, penalties for tax omissions or non-compliance have been severely increased; taxpayers are obliged to establish more and better controls on disbursements so as not to be affected by their non-deductibility.
The statement of such reasons for the 2020 Tax Reform proposed by the Government justifies this reform, which indicates that Mexico has been plunged into a severe corruption problem which is deeply embedded in all sectors of society; it is mentioned in this statement of reasons that the problem of corruption increased significantly in the previous government period, being one of the fundamental problems the traffic of invoices to register non-existent operations.
Although the 2020 Tax Reform does not incorporate new contributions, a series of quite severe fiscal measures are based on the premise of increasing the perception of risk in taxpayers, the above will surely contribute to substantially increasing collection.
Mexico keeps an ISR (Income Tax) rate of 30% for legal entities and for individuals with a rate that can reach up to 35%, it should be noted that this last level of 35% is easily reached with low incomes so that Annual income exceeding $100,000 US Dollars is reached at the maximum rate. In addition to the ISR rate, legal and individual entities are subjected to pay their workers a 10% of the fiscal profits obtained during the year, this creates the international perception that the ISR rate in Mexico is 40 %. In addition, partners or shareholders (individual entities) and residents
abroad will be subjected to a 10% withholding tax on the amount of received dividends.
2020 Tax Reform.
The guiding axes of the 2020 Reform are fundamentally two as mentioned as follows:
1) Measures to combat invoice traffic to register non-existent operations.
2) Incorporation of BEPS recommendations
1) Combat to the purchase-sale of invoices;
a) Since the 2014 Tax Reform, the tax authorities may presume that taxpayers are issuing tax receipts to cover non-existent operations if the issuer lacks personnel, infrastructure or material capacity or it is not located. For such purposes if the taxpayer fails to distort the presumption of non-existence, it will be published in a list (which has been called as the “blacklist”) such publication is made directly to the taxpayer through the internet in the personal “tax mailbox” of the taxpayer and through an official mass instrument the “Diario Oficial de la Federación”. The immediate effect is that the taxpayer who received such receipts (invoices) may not deduct the expenses covered by such receipts, for this purpose the authority allows the person who received them to prove that the service or purchase was real (materiality), and it must be provided within 30 business days after its supplier was published.
b) In Mexico, billing is handled through what is known as Digital Tax Proof made by internet or CFDI, (incorporated in Mexico about 6 years ago following the recommendations of the UNCEFAC) such CFDI has been a rather effective instrument of control since it allows the authority to know in real time the operations of purchase, sale, taxpayer payments, concepts, suppliers, etc.
c) With the 2020 Reform, if a taxpayer had received a CFDI from a supplier which has been listed in the “Blacklist”, the taxpayer has 30 days from the publication of the list to prove the materiality of the operation (which implies the documentary support) or in it the case, he will have to self-correct and leave these receipts without tax effects. Otherwise, in addition to the fact that it is not deductible, a fine of 55% to 75% will be applied on the operation amount and his digital seal certificate will be temporarily cancelled, which is the instrument that allows the taxpayer to issue his invoices. However, the tax authorities will restore the use of the digital seal to issue invoices as long as the taxpayer has self-corrected, leaving without effect the invoices issued by his supplier enlisted in the so-called “blacklist”.
d) The figure of the tax informer (tax whistleblower) is also incorporated, which implies that any person who detects that a taxpayer is acquiring or selling invoices and has elements that can prove it, then he may report the taxpayer and receive as a prize the chance to participate in a tax raffle which will allow him to get prizes in cash or in goods.
e) In addition to the above mentioned, the taxpayers who have been found guilty of purchasing or selling invoices to cover non-existent operations, they will be subjected to severe criminal penalties when the amount of such acquired or sold invoiced exceeds $8’000,000.00. Severe criminal sanctions imply deprivation of liberty without bail, up to 15 years in prison, equating crime as organized crime and terrorism, being susceptible to also applying domain extinction which means removing assets acquired with resources of illegal origin.
2) Regarding to the incorporation of the BEPS recommendations, some of the 15 BEPS actions are included in Mexican legislation;
a) Action 1 BEPS; Digital economy;
In this sense, the Mexican tax authorities do not incorporate significant changes, pointing out that, due to international negotiations to tax the digital economy, it is now fundamentally incorporated to tax the services provided by foreigners which allow the user to download images, movies, music, among others.
b) Action 2 BEPS “Combat hybrid mechanisms”;
Article 4-A is added to the ISR (Income Tax) Law to regulate the income generated by foreign entities which are considered to be transparent for tax purposes of a foreign tax legislation.
These entities are obligated to pay the ISR and will be taxed in the same terms as the legal entities for purposes of the ISR Law. Like any legal entity that has been established in Mexico or abroad, such entities will pay taxes depending on whether they are residents in Mexico or abroad under the terms of Article 9 of the CFF.
Article 4-B is incorporated in the ISR Law in order to avoid confusion mainly between income generated through foreign entities and transparent legal figures; and income generated through foreign entities which are subjected to preferential tax regimes.
It is pointed out that according to the recommendations of the Final Report of Action 2 of the BEPS Project, foreign legislation may deny the deduction of payments made to transparent foreign entities, when the partners or shareholders do not accumulate such income as an “ordinary income”. Therefore, to prevent a foreign legislation from denying the deduction of payments to transparent foreign entities in which a Mexican resident or permanent establishment located in Mexican national territory has participation in it, it is required that such income must be subjected to the general provisions of the ISR Law.
Action 5 BEPS “Pernicious tax practices;”
A concept that has been called by the doctrine as fraud to the law, it is finally incorporated into Mexican legislation, it should be noticed that it had been the claim of a series of governments to include such a provision in the fiscal framework. This reform sanctions by leaving without effect the tax planning schemes when they lack a business reason. All acts in which the tax benefit is greater than the economic benefit will be liable to have no tax effect whatsoever. The re-characterization will be carried out only when the authority detects such an act through some faculty of verification.
Action 12 BEPS “Aggressive tax planning”;
A new title called “Disclosure of reportable schemes” is established in the CFF, which basically states that tax advisors and in certain cases taxpayers must process a record and submit a report to the tax authorities when the taxpayer carries out a series of schemes that the legislation itself established as reportable, including for example: the fact of migrating an intangible abroad, the transmission of tax losses, avoid establishing a permanent establishment in Mexico, business restructuring, etc. It should be noticed that the sanction for the adviser who fails to report the scheme can be up to 20 million Mexican Pesos and in the case of the taxpayer, he can face a penalty of 55% to 75% of the amount of the not reported benefit.
Action 4; Interest deduction;
It is incorporated into the Income Tax (ISR) Law, the limitation on the deduction of interest when it exceeds $20,000,000.00 per year for such purposes if working as a group of companies the amount referred will apply to all companies in the group and will be applied in proportion to their income