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Tax Transparency and Reporting in Mexico

Posted on June 11, 2018
Javier Ordoñez-Namihira
Javier Ordoñez-Namihira

Javier Ordoñez-Namihira is a senior associate with Baker McKenzie in the Miami office. He is a Mexican attorney and foreign legal consultant (not admitted in Florida).

In this article, the author discusses recently enacted tax reporting obligations, including Mexico’s implementation of the common reporting standard, that affect Mexican taxpayers engaging in cross-border transactions and maintaining investments abroad.

Mexican taxpayers, like those around the world, face growing reporting obligations — obligations that countries and international bodies have put forth as they seek to advance the cause of global tax transparency. This article will describe domestic tax provisions in Mexico, including unprecedented provisions that recently passed into law and others that have been reactivated from dormancy. I will also briefly discuss a new type of reporting that soon may not only affect Mexican taxpayers (as is now the case), but also directly affect tax practitioners in Mexico. I will also comment on the practical implications of the new rules for Mexican taxpayers in specific scenarios, whether they engage in cross-border transactions or maintain investments abroad.

Without a doubt, the obligations described below constitute a robust and strict set of rules that are now part of Mexico’s highly regulated tax system. However, readers should bear in mind that Mexico did not unilaterally decide to enact these provisions in a frivolous attempt to change — or complicate — the Mexican tax system. On the contrary, the enactment of these various provisions is part of an effort to implement the transparency principles developed by many countries around the globe (including Mexico) to achieve the objectives sought by the G-8 and G-20 countries. Namely, they are part of an international effort to automatically exchange financial information on a multinational basis and — using the information gathered and processed — attack tax evasion.

Mexican Taxpayers’ Reporting Obligations

Relevant Transactions

As part of the federal government’s recent tax reform efforts, the government amended the Mexican Federal Fiscal Code (Código Fiscal de la Federación) in January 2014 to include a new article 31-A that requires Mexican taxpayers to file an informative tax return detailing several different types of activities or transactions considered relevant by the Tax Administration Service (Servicio de Administración Tributaria, or SAT).

From its inception, this obligation was described by the SAT in simple terms, without much detail as to what constituted a “relevant transaction” and what details needed to be reported. A few months after enacting article 31-A, the SAT developed a list of activities, organized by category, and in October 2014 published Form 76 (regarding information about relevant transactions) to help taxpayers comply with the new reporting obligation and understand the type of transactions that the SAT considered relevant and that taxpayers needed to report. 

Transactions that need to be reported include the following: derivative financial transactions; transactions that trigger transfer pricing adjustments; direct or indirect changes of ownership in Mexican corporations; changes in the tax residence of the shareholders in Mexican corporations; corporate reorganizations; changes of tax residence (by legal entities or individuals); transfers of intangible or financial assets; transfers of goods when the seller reserves specified rights to the goods transferred; transfers of assets triggered by mergers or spinoffs; transactions carried out with residents of countries that have territorial systems of taxation, when a double tax treaty has been applied; financial transactions when the payment of interest is pushed out more than one year; payments of interest payable after one year or more; transfers of tax losses upon spinoffs; reductions of tax losses following a merger; and capital reimbursements of payment of dividends when the resources come from loans.

Although some of these transactions were previously disclosed on the tax audit report (dictamen fiscal) that taxpayers’ external auditors prepared and filed, the information that must be disclosed via Form 76 includes much greater detail.

The comprehensive list above highlights transactions that the SAT deems relevant from a tax perspective. Given the importance of the information to the SAT, the statute requires that taxpayers file Form 76 within 30 days after the date the transaction occurred. This reflects the rationale behind the provision — ensuring the SAT has timely information regarding taxpayers’ transactions so that the SAT can focus on, have a better understanding of, and tackle aggressive tax planning schemes. Taxpayers that fail to comply with the Form 76 requirements may be prevented from participating in public work biddings with centralized and decentralized government agencies and may also be subject to economic penalties.

Some special filing deadlines — and very few exceptions — apply.1 First, taxpayers may file Form 76 quarterly. Second, there is a MXN 60 million (approximately $2.9 million) threshold. If the taxpayer carries out less than MXN 60 million in relevant transactions during the fiscal year, then that taxpayer does not need to file Form 76. Importantly, this threshold is computed on an aggregate basis for all relevant transactions — not on a per-transaction basis. The threshold is, however, irrelevant for some transactions. One event that would require filing Form 76 — regardless of the peso threshold — is an individual who changes his tax residency from Mexico to another country. In this situation, the obligation to report the change to the SAT applies in addition to the standard tax notice that an individual must file to inform Mexico of the change in tax residency. Any taxpayer can elect quarterly filing as per the SAT’s special calendar, which has been published annually since the introduction of Form 76.

As noted above, Mexico did not enact these legal provisions based on a unilateral decision made by the Mexican legislature. Rather, the rule reflects the SAT’s approach toward tax evasion — and, more broadly, toward aggressive tax planning — following Mexico’s enthusiastic adoption of the OECD’s base erosion and profit-shifting action plans. In particular, it reflects a commitment to BEPS action 12 and the effort to combat tax-driven practices that erode the taxable base of specific transactions and shift profits from high- to low-tax jurisdictions. Action 12 calls for the disclosure of aggressive tax planning. Article 31-A is Mexico’s response to action 12: It is Mexico’s domestic effort to prevent those tax-driven aggressive business practices.

The relevant transactions subject to reporting are those carried out as of January 2014. Thus, it is important for Mexican taxpayers (legal entities and individuals) to bear this obligation in mind and verify whether a given transaction is subject to Form 76 reporting.

Consider this example: A multinational enterprise with a group of entities in Mexico is undergoing a major reorganization involving multiple steps, including the transfer of Mexican shares to consolidate the group under a single holding company. The transfer causes changes in the direct and indirect ownership of the Mexican group entities; the incorporation of new entities; the granting of intercompany loans to capitalize the newly created and existing entities; and the migration of a foreign entity’s tax residency into Mexico.

In this type of reorganization, it is important for the taxpayers to keep track of each step, its nature, and the amount involved because the parties involved in the reorganization may be required to file Form 76, whether or not the MXN 60 million threshold is exceeded in any given step, and, more importantly, regardless of the fact that the transaction as a whole does not involve aggressive tax planning. As noted above, in some cases, the triggering event — say, migration of tax residency to Mexico — that requires the filing of Form 76 may not involve a specific amount, in which case the monetary exception does not apply and the parties must file Form 76. Ultimately, the obligation to file Form 76 arises whether or not the transaction is part of an aggressive tax planning (that is for the SAT to determine), as long as the transaction falls under the scenarios prescribed in Form 76 — sometimes whether or not the threshold is exceeded.

Likewise, even if the taxpayer is not currently undergoing a complex multi-step transaction, if the taxpayer envisions that it may engage in other relevant transactions during the fiscal year, the taxpayer must bear in mind the special filing calendar (quarterly) and the MXN 60 million threshold. The taxpayer must consider all expected transactions and compute — on an aggregate basis — their value to determine whether it must file Form 76.

Because the information on Form 76 may be used by the SAT to initiate an audit, once the taxpayer has determined that a transaction or transactions will be reportable, regardless of the type of planning behind a given transaction, it is essential that the taxpayer ensure that all information shared is accurate and complete.

Low-Tax Jurisdictions and Transparent Entities

Generally, article 178(1) of Mexico’s income tax law (Ley de Impuesto Sobre la Renta, or LISR) requires Mexican taxpayers that earn income subject to a preferential tax regime (Régimen Fiscal Preferente, or REFIPRE) — that is, the income is taxed at less than 75 percent of the rate that would be triggered and payable in Mexico — must file an annual information return reporting any such income earned in the immediately preceding tax year. For these purposes, deposits and withdrawals are also considered income subject to REFIPREs. Taxpayers that earn any type of income from a jurisdiction on Mexico’s blacklist (found in the LISR transitory provisions) and taxpayers that engage in any transactions through fiscally transparent entities are also required to file an annual information return. Failure to file the information return for more than three months or filing an incomplete return is a criminal offense, punishable by incarceration from three months to three years.2

Under any of these scenarios, the reporting obligation alone does not mean the SAT will deem the taxpayer to be benefiting from a REFIPRE, unless the income-generating activity through the corresponding structure falls under the hypothesis to be deemed a REFIPRE or unless the taxpayer fails to file the annual information return.3 

An entity or legal figure is considered “fiscally transparent” for purposes of the Mexican REFIPRE rules when — as set out in LISR article 176(8) — it is not treated as a taxpayer for income tax purposes in the country where it was formed (or has its headquarters or effective place of management) and the income it earns is attributed to its members, partners, shareholders, or beneficiaries.

In cases where the reporting obligations apply, the owners of the income subject to REFIPREs must file the information return. Copies of the statements regarding deposits, investments, savings, and related information should be enclosed with the information return, along with any other documentation that the SAT identifies in the administrative tax guidelines. Alternatively, the regulations provide that the taxpayers may wait and instead simply furnish exhibits to the SAT upon request. However, if the taxpayer does not furnish them when requested, the information return shall be deemed not filed.4

Special care must be taken in preparing and filing these information returns. The SAT will deem an information return that does not include all of the required income generated in the preceding tax year to not have been filed at all. Aside from the nominal penalty for not filing the return, this could result in the taxpayer losing the ability to be taxed on a net basis.

In the past, the tax administrative guidelines that the SAT publishes and revises annually (the Resolución Miscelánea Fiscal) included some key exceptions to the application of reporting obligations under the REFIPRE rules. Namely, no reporting obligations applied to a Mexican taxpayer that:

  • carried out transactions through fiscally transparent entities (or legal figures) in a country that had a tax information exchange agreement with Mexico — as long as the taxpayer did not control the entity or figure;

  • derived non-REFIPRE income from a blacklisted jurisdiction that had a TIEA in force with Mexico; or

  • indirectly maintained an investment in a blacklisted country via an entity or legal figure located in a non-blacklisted country.

Following important changes to the tax administrative guidelines effective August 15, 2016, these exceptions no longer apply. Thus, Mexican taxpayers that derive income from a blacklisted jurisdiction or carry out transactions through foreign fiscally transparent entities (regardless of whether they are located in a blacklisted jurisdiction) must file an annual informative return — an obligation that applies regardless of whether an effective TIEA is in place between Mexico and the jurisdiction from which the income derives or in which the fiscally transparent entity is located.

These reports are due in February of each year.

The Common Reporting Standard

In October 2014 Mexico adopted the common reporting standard (CRS) for the automatic exchange of information (AEOI) as approved by the OECD Council on July 15, 2014. This regime requires jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions annually. Mexico is a signatory to the CRS Multilateral Competent Authority Agreement, which is the framework that allows for the AEOI of CRS information among jurisdictions. As an early adopter committed to begin exchanging information as of September 2017, Mexico has already introduced rules for the collection of information, transparency, privacy, and confidentiality.

Briefly, the AEOI involves the systematic and periodic transmission of bulk taxpayer information from the source jurisdiction to the residence jurisdiction concerning various categories of income. The source jurisdiction collects the needed information routinely, typically through reporting of payments made in a given transaction, along with account-based data. As a result, the residence country can check its tax records to verify that taxpayers have accurately reported their foreign-source income. The AEOI can also be used to transmit other types of information — for example, change of residence, purchase or disposition of immovable property, and VAT refunds.

Under article 32-B bis of the Mexican Federal Fiscal Code, legal entities and legal figures acting as financial institutions in Mexico — including residents in Mexico for tax purposes and nonresidents with a permanent establishment in Mexico — are liable for implementing and complying with the CRS to allow Mexico to implement the annual AEOI with participating jurisdictions. The Federal Fiscal Code also contains the domestic legal framework needed for Mexico to implement the CRS, meet its international commitments, and begin the AEOI with the more than 100 jurisdictions that have committed to exchange financial information among the group.

These are the most relevant obligations that financial institutions in Mexico must comply with as part of this effort:

  • Implement procedures to identify foreign and reportable accounts so as to distinguish those that are high value, low value, and preexisting. “Preexisting accounts” are those opened as of December 31, 2015. “New accounts” are those opened from January 1, 2016, onward.

  • Maintain a special registry using appropriate procedures to identify foreign and reportable accounts and distinguish these from all other financial accounts.

  • Carry out annual information filings to provide the SAT with information on foreign and reportable accounts. Filings are due no later than June 30 of each year.

To comply with the obligations established under article 32-B bi s, financial institutions must also abide by the rules in annex 25 of the tax administrative guidelines. These rules detail how the institutions must prepare the information reports for disclosure purposes in line with the CRS.

In accordance with the rules on confidentiality and privacy, the Mexican tax authorities are bound to use the information received as part of the CRS and AEOI processes strictly for tax purposes. They shall not disclose or share information corresponding to taxpayers, except for cases involving:

  • data transfers to officers in charge of defending the best tax interest of the country;

  • transfer of tax information to criminal judges and civil judges (in alimony cases);

  • tax or criminal investigations on money laundering;

  • exchange of information with the Federal Commission for the Protection Against Sanitary Risk, the National Antitrust Commission, and the National Telecomm Communication;

  • taxpayers with a tax assessment imposed on the taxpayer as an obligation to pay tax determined upon an audit by the SAT;

  • unreachable taxpayers who abandoned the tax domicile without proper tax notice and are unreachable by SAT;

  • taxpayers convicted of a tax offense; and

  • taxpayers having obtained pardon of a tax assessment.

Conclusion

Mexico’s active involvement in the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes and its enthusiastic approach to the BEPS action plan involving transparency demonstrate that Mexico has truly embraced transparency principles as part of the effort to combat aggressive tax planning schemes and fight tax evasion. The above-described provisions are just a few examples of Mexico’s effort to implement transparency principles and introduce related tax legislation.

The exchange of information with multiple countries and the enhanced local reporting obligations imposed on Mexican taxpayers are significant and useful tools that the Mexican government can use to counter noncompliance from a tax standpoint. They are particularly useful in response to tax-driven aggressive transactions and the maintenance of undisclosed assets or investments outside Mexico.

In light of the AEOI agreements to which Mexico is a party — and because previous exceptions to reporting obligations no longer apply — Mexican taxpayers must analyze every investment structure maintained outside Mexico to determine whether the taxpayer has reporting obligations and prevent any unfavorable results from a possible audit.

Mexico’s engagement in AEOI and its adoption of the BEPS actions plans, including action 12, have produced some key benefits. Chief among these are the opportunities to:

  • receive timely information on noncompliance;

  • identify transactions in which tax has been evaded or may be evaded in the future;

  • identify cases of noncompliance or tax evasion, even when the SAT has had no previous indications of noncompliance, abuse, or tax evasion by the taxpayer;

  • foster voluntary compliance and encourage Mexican taxpayers to report all relevant information; and

  • ensure that all taxpayers pay their fair share of tax.

On the other hand — judging from the strong results that Mexico is beginning to see from local reporting obligations imposed on Mexican taxpayers and financial institutions, as well as from the AEOI and CRS — I believe that Mexico and the SAT may consider additional rules on transparency. Specifically, they may seek to implement rules applicable to tax advisors — measures akin to those recently approved by the European Commission, which will require tax intermediaries (such as accountants, tax advisors, bank executives, and lawyers) who provide their clients with advice on complex cross-border financial and tax structures to report these structures to the tax authorities in their corresponding EU countries.5 That EU obligation is expected to focus on advice about structures that make use of tax attributes to help the taxpayer reduce tax liability, that involve preferential tax regimes, or, more generally, transactions that could help a taxpayer avoid taxes.

I believe that evaluating a similar reporting obligation for use in Mexico requires careful consideration of the attorney-client privilege as it applies under Mexican law (secreto professional) as well as a crystal-clear description of what constitutes advice on structures that may help lead to the avoidance of taxes.

It is clear that sophisticated transparency measures introduced and implemented into Mexican law in recent years are now the name of the game. The rules require high-level compliance from taxpayers and tax practitioners alike — levels they can achieve if they operate with resilience and adapt to the new legal and tax framework applicable worldwide. At the end of the day, adapting should cause tax practitioners — and, most importantly, taxpayers themselves — to be cognizant of how they carry out transactions and structure their investments (domestic and abroad), recognizing the tax consequences of their transactions in a (tax) transparent world.

FOOTNOTES

1 Tax Administrative Guideline 2.8.1.17, effective fiscal 2018.

2 Federal Fiscal Code, article 111(V).

3 LISR, article 178(2).

4 Regulations to LISR, article 301.

5 For more details, see European Commission, “Questions and Answers on New Tax Transparency Rules for Intermediaries,” MEMO/17/167 (June 21, 2017).

END FOOTNOTES

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