This content is from: Mexico
Mexican Congress approves new limitation to deduct interest based on profits
Ángel Escalante Carpio and Alejandro Gordillo Rousse of Nader Hayaux & Goebel unravel the new economic proposal put forth to strengthen compliance with Mexico’s existing tax structure.

On October 30 2019, Mexican Congress approved the economic package submitted by Mexico's executive branch with few changes agreed upon as part of the legislative process. The approved economic package is currently pending for the executive’s signature and further publication in the Official Gazette, which are expected to occur shortly. As part of the foregoing, the economic package contains significant newly incorporated tax provisions as well as amendments to existing ones that may affect multinational operations in Mexico.
The bill proposed by the executive is based on the recommendation presented in the context of Action 4 of the BEPS Project, which has the purpose of implementing a measure to limit three unwanted scenarios:
- That multinational groups allocate greater debt obtained from third parties in those jurisdictions where they have higher tax rates, that is, where they have a higher interest deduction;
- That multinational groups use intercompany debt to obtain interest deductions greater than the interest paid to third parties; and
- That multinational groups use third party or intercompany debt to fund the generation of exempt income.
In addition, the OECD report recommends determining a ratio to allow the deduction of interest in such scenarios between a range of 10% - 30% of the so-called ‘fiscal EBITDA’ (which consists in a calculation of the fiscal profits adjusted by depreciation and interest to consider a greater tax basis for purposes of the limitation).
For this purpose, the OECD report proposed some useful considerations when determining the ratio, which includes, among others:
- a fixed ratio rule is proposed but also including a further comparison between the level of indebtedness in the country where the affiliate is entering into debt (the borrower country, i.e. Mexico) versus the overall indebtedness level of the multinational group, to confirm that interests were indeed being unduly assigned to the borrower country; and
- take into consideration whether the borrower country has already implemented other rules to prevent erosion of the fiscal base through undue indebtedness (e.g. such as transfer pricing rules, thin capitalisation, interest characterisation as dividends or other limitations to payments made to related parties.
None of these considerations were taken into account in the legislative process to approve the new tax provision, as explained below.
Interpreting the new provision
To the extent that interest is considered non-deductible under the new rule, the provision allows the underlying debt to be excluded from the inflationary adjustment calculation; however, if the interest is eventually deducted under the carryforward rules such debt must be included in the determination of the inflationary adjustment. Since the limitation relates in principle to interest expense, in our opinion additional guidance from administrative rules issued by the tax authorities or the income tax regulations would be needed in order to determine the portion of debt that shall be excluded from the calculation of the inflationary adjustment.
The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms and Conditions and Privacy Policy before using the site. All material subject to strictly enforced copyright laws.
© 2019 Euromoney Institutional Investor PLC. For help please see our FAQ.