Information exchange as a worldwide trend
Nowadays, information exchange has become a global practice for governmental agencies. The main objective of such exchange is for any relevant authorities to obtain useful data (such as financial and tax records) regarding transactions and/or investments held abroad by taxpayers – both individuals and legal entities. This information will then be the basis for the construction of cross-referential databases that are intended to be used as a trigger for future audit or investigation processes regarding relevant taxpayers, transactions and organisations, mainly focusing on the detection of potentially illegal practices or tax evasion schemes structured abroad.
Considering that one of the main objectives of the cross-governmental information exchange practices is the avoidance and control of fiscal evasion, an effective data flow between countries is intended to force taxpayers to pay taxes and disclose all relevant fiscal information related to transactions and investments undertaken abroad, under the knowledge that such information will be provided to the corresponding domestic tax authorities.
The information requests began with bilateral or multilateral agreements between countries. Such agreements have been standardised pursuant to global practices (in line with regulations set out by, for example, the OECD, UN and others) which require very specific technical and practical guidelines to ensure that the information exchange flows effortlessly. Needless to say, this type of information exchange process requires the implementation of extremely detailed legal and regulatory frameworks, such as the one proposed by FATCA provisions.
FATCA was enacted in the United States in 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE Act) and was developed to target non-compliant US taxpayers owning foreign accounts. From a tax standpoint, it aims to reduce tax evasion by US taxpayers holding investments in offshore accounts by establishing a 30% withholding rate on payments sourced in the US payable to foreign financial institutions (FFIs) or non-financial foreign entities (NFFEs) that do not disclose annually to the IRS on its accountholders who are US persons or foreign entities with substantial US ownership, unless they enter into an agreement with the IRS under which they agree to comply with several disclosing procedures. Payments subject to the withholding are, among others: interests, dividends, rent payments, salaries, prizes, annuities, and capital gains where the source of wealth is deemed to be in the US.
As can be seen, the financial sectors that will be most affected by these rulings are those related to fundraising, wealth management, private banking, depository and custodial institutions, investment and corporate banking, insurance, trust creation and maintenance, among others.
As a first reaction, international concerns have been raised in connection with the legal grounds for US authorities to sustain a unilateral withholding tax to those FFIs and NFFEs that do not enter into an agreement with the IRS. To address these concerns, the US Department of Treasury developed the "Model Intergovernmental Agreement to Improve Tax Compliance and to Implement FATCA". This model Intergovernmental Agreement (IGA) establishes the limits and procedures for FFIs and NFFEs in the relevant jurisdiction to report information under local tax regimes and then carry out an automatic exchange of information between the relevant tax authority and the IRS.
Should the US and another country enter into an agreement pursuant to an IGA, the FFIs and NFFEs will not be subject to the withholding mentioned above, to the extent that the relevant information is disclosed to the corresponding domestic tax authorities. Afterwards, tax authorities willl exchange information with the IRS.
As of today, the IRS has entered into several IGAs with different domestic tax authorities, such as France, Germany, Japan, Norway, Spain, Switzerland, and the UK, as well as Mexico (the IGA with Mexico was signed on November 19 2012).
Pursuant to FATCA and further notices issued by the IRS, the withholding obligations will commence on July 1 2014. Those countries that have entered into an IGA with the IRS will be bound to report information related to tax year 2014 on a delayed basis. As for Mexico, the Mexican IGA entered into force on January 1 2013 and provides different dates on which the relevant disclosure obligations will be effective.
US – Mexico IGA
The US – Mexico IGA requires the tax authorities of both jurisdictions to collect certain information with respect to Reportable Accounts from their respective FFIs and NFFEs. As defined in the IGA, a "Reportable Account" means a "US Reportable Account" or a "Mexican Reportable Account". The term "Mexican Reportable Account" means a financial account maintained by a reporting US financial institution if: i) in the case of a depository account, the Mexican Reportable Account is held by an individual resident in Mexico and more than $10 of interest is paid to such account in any given calendar year; or ii) in the case of a financial account other than a depository account, the accountholder is a resident of Mexico, including entities that certify that they are resident in Mexico for tax purposes, with respect to which US source income that is subject to reporting under chapter 3 or chapter 61 of subtitle A of the US Internal Revenue Code is paid or credited. The term "US Reportable Account" means a financial account maintained by a reporting Mexican financial institution and held by one or more specified US persons or by a non-US entity with one or more controlling persons that is a specified US person. Notwithstanding the foregoing, an account will not be treated as a US Reportable Account if it is not identified as a US Reportable Account after application of certain due diligence procedures.
In general terms, the information collected will consist in the name, address and taxpayer identification number (TIN) of each accountholder, as well as the account's identifying number, average monthly balance and the total gross amount of interest, dividends and other income generated with respect to the assets held in the account. The collected information will be automatically exchanged between tax authorities.
According to the US – Mexico IGA, the information to be obtained and exchanged on an annual basis shall be remitted within nine months after the year ends. However, information regarding accounts held during calendar year 2013 shall be exchanged no later than September 30 2015.
It must be mentioned that the US Treasury Department and the Mexican Ministry of Finance, respectively, agreed to establish before January 1 2017, additional procedure rules addressed to reporting FFIs in connection with the collection and report of the Mexican or US TIN of each accountholder of a reportable account, as the case may be. Such rules will be applicable for the reporting of 2017 accounts and subsequent years.
Other relevant information exchange rulings
In addition to FATCA, it should be noted that in the past couple of years, the Mexican government has also focused on the negotiation of broad information exchange agreements with several countries, including some that had been previously blacklisted as tax havens. Some of the most recent agreements are the ones entered into with: the Bahamas, Belize, Bermuda, the Cayman Islands, the Cook Islands, Costa Rica, Guernsey, Hungary, Jersey, Luxembourg, and Netherlands Antilles, among others.
Furthermore, on August 17 2013, the Mexican Anti-laundering Law entered into force. These provisions are intended to establish the legal framework to combat organised crime in Mexico through the establishment of new measures and procedures to prevent and detect operations carried out with funds obtained from illicit activities.
This law will be applicable to many sectors of the Mexican economy (for example, traders, corporate advisers, raffle and lottery organisers, notaries, customs agents, and so on), who will be obliged to report to the relevant authorities any activities defined as "vulnerable" by such law, based on the sharing of detailed information including the identity of the parties involved in the transaction, method of payment, and so on. Furthermore, certain transactions that involve cash payments will be banned.
The general consequences that may derive from failure to disclose the information required by this law are, among others: monetary fines, revocation of permits when involving raffles and lotteries, disqualification of public commercial attesters and, in some cases, prison.
As can be seen, it is clear that Mexico is making a coordinated effort along with other countries to expand its information sources – both domestic and foreign – to obtain data regarding relevant taxpayers and transactions.
Impact of FATCA implementation for Mexican taxpayers
It is clear that the implementation of the intergovernmental information-exchange processes marks the start of a new challenge for tax authorities in Mexico and the rest of the world. In a few years information will be easily available to them, and their immediate goal will be to complement their information gathering processes with strict data-mining strategies in order to obtain relevant insights as to the level of compliance of their taxpayers.
Even though we cannot foresee how long it will take to implement and optimise these processes, what we do know is that the tendency for the near future marks the start of a more transparent era with simpler and more dynamic access to information.
Derived from the above, the current international juncture created by Mexico's participation in FATCA and other international information exchange agreements provides the perfect timing for taxpayers to carry out an in-depth revision of any and all investments held abroad, whether directly or through the use of specific structures. In our opinion, this revision should focus on the following issues:
Investment structure validation
Is your investment structure still complying with the objectives you set out when it was originally created?
Mexican taxpayers may have developed and implemented investment structures to be held abroad with the use of foreign special purpose vehicles, whether it is for business development, wealth management or international investment purposes, among others.
In such cases, investment structures are designed and created attending to the particular business needs of the individual or entity, while attempting to foresee all the corporate, financial and tax aspects and implications that will derive both in Mexico and abroad due to such structure.
In this regard, it is critical that once the structure has begun its operation, taxpayers review such structure from time-to-time to define whether the original investment objectives are still reachable with the current structure used.
A common example of this is the use of succession structures for individuals: even though they are designed and implemented to protect the person's assets, the tax aspects of such structures are not always taken into account; an omission that may trigger significant costs in the future for all the parties involved and render ineffective all the asset protection objectives that were originally intended.
One of the most relevant issues here would be to ensure there have been no modifications in the applicable legislations that change the outcome of the investments made, in order to ensure that the structure used is still valid and efficient and will not cause additional unforeseen costs in the future (that is, withholding issues, taxes triggered by the structure or account liquidation, and so on). If additional contingencies are detected under this analysis, it might be the perfect moment to consider a change of investment strategy and/or structure.
Obligations and requirements
The next item in this analysis consists in the identification of all the corporate and tax obligations and requirements that must be complied with deriving from investments held abroad.
Mexican resident individuals and entities are obliged to pay income tax regarding all their revenues on a worldwide basis. However, some taxpayers may not realise the full implications of their investments held abroad (that is, life insurance policies or trust funds) and thus may currently hold several of them that are in a state of default regarding the applicable tax obligations, such as disclosing them in informative tax returns and, in more extreme cases, determining and paying the corresponding income tax for such revenues.
As an example, the Mexican tax provisions in force include a specific treatment for certain types of income obtained through preferential tax regimes (REFIPRES). Such regime obliges taxpayers to anticipate income tax payments regarding income obtained through certain specific structures, as well as to make an annual filing of informative returns, among others. Investors must be aware of whether their investments qualify as deriving from a REFIPRE regime in order to ensure they are able to comply with all applicable obligations for this regime.
Once the corresponding investment scheme and structure has been evaluated and analysed in detail, the next step would be to identify whether the corresponding investor has actually complied with all the applicable tax and corporate obligations for such investment, keeping in mind that not all tax obligations necessarily involve the payment of taxes but may also refer to the filing of information or the issuance of certificates or receipts.
Please keep in mind that this revision must be done on a regular basis, since it is possible that due to modifications in the Mexican or international tax provisions, the treatment and obligations that taxpayers must comply with regarding such structures could have changed with time and may even derive in a situation in which the taxpayers are in a state of default for not filing the applicable informative returns or for determining tax effects under a regime that may no longer be applicable to them.
Regularisation process and alternatives
In case the result of the previous revision shows that a regularisation process must be carried out by the taxpayer, the next step would be to understand and determine the best opportunity as well as the alternatives that are currently provided by the Mexican tax authorities for doing so.
For these purposes, there are several options under the Mexican provisions in force with which individuals may carry out some of these regularisation processes in a confidential manner.
With the implementation of FATCA and other similar information exchange regulations, the revision, updating and – if necessary – the regularisation of investment structures held abroad has become more important than ever.
Long-term strategy essential
As previously mentioned, the global information-sharing practice among governments is starting to pick up force. Nations are realising the importance of being able to detect and identify high-risk transactions in order to minimise both tax evasion and other illegal activities.
It is the perfect moment for taxpayers to change the way they look at all foreign transactions and investments and realise that all medium and long-term business planning should be made considering a global compliance basis.
Considering the above, it is extremely important for both individuals and entities to align their business and investment objectives with a long-term tax compliance strategy.
Eduardo Ocampo Gayón
Tel: +52 55 5004 6100
Graduated from the Instituto Tecnológico Autónomo de México (ITAM) and also obtained the Harvard Certificate in International Taxation.
Eduardo is a founding partner of Muñoz Manzo y Ocampo and has also previously worked in Chevez, Ruiz, Zamarripa. After that, he was a founding associate of Ortiz, Sosa, Ysusi, where he was promoted to partner.
He is a member of the Mexican College of Public Accountants (CCPM) of the Mexican Institute of Public Accountants (IMCP) and of the International Fiscal Association (IFA), where he is a reporter of the Mexican branch in world congresses.
Eduardo was hired by the Mexican Government to participate in the creation of the new Mexican Stock Market Law in force, specifically in the development of the vehicle commonly referred to as SAPI [Sociedad Anónima Promotora de Inversión]. Such vehicle has been recently adopted in the corporate world, revolutionising corporate governance in Mexico.
He participated in the development of a wood-revenue securitisation structure designed to raise 1.65 billion pesos from Mexican pension funds. These securities are the first of their kind in Mexico, since they were designed to comply with strict investment restrictions and regulations, in order to be eligible for purchase by Mexican institutional investors, particularly pension funds.
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