2020 Mexico Tax Reform

FEDERAL REVENUE LAW (LIF)

Tax incentives     

The employees profit sharing reduction applicable in monthly corporate tax installments is proposed to remove from the Revenue Law and incorporate directly into the Income Tax Law (LISR),  also the  option of not issuing ISR and VAT withholding proof receipt among others are included in the Value-Added Tax Law (LIVA),           

The document establishes a number of justifications for the loss of tax incentives, including not having filed tax returns, having the status of “not located” before the authority, and having a verdict of guilty for a tax offense.                                             

INCOME TAX LAW (LISR)

Payments to fiscally transparent foreign entities and foreign legal figures

The activities of transparent foreign entities will be subject to taxation under the same terms as corporations in Mexico. When their main business administration is located in Mexico, they will be considered Mexican tax residents, except in the event that an express provision exists in the Treaty  to Avoid Double Taxation allowing such an exception.  

Limitation to the deductibility of interests

A new limit the deductibility of interests generated with debts with related parties as well as third parties.

Year net interest will be non-deductible. When it exceeds $20 million pesos, the deduction will be limited to 30% of the adjusted tax  profit and only when this limit is exceeded will the non-deductible interest trigger under the thin capitalization rule. It is important to mention  that if the interest exceeds the non-deductible interest trigger by thin capitalization, only  thin capitalization interest will be non-deductible. 

The Economic Package further clarified that the adjusted tax profit will be determined by adding the tax profit or loss to the accrued interest deducted in the year (generated by debts from the taxpayer), and the tax depreciation of fixed assets, deferred expenses and preoperative expenses  EBITDA.

The net interest non-deductible in one tax year could be deducted in the following 10 years. However, the amount pending to be deducted will increase the net interests of the following tax year.

The limitations on this deduction will not be applicable to financial institutions that carried forward operations related to the business purpose, debts generated by public infrastructure, hydrocarbon projects and, in general, strategic projects for the federal government specified in the new law.

Taxation on digital platforms and applications

It  is include in LISR a specific section referring to income focusing on individuals with business activity delivery goods or providing services through the Internet, through technological platforms, and technological applications participating in the provision of goods or services by third parties. It is provided that the tax applicable to such individuals shall be withheld by the domestic or foreign entities or figures that directly or indirectly grant the use of the digital platform or application. The applicable progressive withholding rates will depend on the activity and the monthly taxable income, in case the individual fails to provide their Federal Taxpayer ID (RFC), in which case the withholding rate will be 20%.

Regime applicable to companies with IMMEX Program under the “shelter model”

There is a specific regime applicable to foreign residents operating through a company with an IMMEX Program under the “shelter model under this model” before the reform it was subject  to a maximum term for application, that is, 4 years or inclusive 4 additional years as provided by the rule. The new shelter model applies as long as ISR is complied with and tax obligations are fulfilled through the entity providing the services of a “shelter maquila entity.”

VALUE-ADDED TAX LAW (LIVA)

Digital economy

The digital services and digital intermediation services provided by foreign residents without permanent establishment in Mexico, will be taxable to a 16% tax rate.

These providers will need to file at the Federal Taxpayer Registry (RFC), separately express the VAT tax on the receipts, submit a monthly VAT tax return and appoint a legal representative. It is important to note that compliance with these obligations does not result in a permanent establishment for the service provider.

VAT withholding on outsourcing services

Taxpayers (corporations and individuals with business activity) that contract labor outsourcing services, to calculate, withhold and pay a 6% tax.

As a consequence, it is being proposed to eliminate the obligations for both contracting parties (provider/client) to provide documentation and information on the outsourcing tax and  labor contributions payed.

Crediting VAT when activities not subject to VAT are carried out

Taxpayer that carries out activities that are not subject to VAT, they shall consider those activities in the total value of the activities to determine the VAT crediting factor.

SPECIAL TAX ON PRODUCTION AND SERVICES (IEPS)

Update of the tax on flavored drinks

The quota applicable to flavored beverages is increased from $1.17 to $1.2705, and that this quota be subject to a yearly update mechanic in the Tax Code (CFF).

Offsetting IEPS tax (Special Tax on Production and Services) favorable balances

Offsetting favorable balances stemming from IEPS, will only be applicable to the same categories goods and services established in the  IEPS Law category.

Federal Fiscal Code (CFF)

Companies issuing, trading and using tax receipts of non-existing operations

With the objective of fighting tax evasion by companies which are invoicing non-existent operations, better known as EFOS (Detection of Abusive Schemes by Simulated Operations Billing Companies) and EDOS (Companies Deducting Simulated Operations), amendments are being proposed to taxpayers with electronic password (e.signature)  to suspend the digital seal when the taxpayer has not verified their identity data and tax status, this will be also applicable  even during the process to clarify the tax situation with the tax authorities.

Offsetting of contributions

For the purpose of having greater legal certainty, regulators are considering eliminating the universal offsetting in the CFF.

General rule “anti-abuse”

It is being considered that when exerting their verification powers, the tax authorities may presume that activities carried forward by taxpayers lack a business reason/basis considering the facts and circumstances. However,  if the authority determine that the tax payer had not bases for the carried forward activities with a business reason the right of audience is granted to the taxpayer and thus, avoid any kind of unjust or illegal action.

Reporting tax schemes

Tax advisors with residence in Mexico and non-residents with a PE in Mexico, to disclose information related to any tax scheme, plan, project, proposal, advice, instruction or recommendation issued, whether expressly or tacitly. If the tax advisor does not report the tax scheme, the obligation will be transferred to the taxpayer.             

Inclusion of Article 69-B as a condition for the application of subsidies or fiscal benefits

It is include as a requisite for the application of a subsidy or fiscal stimuli, to not be treated under Article 69-B of the CFF.