The proposed package includes changes in the Income Tax Law, Federal Duties Law, Federal Fiscal Code, Excise Tax Law and Federal Law of Budget and Fiscal Responsibility. Additionally, the Federal Revenue Act and the Federal Budget for 2016 have been proposed.
According to the Mexican Government, this tax reform focuses on the promotion of investment and will not include an increase in tax rates.
Accelerated asset deduction
The tax reform package would permit the accelerated deduction of investments made by small and medium-sized enterprises (SMEs) - classified as those with revenues up to 50 million pesos - and investments made with the purpose of developing and expanding transportation infrastructure, as well as for the production and distribution of energy.
Recently, the senate increased the SME threshold to 100 million pesos.
The intention of this reform is essentially to encourage greater levels of investment from this type of company.
The incentive would be temporary, since it would only apply to investments made during 2016 and 2017. Moreover, the rate of accelerated deduction would be calculated with a discount rate of 3% for investments made in 2016 and 6% for investments in 2017.
To trigger the benefit of this incentive, it would be applicable in the tax prepayments made in 2016 and, consequently, would allow the benefit in the deduction of investments made in the last quarter of 2015 for the annual monthly income tax payments of 2015 filed in 2016.
Credit for dividends and reinvested profits
Due to the government strategy of incentivising the reinvestment of profits generated by companies which operate in Mexico, a new temporary benefit would be granted.
This benefit would increase in accordance with the period in which the profits would be reinvested.
This measure would be applicable for profits generated from January 1 2014 to December 31 2016, and distributed from the year 2017 onwards.
The benefit would consist of a credit applicable against withholding tax on dividends (which is charged at 10% in Mexico) for individuals holding stock of companies as follows:
Year of distribution of dividends or profits
Percentage applicable to the amount of the dividend or profit
2019 and onwards
This would only apply for those companies whose shares are on the stock market according tothe terms of the Stock Market Law.
It is also important to mention that to apply this tax incentive, it would be necessary to identify in the entity book records, the profits or dividends to be reinvested during 2014, 2015 and 2016.
Thin capitalisation in the electric industry
As a result of the recent energy reform, included in the economic plan for 2016 presented the president, the national electric industry was modified structurally in order to open it up to national and foreign investment, among other objectives.
Therefore, it is being proposed to reform article 28 fraction XXVII, which prevents the deduction of interest from loans with foreign related parties where debts exceed the equity in a ratio of more than three-to-one (in line with Mexican thin capitalisation rules).
The modification proposes the exclusion of debts contracted for the infrastructure investment related with the energy generation from thin capitalisation rules.
Repatriation of funds
The proposed tax reform for 2016 also includes a tax incentive for the repatriation of funds kept offshore by Mexican companies and individual taxpayers up to December 2014.
This incentive would only be applicable during the first part of 2016 for those funds that had not been reported in Mexico. It also covers funds in preferential tax regimes (tax havens).
It is important to note that, compared with previous repatriation fund programmes, this incentive would not cause any reduction of taxes, and would not be on an anonymous basis.
Nevertheless, the formal tax obligations for these funds will be considered fulfilled, there will not be penalties or interest, the funds will not be considered for tax discrepancy and the tax paid (within 15 days after the fund is repatriated) will be considered as creditable.
In this regard, any individuals who did not report investments in tax havens and, consequently, did not file the corresponding informative return, could eliminate criminal implications by taking advantage of this disclosure incentive.
Funds repatriated by companies must be reinvested through the financial system using one of the following options:
i) Fixed assets for the company during a period for at least three years;
ii) research and development of technology to improve the taxpayer activities; or
iii) payment of loans with independent parties acquired previously than this disposal.
Individuals and foreign residents with a permanent establishment can reinvest their funds in cases (i) and (ii) and in financial instruments or shares issued by companies in Mexico for at least three years.
Finally, taxpayers which apply this benefit would have to consider this taxable income in the net after-tax profit account (CUFIN) and in the taxable profit for the employee’s profit-sharing.
Additionally, the tax authorities will publish the rules to apply this incentive in order to have additional information of the taxpayer and taxpayers must keep the supporting documentation that demonstrates the investment and the tax payment for a period of five years.
Transfer pricing documentation requirements
Mexico has been one of the first members to implement BEPS-related measures in the wake of the final OECD recommendations. One of the actions that has been considered in the tax reform proposed in the economic package for 2016 has been the inclusion of the recommendations under action 13 of BEPS: ‘Guidance on Transfer Pricing Documentation and Country-by-Country Reporting’, through the addition of article 76-A of the Income Tax Law.
The precept included in the chapter of the “taxpayers’ rights and obligations”, establishes an obligation to those taxpayers required to file the information tax return (DISIF), established in article 32-H of the federal fiscal code.
The new obligation comes in the form of an annual filing of three informative returns regarding the operations with related parties, which must be filed no later than December 31 of the year after the operations were conducted.
The mentioned informative returns are:
1. Master informative return containing information regarding the related party transactions of the multinational business group.
2. Local related parties informative return.
3. Country-by-country informative return of the multinational business group.
Another modification proposed in the tax reform is the addition of the fraction XL to the Article 81 of the federal fiscal code. This fraction would establish penalties for not presenting the information of article 76-A of the income tax law and/or for providing it incomplete, with mistakes, with inconsistencies or in a different form than stated by tax regulations.
Finally, there are different particularities which have not yet been clarified by the tax authorities about the way these informative returns will be filed, the level of detail about the information of the foreign business group and whether all of the related party transactions will be considered without regarding the amount of them.
These points will probably be clarified if the tax reform package is approved, with the general rules issued by the tax authorities, which may detail the information required to fulfill these obligations.
Gustavo Gómez (email@example.com), is a tax partner at EY Mexico, principal Mexican correspondents of the Compliance Management cannel on www.internationaltaxreview.com. The co-authors for this article are: Sugeih Rosas, Mauricio Benitez, Sebastian Melendez, Luis Molina, Alberto Morales, and Cuitlahuac Soria.
EY’s other tax compliance partners in Mexico City are:
Hector Armando Gama Baca (firstname.lastname@example.org); Fernando Tiburcio Lara (email@example.com); Juan Manuel Puebla Domínguez (firstname.lastname@example.org); Raúl Tagle Cázares (email@example.com); and Ricardo Delgado Acuña (firstname.lastname@example.org).
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