Reform erodes benefits of Mexican tax consolidation regime

The Mexican tax consolidation regime was recently the subject of considerable controversy, derived mainly from a political party on the left, that considered that it protected the interests of multinational groups that took advantage of it to drastically diminish their tax burden.

In reality, the tax consolidation regime has lost most of its benefits over the last years.

The regime was enacted in the Income Tax Law in 1981, though through decrees and rules it has existed since the 1970s. The tax reform enacted on December 30 1980 included this controversial regime and became fully available for those groups that complied with its requirements.

In general terms, the period between 1981 and 1998 was the most important for tax planning, since the regime had practically no limitations on its benefits, therefore, holding companies took advantage of tax losses, dividend distributions and other consolidated concepts without any limitations or moment to pay savings. It is fair to say that during this period the benefits of tax consolidation were definitive.

From 2009, most of the benefits of consolidation were limited to the moment of i) de-consolidation (total of partial) or ii) variation of share ownership.

Another important limitation on benefits consisted of the 60% threshold that was applied for consolidation between 1999 and 2004. As a consequence of this, for instance, if a consolidated company triggered a tax loss, such item could only be used in consolidation on up to 60% of its value.

All of these changes turned the Mexican tax consolidation regime into a high complexity monster that was both used by taxpayers to take advantage of loopholes to implement aggressive tax planning and by the tax authorities to assume radical positions to take advantage of abusive interpretations of the law to collect taxes.

To compute the tax consolidation, it was necessary to consider the different legislation mentioned above as well as a lot of transitions and miscellaneous rules for the different periods of the regime. Again, this situation caused the consequences already mentioned.

From 2005, tax consolidation returned to a 100% basis, rather than 60%, and, at the same time, a number of benefits were eliminated from the regime.

In 2010, the tax regime was amended to limit its benefits to up to five years and taxpayers had to pay the deferred tax savings in consolidation from the sixth year after the corresponding benefit. Therefore, the payments to the tax authorities started as follows:

As previously mentioned, the 2014 tax reform establishes that the consolidation regime is no longer available for taxpayers and all benefits (deferred tax) derived from consolidation must be paid to the tax authorities for fiscal years from 2008 to 2013 within five years.

It is a fact that changes, rules and transitions in the consolidation regime over the years provoked abuses from taxpayers. In some cases, however, it is also a reality that unclear law and rules were also responsible for distortions in tax calculations and that in many cases, the rules were also against the taxpayers. A number of different taxes to pay with respect to consolidation and de-consolidation can be easily identified.

The consolidation annual 2013 income tax return will be due on April 30 2014 and taxpayers will have to file an amended return to recognise the obligated de-consolidation effects. However, this interesting story of controversy between taxpayers and the authorities is still not over, since it is expected that the terms of the interpretation of the exit rules for the regime will be, once again, the source of differences between them.

Gustavo Gómez (gustavo.gomez@mx.ey.com), tax partner, EY Mexico