Economic package for 2022 closes loopholes, improves tax compliance
Both houses of Mexico’s congress approved the 2022 economic package on 26 October 2021 without making any significant changes to the version presented to congress on 8 September. The package does not introduce new taxes or rate changes, instead focusing on removing loopholes, improving tax compliance and enhancing the oversight powers of the tax authorities (State Administration of Taxation or SAT). Once the president signs the legislation and it is published in the official gazette, the law will become effective, with most measures applying from 1 January 2022.
This article summarizes the most significant measures in the economic package that affect companies.
- Payments made by Mexican residents for technical assistance, the transfer of technology or in the form of royalties will be deductible for tax purposes if they are made directly by the service provider. If the services are provided by a third party, the provider will have to comply with the rules for specialized services that were introduced earlier in 2021 and be able to demonstrate that it is capable of providing the services. (For coverage of the labor law reform, see the article in the July 2021 issue of Corporate Tax News.)
- The definition of a back-to-back financing arrangement will be expanded to include related party debt that does not have a valid business purpose, which will result in the recharacterisation of interest as dividends.
- The order in which tax credits are to be used will be revised to require taxpayers to first apply credits to the advance payment of corporate income tax and then any foreign tax credits.
- Changes are made to the rules governing special purpose financial institutions (SOFOMs), which are companies used for financing activities. SOFOMs, which currently are exempt from the application of Mexico’s thin capitalization rules, will no longer be exempt. Additionally, the 4.9% withholding rate on loan interest paid by a SOFOM to a foreign related party will be eliminated if certain requirements are met.
- Foreign exchange gains/losses will be determined based on the exchange rate established by the Mexican Central Bank.
- A simplified cash-basis tax regime will apply to Mexican resident companies whose total revenue in the preceding tax year does not exceed MXP 35 million.
Mergers, spinoffs and restructurings
- A new requirement will have to be met for a merger, spinoff or restructuring to qualify for tax-free treatment: the taxpayer will need to demonstrate a valid business purpose for the transaction.
- The rules governing losses will be revised:
- In the case of a corporate spinoff, tax losses will be able to be transferred only to companies that are engaged in the same line of business.
- The definition of a direct and an indirect change in shareholder control of a company for purposes of net operating loss utilization will be revised. A change in control will be deemed to arise if, during a three-year period from the date of the merger, (i) there is a change in more than 50% of the original shareholders with voting rights; (ii) rights to remove officials, make business decisions and formulate company policies and strategies change and/or are cancelled; or (iii) the merged entities fail to issue consolidated financial statements according to Mexico’s financial reporting standards.
- Domestic related party transactions will be treated the same way as cross-border transactions for purposes of the transfer pricing study and information return, i.e., information on all transactions with related parties will have to be reported, regardless of whether the parties are resident or nonresident.
- More clarity and detail will be provided on the contents of supporting documentation that indicates that the amount of income and deductions are carried out in accordance with the prices, consideration or profit margins that would have been used by independent parties in arm's length transactions.
- The compliance period for filing the information return and the local related party information return will be aligned with the deadline for filing the certified public accountant (CPA) opinion.
- The possibility for entities in the IMMEX/maquila program to obtain an advance pricing agreement will be eliminated, with the result that such entities will only have the option to determine their taxable base using the safe harbour rules.
Measures affecting nonresidents
- An information reporting requirement will be introduced for sales of shares of a Mexican company between nonresidents, i.e., the Mexican entity whose shares are being transferred will have to notify the SAT of the sale.
- Legal representatives appointed by nonresidents will be required to voluntarily assume joint and several liability for the payment of tax assessed on the nonresident.
- Where a nonresident derives income from the acquisition of immovable property based on a valuation made by the SAT, the Mexican seller or foreign company with a permanent establishment in Mexico will be required to withhold tax and pay it to the SAT; if the seller does not pay the tax, the burden will fall on the nonresident buyer.
- The definition of royalties will be revised to include image rights relating to the use of a copyright of a literary, artistic or scientific work.
- Financial statements of legal entities whose income exceeded MXP 1,650,490,600 in the previous year will have to be audited by a registered CPA. Taxpayers with income in excess of MXP 122,814,830 and those with assets in excess of MXP 97,023,720 will be able to opt to have their financial statements audited.
- The SAT will be authorized to reject a taxpayer’s electronic signature if its shareholders or partners that have effective control over the entity have not complied with all of their tax obligations.
- The power of the SAT to suspend periods and/or deadlines in the event of force majeure or act of God will be specified.
- A CPA will be required to report to the SAT any conduct by a taxpayer under audit that could rise to the level of a crime; failure of the CPA to act could result in criminal prosecution.
Companies doing business in Mexico should begin now to assess the impact of the changes on their business operations.
Jaime Zaga Hadid