Mexican procedure for submitting merger notices creates taxpayer uncertainty
Ángel Escalante and Juan Manuel Morán of Escalante & Asociados explain how the Mexican tax authority’s latest change to the process for submitting merger notices has made the process more complex, and how taxpayers can mitigate the risks.
Since the Mexican Congress approved the labour reform in April 2021, which prohibits the provision of outsourcing services that include personnel, it has been common for companies to merge in order to comply with the new regulations, especially if they belong to the same group.
However, merging entails several obligations for the surviving (and the merged) company, including the filing of a merger notice as required under Article 14-B, Section 1, Subsection a) of the Federal Tax Code and Article 24, Section 1 of its Regulations.
The filing of this notice prevents the merger from being deemed a sale, which would trigger income tax and value added tax on the operation. Yet there are some difficulties associated with filing the notice.
Practical issues with filing a merger notice before the new procedure
Under Rule 2.5.13 of the Omnibus Tax Resolution and Form 86/CFF of its Annex 1-A, the merger notice must be filed within a month after the merger. According to Article 14-B, Section 1, Subsection a) of the Federal Tax Code, the notice was merely supposed to let the tax authority know of the merger and result in the cancellation of the taxpayer identification number of the merged company.
In practice, however, the merger notice was a long process, since, depending on the office of the tax authority that the taxpayer attended, the notice could be rejected for various reasons. Sometimes, the notice was even rejected over something that was not required by law.
Each attempt to submit a notice required an online appointment (which were very limited from the beginning of the pandemic, until recently) and the presence of a legal representative of the surviving entity. This means that a successful filing could take up to two years in some cases.
First amendment to Omnibus Tax Resolution: pre-vetting before filing a merger notice
In March 2022, the Mexican government attempted to address this issue and prevent taxpayers from scheduling several appointments and receiving multiple rejections. At this point, Rule 2.5.25 and Form 316/CFF were added to the Omnibus Tax Resolution.
This provides a pre-vetting procedure through which taxpayers must submit documents allowing the tax authority to verify that they comply with certain requirements, prior to scheduling an appointment to file the merger notice. The requirements include, but are not limited to, the following:
The merging companies cannot be subject to an audit or have tax assessments pending payment;
The merging companies must not be included in any of the blacklists established in articles 69, 69-B and 69-B Bis of the Federal Tax Code;
The income and withheld taxes represented in the merging companies’ tax returns must match the invoices issued (CFDI) registered in the tax authorities’ systems and databases, and the files to which it has access; and
The information of the identity of the shareholders or partners the tax authority has in its possession must be up to date.
Second amendment to Omnibus Tax Resolution
Despite this amendment introducing a pre-vetting procedure, in our experience, taxpayers remain unable to file the merger notice. This is because the tax authority keeps rejecting the pre-vetting documents filed by taxpayers. As a result, far from easing the process, the procedure serves as an additional hurdle to filing the merger notice. The most common reasons for rejection are points 3) and 4) above.
Therefore, on May 6, 2022, the Second Amendment to the Omnibus Tax Resolution was published, adding an additional provision to the Form 86/CFF. This establishes that the one-month period for the surviving company to file the merger notice before the tax authority will be suspended until the tax authority responds to the pre-vetting procedure. However, if the pre-vetting process is resolved unfavourably, the deadline is resumed until the request is filed again.
Uncertainty for taxpayers
All of this causes uncertainty among taxpayers regarding compliance with the requirement set forth in article 14-B of the Federal Tax Code for the merger not to be deemed a sale. Not only that, it causes an additional administrative burden by forcing taxpayers to file tax returns for a company that in practice no longer exists, since the merged company must be up to date with its tax obligations until the notice is successfully filed and the taxpayer ID of the merged company is cancelled.
All the above makes it clear that it is very important for taxpayers to prepare the necessary documentation for everything that the filing of the merger notice involves. Taxpayers wishing to merge should also prepare a defence file in case the tax authority questions whether they have met the requirements for the merger to not be considered a sale.
It will be important to follow up on future changes that the tax authority makes to the requirements involving both the pre-vetting process and the filing of the merger notice. Both processes have been modified multiple times during 2022, making it difficult for taxpayers to check all the boxes when attempting these proceedings.