Tax Reform 2022

On November 12, 2021 the Decree to Amend the Federal Tax Code (FTC), Income Tax Law (ITL), Value Added Tax Law (VATL), Special Products and Services Tax Law (SPSTL), among other laws (jointly referred to as (“2022 Tax Reform”) was published in the Federal Official Gazette.

The 2022 Tax Reform, in force as of January 1, includes modifications to the tax regulations that may seem minor and superficial. However, several of them could result highly important and trigger relevant effects for the taxpayers, depending on their particular situation and hence our recommendation is to analyze these amendments on a case-by-case basis.

The purpose of this document is to summarize the modifications that we consider to be the most relevant, while not pretending to be either an exhaustive analysis of such modifications, or to exhaustively include every modification.

INCOME TAX LAW

Exchange rate for the determination of exchange rate gains

It is established that the exchange rate gain determined by taxpayers cannot be less than the one resulting from applying the exchange rate for the payment of obligations in foreign currency, established by the Bank of Mexico (Banco de Mexico) and published in the Federal Official Gazette on the day in which the gain is realized.

Said parameter was previously established only for purposes of determining the exchange rate loss by taxpayers. However, hereinafter it will be used for any tax effects derived from the exchange rate fluctuation from any transaction established in foreign currency.

Although determining with precision the exchange rate to be used for the calculation of exchange rate gains provides certainty and a clear parameter for taxpayers, its use could disregard or not be compatible with the financial and business reality of certain transactions. Thus, it will be important to review the possible effects for taxpayers that this reform could have in the case of transactions in which a different exchange rate have been agreed to between the parties involved.

New case of back-to-back loans

A new case for back-to-back loans is enacted, under which it is considered that any financing transaction that does not have a business reason will be deemed as such. Consequently, in these cases interest derived from such financing will be construed as a dividend for tax purposes.

For purposes of its application, the amended provision does not make specific reference to the application of Article 5-A of the FTC, which establishes some parameters January 07, 2022 Tax Practice Group Newsletter to determine if a transaction has a business reason or not. Thus, a detailed analysis of the interpretation of such concept will be required, since the lack of precision on the scope of such concept could generate uncertainty for taxpayers, and derived from excessively broad interpretations by the tax authority on the level of detail required to explain the business reasons for a company’s obtaining any financing, particularly with related parties.

Therefore, because of the important tax impact that having the tax authority deem a financing transaction as a back-to-back loan could trigger, i.e. of the denial of the deduction of interest and a possible income tax payment if re-characterized as dividends, it is imperative that taxpayers review their current financing transactions, to ensure that adequate business reason support them.

Finally, the new back-to-back loan case is completely unrelated to the currently existing definition of such concept, both in the Mexican tax and financial law and applicable regulations, as well as in the foreign one. This is since, typically, a back-to-back loan has been considered as a financing transaction where a company provides indirect financing to a related party through the use of third-party intermediaries, for which an analysis of the business reasons that led to such financing has not been necessary.

Thus, such analysis becomes even more relevant, considering the extremely broad interpretation that the tax authority has given, in recent times, to the definition of back-to-back loans established in the Income Tax Law.

Taxable income for consolidation of bare ownership and usufruct of goods

It is specified that the consolidation of the bare ownership and the usufruct of goods will be deemed taxable income for corporate taxpayers. Such taxable income will be equal to the value of the usufruct right at the time of the consolidation, as determined by an appraisal performed by an authorized valuator. Said income must be recognized by the bare owner of the corresponding good.

In addition, in order for the tax authority to keep an appropriate control, public notaries, brokers, judges and public attesters that issue public deeds in which the property attributes are separated must inform the tax authority of such separation within the 30 days of the date in which the transaction takes place.

Gains for the transfer of bare ownership and usufruct of goods

Aligned with the above reform, a new mechanism is created to determine the taxable gain derived from the transfer of the bare ownership or usufruct of goods. Such gain should be the result of the purchase price of the relevant attribute (bare ownership or usufruct) minus its acquisition cost, in proportion the proportion that the price of the attribute that is being transferred (determined by an appraisal performed by an authorized valuator) represents over the overall price of the good.

New requirements and business reason for corporate reorganizations

The reform imposes new requirements to request a corporate reorganization to transfer shares at cost. In addition, the reform also imposes new obligations that must be met after the granting of such corporate reorganization authorization, including the need for proving the business reasons for which the reorganization was performed.

• Information required in certified public accountant report:

The certified report issued by a certified public accountant must now include information related to the accounting value of the transferred shares; a chart of the corporate group including the percentage of participation by partners and shareholders in the equity of the companies; the direct and indirect equity ownership in such companies, before and after the reorganization; the business lines and activities of the issuer and acquiring companies; and a certification that such companies consolidate their financial statements in terms of the accounting and financial regulation applicable.

It is worth highlighting the relevance of the incorporation of the requirement consisting in the consolidation of the companies involved in the reorganization since, previously, said requirement did not exist.

• Disclosure of relevant transactions related to the reorganization:

The reform sets forth that taxpayers requesting a corporate restructure authorization must disclose any relevant transactions that took place within the 5 prior years to the restructure that is subject to authorization.

For such purposes, a relevant transaction is defined as any act, despite its legal nature, through which:

i) The property, use or enjoyment of the shares, as well as the voting or veto rights on decisions of the issuer, acquirer or transferor company and the voting rights for decision-making on such companies is transferred.

ii) The rights over assets or profits of the issuer, acquirer or transferor companies, in case of a capital reduction or liquidation, is granted at any moment.

iii) The accounting value of the issuer company is reduced or increased by more than 30%, with respect to the accounting value determined at the date of the authorization request;

iv) The issuer, acquirer or transferor companies cease consolidating their financial statements;

v) The equity of the issuer, acquirer or transferor companies is reduced or increased (with reference to the capital contributed used for purposes of the authorization);

vi) A partner or shareholder increases or reduces its percentage of direct or indirect participation in the equity of the issuer, acquirer or transferor company and, as consequence, the percentage of participation of another partner or shareholder of the issuer company is also increased or reduced;

vii) The jurisdiction of tax residency of the issuer, acquirer or transferor company is changed.

viii) One or several business lines of the issuer company is transferred, as well as of the acquirer or transferor companies, if related to one or several business lines of the issuer company.

In addition, if a relevant transaction is performed within the following 5 years as of the date of a corporate reorganization, the acquirer company will have to file an informative tax return on relevant transactions, being that the non-compliance with this obligation will have as consequence the cancellation of the authorization previously granted.

• Business reason for corporate reorganizations:

Finally, and more importantly, the tax authority will be entitled to cancel any authorization previously granted if, in the case of a tax audit, it considers that the corporate reorganization had no business reason.

It is important to mention again that the law does not define the term business reason and therefore the analysis of the scope and interpretation that the tax authority could give to such concept becomes relevant.

Entitling the tax authority to review the business reasons for corporate reorganization, subsequent to the granting of the corresponding authorization, is highly questionable.

This is since, as mentioned, derived from the requirements established to apply for the authorization, as well as from the new obligation to disclose relevant transactions, the tax authority is provided with an important amount of information and documentation that can serve to prove such business reason, being that the granting of such authorization supposes that the tax authority has already analyzed and validated such information and documentation.

Requirements for the deduction of fuel

The reform imposes a new requirement to deduct the acquisition of fuel consisting in having the relevant tax invoice including information regarding the authorization granted to the fuel supplier, in terms of the Mexican Hydrocarbons Law, as well as for such authorization to be valid at the moment of the issuance of the invoice. These new requirements represent an additional measure to combat and tackle the illegal oil and gas market. Therefore, their incorporation could be seen as positive.

However, it can also represent an important administrative burden for companies that acquire fuel in high volumes. This is mainly because of the need for ensuring that the authorization granted to the fuel supplier is valid at the moment of the issuance of the corresponding invoice, since this could be extremely complicated as it could not be a way for taxpayers to verify such information.

Payments for technical assistance, know-how and royalties

A new requirement for the deduction of payments for technical assistance, know-how and royalties is incorporated. Hereinafter, the corresponding services can be indirectly rendered by third parties only when considered as specialized services, for which the provider will have to obtain its registry with the Ministry of Labor as a specialized services provider under the newly enacted subcontracting reform.

Deduction of bad debt

In the case of bad debt losses for an amount higher than 30.000 Units of Investment (UDIS as its Spanish acronym), the deduction requirement of considering that there is a notorious collection impossibility can be materialized only upon a having definitive favorable resolution by competent authority through which the taxpayer proves that it has exhausted the entire collection process or that it was not possible to execute the definitive favorable resolution obtained.

Previously, collection impossibility was evidenced simply with the filing of the corresponding claim before the judicial authority or by initiating the arbitration procedure agreed. Going forward taxpayers will have follow the entire litigation or arbitration procedure requires and the relevant judicial collection process, in order to be entitled to deduct bad debt losses. This will certainly translate into a much longer period to deduct such bad debts.

READ MORE HERE