Considerations and recommendations for the close of the 2020 year

The close of the calendar year also means the close of the tax and financial year for most companies in Mexico. For this reason, the last few months are the most suitable for taking a pause and evaluating company position; above all, now that the year’s health crisis has to be taken into account, which may have a critical impact on results.

December, 2020

A few of the points that are worth considering before making the close of year assessment are:

Thin capitalization. Both in Mexico and in many other countries, specific rules exist to determine the tax treatment that should be given to leverage on the debt that companies may have, and which in addition generates interest. Under this heading, it is indispensable to evaluate the debt held during the year and to compare it with the capital, as the case may arise in which the amount of the debt exceeds three times the capital and this leads to the non-deductibility of the interest generated by the amount proportional to the interest.
Transfer pricing study (TPS). The close of the year is the best time to reflect and start to plan the preparation of the TPS for 2020. For this reason it is indispensable to evaluate whether the year’s operations are within market values; if not, it is the perfect moment to make the pertinent adjustments so as to maintain operations at ¨Arm’s Length¨ market value according to the year’s book entries.
Distribution of dividends. Derived from the new global panorama faced by all businesses, and which have clearly been affected by Covid-19, different corporations have chosen to return part of the profits generated at their different sites to their shareholders. And as Mexico is no exception, this possibility should be assessed together with the different tax implications that it triggers.
Results at the close of the year. The best time to carry out the reconciliation processes between the sales recorded during the year and the Digital Tax Receipts (CFDI) issued is before the close of the calendar year. Therefore, the principal Non-deductible accounts should be evaluated, as well as those items that may have a significant impact on the profit or loss of the year; specifically, “intercompany” items, as well as reviewing the contracts and legal documents that have to be updated or rewritten for 2020.

Contact our team should you require further assistance.

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