As from 2005, Mexican entities may consolidate up to 100% of their taxable income or loss of group members, based on the controlling Mexican resident company’s shareholding in its Mexican subsidiaries.
One of the main advantages of filing a consolidated tax return is the possibility of deducting, at the consolidated level, the tax losses incurred by the subsidiaries corresponding to the portion of shares owned by the Mexican resident holding company. In the case of tax losses incurred before the consolidation, the deduction may be applied only up to the amount of the controlling or controlled company’s individual taxable profit in the period in question.
Also a tax-deferred flow of dividends in excess of the net previously taxed income, (registered in the individual CUFIN (net profit account)), to the extent that the dividend flow remains within the consolidated group, benefit that is limited to five years.
The MITL precludes the possibility of filing a consolidated tax return if more than 50% of the holding company’s shares are held by a foreign corporation, unless it is a resident of a country where there is a broad exchange of information agreement with Mexico in force.
In 2010, a relevant tax reform entered into force in the MITL which limits the deferral benefits under the consolidation regime (CR) to five years.
Two years after such tax reform clarifications concerning some of the new provisions still remain pending. This has given room to an undesired uncertainty for groups that file a consolidated income tax return, specifically, derived from the lack of precise procedures to determine the deferred income tax under the CR which may generate substantial risks for the taxpayers.
Pursuant to the 2010 tax reform mentioned above, article 70-A was introduced in the MITL, which obliges the controlled companies to pay in each taxable year the income tax deferred, restated for inflation, for consolidated purpose, obtained in the sixth taxable year preceding that in which the payment has to be made and that had not been paid by December 31, of the immediate preceding taxable year to that in which the payment was due.
In the determination of the deferred income tax, the controlling companies shall apply the procedure pursuant to article 71 of the MITL or apply the procedure according to article 71-A of such law, at the election of the controlling company.
Article 70-A of the MITL provides that the resulting deferred income tax shall be paid during the following five years pursuant to the following:
25% in the taxable year in which the payment of the deferred tax shall be made;
25% in the second taxable year;
20% in the third taxable year;
15% in the forth taxable year; and
15% in the fifth taxable year.
As a result of the public comments received on the 2010 tax reform and considering the different distortions that derive therein, the Mexican tax authorities elaborated administrative rules contained under the Miscellaneous Tax Resolution (MTR), Resolución Miscelánea Fiscal.
For instance, rule I.3.6.13 which deals with the determination and payment of the tax provided under article 71-A, section II of the MITL, grants the benefit to postpone the determination and payment of the deferred income tax that corresponds to the comparison between the registrations or records in the net tax profit account (RCUFIN) for fiscal year 2006, in certain cases and subject to some obligations.
Notice to postpone payment of the income tax deferred
On March 31 2010, rule I.3.5.17 of the MTR was published, providing an alternative to postpone the deferred income tax derived from differences in the RCUFIN of taxable years 2004 and previous taxable years, provided certain requirements were met. This rule was extended to cover fiscal year 2005.
In 2012, rule I.3.6.13 of the MTR entered into force to establish that to apply article 71-A section II of the MITL, la controlling company may determine and pay the deferred income tax for taxable year 2006 until:
It reduced its participation in a controlled company.
A controlled company abandoned the consolidation regime.
The group abandoned the consolidation regime.
Therefore, the income tax deferred for 2006 as a result of the effect of RUFIN will be calculated until the three circumstances mentioned above take place. Some requirements apply in these circumstances, for instance, the deferred tax for fiscal year 2006 has to be paid under the following scheme:
25%, no later than March 2012.
25%, no later than March 2013.
20%, no later than March 2014.
15%, no later than March 2015.
15%, no later than March 2016.
Also, to postpone the effect of RCUFIN of the income tax deferred in 2006, the controlling company had to file a notice before the Mexican tax authorities, no later than February 2012, to request the application of the rule to meet section II of article 71-A of the MITL. With this notice the taxpayers disclose specific facts and circumstances.
It is important to note that if the tax authorities in the course of an examination verify that the notice was not timely filed or contains information that is not accurate or incomplete the notice is considered as not filed pursuant to the mentioned rule.
If the group abandons the consolidation regime it is evident that once the deferred tax is calculated and paid either under article 71 of the MITL or under the optional procedure under article 71-A, no more issues concerning deferred tax will arise. However, there are some aspects to consider in cases where the participation is reduced in a controlled company or when a controlled company leaves the CR.
Under those circumstances, pursuant to the mentioned rule I.3.6.13 of the MTR, the total amount of deferred income tax for fiscal year 2006 shall be paid for differences in RCUFIN and not only the deferred income tax that corresponds to the controlled company that leaves the CR or to the controlled company for the controlling company modifies its shareholding participation.
Therefore, it is advisable to approach the tax authorities to expose the issue to obtain a private tax ruling in this respect.
Also, it is advisable to be aware of the effects that result from the comparison of RCUFIN to avoid presenting the notice to postpone the payment of the deferred income tax without knowing the real impact of such calculation or, as the case may be, evaluate or confirm the criteria applied in its determination.
In this context, the following elements need to be carefully reviewed and evaluated:
If the notice was filed, the controlling company has or had to pay on March 2012 the first installment of deferred income tax for taxable year 2006 (25%), as well as deferred income tax corresponding to fiscal years 2005 (25%) and 2004 (20%).
In case that during 2012 the shareholding participation is reduced or a controlled company leaves the consolidation regime, the corresponding deferred tax shall be determined and paid.
Evaluate, as the case may be, the convenience of requesting a private ruling from the tax authorities to confirm that total deferred tax is not due from differences of RCUFIN of the taxable years for which the notice was filed, but only that corresponding to the controlled company that leaves the CR or in which the shareholding participation was diminished.
Analyse the criteria used in the determination of the deferred income tax for differences in the RCUFIN and evaluate the different situations.
Consider the effect of the recent court rulings concerning the calculation of CUFIN and evaluate the possible effects on the determination of the deferred income tax deferred.
The review and evaluation of the preceding issues and the definition of actions to be taken can avoid costly tax disputes in an environment where litigation shall be viewed as the last resort considering the trend of the Mexican tribunals to rule in favor of the tax authorities.
It is desirable that the tax authorities continue to issue guidance to provide legal certainty to the taxpayers for a determination of a deferred income tax that is consistent with the benefits that taxpayers had under the CR.
Karina Perez Delgadillo (firstname.lastname@example.org) and Irene Hernandez (email@example.com) of PwC Mexico.