Mexico's Tax Administration Service (SAT) issued a
nonbinding ruling on May 16 2017 that contains a new and
controversial interpretation of the rules in the Income Tax Law
(ITL) that allow for a preferential withholding tax rate of
4.9% to be imposed on certain interest paid to a
non-resident.
Article 166 of the ITL sets out the situations in which
interest payments made by a Mexican resident to a non-resident
will be subject to income tax withholding at a rate that ranges
from 4.9% to 35%. Paragraph 11 of Article 166 provides that the
35% rate rather than the 4.9% rate will apply where the
non-resident beneficiaries of the interest hold bonds issued by
a Mexican entity and receive more than 5% of the interest
arising from the bonds; and (i) own directly or indirectly more
than 10% of the stock of the bond-issuing entity, or (ii) is an
entity whose shares are more than 20% owned directly or
indirectly, individually or with related parties, by the
bond-issuing entity.
Until the SAT ruling, the accepted interpretation of
paragraph 11 (by taxpayers and the SAT) was that the scope of
the limitation was restricted to interest derived from bonds
and similar credit or financial instruments, but not to
interest derived from other transactions, such as loans (i.e.
bank loans). This interpretation was aligned with the
explanation given by the Mexican Congress at the time Article
166 was enacted.
The SAT ruling now has expanded the situations where the
4.9% withholding tax rate is not applicable to include interest
derived from certificates, loans and other financial
transactions. Instead, the 35% withholding tax rate will apply
in these cases.
Due to this unexpected new interpretation of Article 166,
several consultations (writs) were filed with the Taxpayers
General Attorney Office (PRODECON, sometimes known as the tax
ombudsman, a public agency that specialises in tax matters, but
with functional autonomy), requesting its view on the SAT
ruling. On November 7 2017, the PRODECON concluded that the
correct reading of Article 166 should not exclude other
financial or credit transactions, such as loans, from the
preferential 4.9% withholding tax rate, and that the
restriction on the lower rate should apply only to interest
derived from bonds placed in financial markets when the holders
are economically related to the Mexican issuer. According to
the PRODECON, the purpose of the provision is to aid the
financing of Mexican corporations through the placement of
bonds in foreign markets.
It is important to note that, while the PRODECON's decision
is not binding on the SAT, it may be considered by a court as
favourable evidence in support of the taxpayer.
Sol Matias (smatias@deloittemx.com)
and Ricardo Santoyo (risantoyo@deloittemx.com)
Deloitte
Website: www.deloitte.com/mx