The Mexican government introduced a new reporting obligation on January 1 2020 as part of an effort by the Tax Administration Service (SAT) to prevent aggressive tax planning. Under the new rules, tax advisors and in certain instances, taxpayers, will have to notify the SAT if they have implemented or offered any of the 14 tax structures/transactions listed in the new Article 199 of the Federal Fiscal Code. The new rules will apply from January 1 2021 for “reportable transactions”, where the tax benefit is obtained on or after January 1 2020.
An interesting feature of the new reporting obligation, and one that has been criticised by both taxpayers and tax advisors, is that it generally applies to tax advisors with taxpayers being required to report to the SAT only in certain circumstances, as per Article 198 of the Federal Fiscal Code.
Overview of the reporting obligation
Under the new rules, any person who routinely engages in tax advisory activities and who has been involved in planning, designing, implementing, offering, or managing a listed tax structure/transaction must report the details of the structure/transaction, as well as information on the taxpayer to whom the structure/transaction was offered or who actually implemented the structure/transaction (i.e. name and tax ID of the tax advisor or taxpayer and parties involved in the transaction, name of any legal representative, description of the transaction and tax benefit, etc.). A reportable transaction will have to be disclosed to the SAT on an information return within 30 business days of the arrangement being made available to the taxpayer for implementation, or the first step in the implementation of the transaction, whichever comes first. However, a transaction could be disclosed as soon as its design is final.
The law enumerates 14 features that will result in a structure/transaction having to be reported (i.e. a ‘reportable scheme’), and includes a plan, project, advice, instruction, or recommendation expressed implicitly or explicitly with the objective of materialising a legal arrangement or a series of legal arrangements that will result in a tax benefit (Article 1999 of the Federal Fiscal Code). A tax saving of any kind, including an exemption, non-accruable item, and/or a reduction of the taxable base of any type is considered a tax benefit for purposes of a reportable scheme. A transaction will have to be reported regardless of the taxpayer’s country of residence if there is a tax benefit in Mexico after January 1 2020.
It should be noted that reporting a transaction will not imply that the SAT approves or rejects the transaction; the rules prohibit criminal prosecution based on in the information reported and will be subject to tax confidentiality rules.
The objective of the new reporting obligation is for the SAT to have a clear and unambiguous picture of the main tax structures/planning ideas that are being devised and/or marketed to Mexican taxpayers.
The original proposal submitted to congress was more stringent than the enacted rule. There originally were 29 listed tax structures/planning ideas, including all structures that were “similar to those listed.” This would have created a grey area in which the reporting agent would have had to guess whether a particular tax planning idea was or was not similar to an item on the list in order to determine whether a reporting obligation was triggered.
The proposal also included a complex procedure under which an ad hoc committee (comprised of the members of the SAT and officials from the Ministry of Finance) would have had eight months to review a reported structure and rule on its validity. Only validated structures would have been permitted to be implemented. The committee periodically would publish a list of allowed and disallowed structures. Finally, the initial proposal was scheduled to apply as from June 1 2020.
The final version of the rule reduced the list to 14 situations, eliminated the committee process, and pushed the effective date forward to January 1 2021. The enacted version allows the report to be used only for the SAT to schedule audits and cannot result in criminal charges on taxpayers.
Despite the changes to the originally proposed rules, certain aspects of the final version of the law has raised concerns by tax advisors and taxpayers, such as the fact that there is an element of potential self-incrimination involved since the taxpayer (or its tax advisor) must reveal transactions that are considered dubious by the SAT.
Penalties for non-compliance with the reporting requirement are steep: a penalty of up to MXN 20 million (about USD 1 million) can be levied on the party responsible for submitting an incomplete or inaccurate report or for failure to report and the taxpayer will forfeit the tax benefit created by the tax structure/transaction.
The reportable structures list includes items such as an “instance or process designed to avoid falling into any of the other items on the list,” which potentially could result in an unintentional (and costly) mistake by the reporting party.
The new obligation also includes any reportable scheme that may have been offered to the taxpayer, regardless of whether the taxpayer decided to implement it. The risk of non-compliance expands if one considers the times a taxpayer has been offered a tax planning idea that ultimately may have been rejected.
The report to be made by the taxpayer itself, in lieu of the tax advisor, must include any tax scheme that was applied before the new rule became effective, but that yields a tax benefit as from January 1 2020.
The SAT has cited comparable obligations required in other areas (e.g., the EU, the UK, and the US) as a justification for the new reporting obligation.
It will be interesting to see how the SAT uses reported information in scheduling audits and, more importantly, how the courts will rule on what potentially could be violations of Mexican law and its constitution, since this would seem to breach professional secrecy and the right not to self-incriminate, in addition to the grey areas that have been briefly discussed in this article.
Ricardo Gonzales Orta
T: +52 55 50 80 70 23
Mauricio Martínez D´Meza Violante
T: +52 (55) 5080 7040
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