Mexico City, Nobember 17th, 2020
Recently, the Congress approved the Economic Package for fiscal year 2021, which includes amendments to the Income Law, Federal Duties Law, Federal Tax Code, Income Tax Law and Value Added Tax Law, among others.
Now, the President must publish the corresponding Decree in the Federal Official Gazette, which should enter into force as of January 1st 2021.
It is important to point out that this Package does not provide any kind of tax relief or tax benefit in support of taxpayers, considering the current world-wide crises caused by the SARS-CoV-2 virus pandemic (COVID-19).
In addition, the amendments under discussion tend to increase the supervisory powers and give the tax authorities greater elements to exercise such powers. Therefore, it is important that companies consider the latest most relevant tax updates to avoid any non-compliance with the tax authority.
If necessary, we will release any news regarding the information provided herein.
Here are the amendments that we consider the most important:
- Income Tax Law
Legal entities must be authorized to receive tax-deductible donations under Title III of the Income Tax Law
- Companies or associations that provide scholarships alongside those dedicated to scientific or technological research, research or preservation of wild, land or aquatic flora or fauna, or the reproduction of protected and endangered species and conservation of their habitat, which intend to pay taxes as non-profit legal entities, will now be required to have prior authorization to receive donations.
- Any expense that is not documented in an electronic invoice (hereinafter “CFDI”) will be considered a taxable profit; Therefore, non-profit entities must obtain the corresponding CFDI for their transactions.
- A phase-in process is included for non-profit entities that do not have such authorization, which must pay taxes generally as a legal entity in accordance with Title II of the Law and determine the profits generated as of December 31, 2020 in terms of Title III relating to non-profit entities of the current Law up to such date. Also, their partners or members will accumulate any profits that such entities may deliver to them, in cash or kind.
Non-profit entities authorized to receive tax-deductible donations
- The Law is amended so that non-profit entities authorized to receive tax-deductible donations that earn most of their income (more than 50%) from activities unrelated to their donation-related activities lose their authorization.
- It is provided that the purpose to which the entities must allocate all their assets is the one for which they have been authorized to receive tax-deductible donations.
- If a non-profit entity’s authorization is revoked or terminates and is not renewed within the following twelve months, all its assets must be donated to other entities authorized to receive tax- deductible donations.
- Non-profit entities that lose their authorization may no longer conduct their activities and maintain the assets that make up their net worth. The same applies if an entity’s request to cancel its authorization to receive tax-deductible donations is approved.
- Non-profit entities authorized to receive tax-deductible donations are required to maintain information relating to their assets available for the general public and the certificate of compliance with tax, evaluation and social impact obligations will be eliminated
Income obtained from selling assets or providing services online, through technology platforms, applications and alike
- The income tax withholding rates that legal entities, whether Mexican or foreign residents, with or without a permanent establishment in Mexico, as well as foreign legal entities or vehicles that provide, directly or indirectly, the use of technological platforms, computer applications, etc., are modified.
- Withholding rates are adjusted as follows:
- The withholding rate for ground passenger transportation and delivery of goods services will be 2.1%.
- The withholding rate for lodging services will be 4%.
- The withholding rate for the sale of goods and services will be 1%.
- The penalty of temporarily blocking for 3 consecutive months access to digital services for foreign resident legal entities without a permanent establishment in Mexico, as well as for foreign legal entities and vehicles that default their obligation to withhold and remit income tax will also apply.
- Value Added Tax Law
- The provisions that became effective as of June 1, 2020, relating to the performance of digital services are amended.
- The provision that establishes exempts from VAT digital intermediation services for the purpose of selling used personal property is eliminated.
- Digital intermediation platforms will now be required to withhold 100% of the VAT collected, when they provide intermediation services to foreign residents without having an establishment in Mexico that provide digital services to persons who are in Mexico, from persons for whom they process payments. In this respect, there was a proposal to eliminate the formal obligations of foreign residents providing such digital services.
- Such platforms will now be obligated to issue and send electronically digital receipts to recipients of digital services on national territory upon request.
- The establishment of a control mechanism was proposed to allow blocking internet access to digital services of foreign resident taxpayers who do not have an establishment in Mexico when they incur serious tax omissions.
- Federal Tax Code (CFF)
General Anti-avoidance rule (GAAR)
- The CFF is amended to provide that, independently of the tax effects that the tax authority grants to a taxpayer’s legal transactions, it may conduct an investigation of a probable felony if there are elements to consider that the taxpayer’s conduct is consistent with any of the established tax crimes.
Business spin-offs, joint liability in business spin-offs and permanent establishment,
- Spin-offs of businesses will be treated as a taxable transfer when it gives the rise to the creation of new provisions or accounting entries that did not exist prior to the spinoff.
- A new presumption of joint liability is incorporated, for the purpose of establishing a mechanism that allows considering as jointly liable any Mexican resident that maintains transactions with foreign-resident related parties when the latter constitute a permanent establishment in Mexico.
Cancelation and temporary restriction of digital seal certificates
- The digital seal certificate shall be immediately rendered ineffective for taxpayers who failed to disprove the presumption of non-existence of transactions or the presumption of improperly transferring tax losses through the corresponding procedure and within the prescribed terms.
- A time limit of forty business days is established to allow taxpayers whose use of the digital seal certificate has been temporarily restricted to submit a request for clarification to correct the irregularities detected, or to disprove the causes that led to the application of such measure.
- The three-day term granted to tax authorities to resolve requests for clarification submitted by taxpayers is extended to ten days.
Reimbursement of favorable balances
- The inability to locate a taxpayer or an address stated before the RFC (Federal Taxpayers’ Registry), is considered grounds to deem that a request for reimbursement has not been filed.
- The term granted to the authority to issue a resolution under the exercise of its powers in a request for reimbursement is extended from ten to twenty days.
Federal Taxpayers’ Registry
- The obligation to establish an email account and telephone number is amended to specify that taxpayers must register and keep updated a single email address and telephone number.
- It is clarified that the notice filed by legal entities must correspond to information relating to their members, shareholders or associates.
- It will be possible to suspend or decrease taxpayers’ obligations registered before the RFC when it is determined that they have been inactive the last three previous years.
- Prerequisites are strengthened, in such way that taxpayers, prior to cancelling their registration in RFC, must be in compliance with their obligations. When taxpayers are already legally liquidated, but their registration is not yet cancelled due to a default of any tax obligation, they may be granted as a facility, the possibility of exemption from compliance with periodic (formal) obligations, in such way that until they can be cancelled, they will not be required to file tax returns or comply with other formal obligations, to prevent creating more obligations for taxpayers in the cancellation process.
Term to preserve accounting records
- Any information and documentation necessary to implement the agreements reached as a result of the dispute resolution procedures provided under the treaties to avoid double taxation to which Mexico is a party, documents and information relating to the original balance and activity of the net tax profit account, of the capital contribution account or any other tax or accounting account involved, information and supporting documentation to prove the economic substance of increases or decreases in capital stock, as well as the dividends or profits distributions, account statements issued by financial institutions in cases of capital increases, or otherwise, the corresponding appraisals, the original balance and activity of the net tax profit account, the contribution capital account or any other tax or accounting account involved, in fiscal years when tax losses are reduced from such balance, dividends or profits are distributed, capital is reduced or capital remittances are reimbursed or sent, are incorporated into the cases of exception to retain accounting records for a term of five years.
- In relation to the application of coercive measures and in the case of preventive seizure, third parties related with taxpayers and/or jointly liable parties are included in order to prevent such third parties from opposing to the exercise of the tax authority’s power.
- The order of preference is adjusted, ranking bank deposits first followed by accounts receivable, stocks, bonds, overdue coupons, etc.; money and precious metals; real estate; personal property; taxpayer’s business; as well as copyrights and works of art, scientific collections and jewelry, among others.
- It was established that the assets or businesses taxpayers, jointly liable parties or related third parties, are secured from the moment they are designated as such in the proceeding for which the preventive seizure is conducted, even if subsequently, ordered, recorded or registered with other institutions, agencies, registries or third parties, in order to avoid fraudulent actions by taxpayers to avoid the preventive seizure of their property.
On-site Tax Audits
- There is an intent to optimize auditing by covering locations where part of the taxpayer’s activities can be conducted, enabling tax audits in more than one instance, considering the authorities may need to return to the taxpayer’s address or establishment where the tax audit is taking place to carry out second or subsequent proceedings under the same order, when the examination cannot be completed in a single visit.
Review of the opinion
- Authorities are empowered to allow auditors to appear before the authority during the review of the opinion and working papers in order to resolve questions in connection with such working papers.
- Limits on the authority’s action to review the opinion in review of uses cases arising under the authorization or concession granted to individuals for the handling, storage and custody of goods are eliminated. In this respect, it was established that such issues also fall within the exception of the sequential review of the opinion.
Presumption of unlawful transfer of tax losses
- The first paragraph of Article 69-B Bis of the CFF is amended to specify that the presumption of the tax authority is related to unlawful transfer of tax losses.
- The fourth paragraph of such article is amended to specify that taxpayer must undermine not only negative but also positive facts.
- The unlawful transfer of tax losses is expected to be considered a simulated act for criminal purposes.
Conclusive Agreements (Mexican Alternative Tax Dispute Resolution Procedure)
- A conclusive agreement may be filed at any time, within twenty days after the date on which the final observation of the tax authorities have been served.
- Filing limits are established when such are used for the purpose of hindering or vitiating the auditing proceedings; in the case of reimbursements; compliance with resolutions or judgments and with respect to alleged or definitive simulated transactions (EFOS).
Penalties for transfer pricing and term adjustment
- Fines for failure to comply with transfer pricing tax provisions are increased.
- 50% reductions are eliminated in the case of fines for transfer pricing violations.
- The terms to pay fines are modified, to be consistent with the thirty-day term to pay or guarantee the tax credit, which is in line with the term to file an administrative appeal.
Violation for public telecommunications network concessionaires
- A penalty ranging from $500,000.00 to $1,000,000.00 is contemplated for concessionaires of a public telecommunications network in Mexico that fail to comply, within a maximum period of five days, with an order to block access to the supplier’s digital service of such services upon the occurrence of any of the events of default provided under the VAT Law that allow the temporary blocking of access to the digital service of the digital services supplier. The same penalty is contemplated when concessionaires do not carry out the unblocking within the same term.
- This penalty will be imposed for each calendar month that passes without complying with the above-mentioned order
Presumption of Smuggling
- Not returning abroad, transferring or changing the regime of the goods that were imported under export programs authorized by the Ministry of the Economy are intended to be included within cases of smuggling.
Documents in a language other than Spanish
- Taxpayers that submit any information and documentation in any language other than Spanish to the tax authority in the administrative appeal must include an accurate translation thereof.
Tax interest guaranty
- An administrative seizure to guarantee tax obligations may be carried out on tangible personal and real property, except for rustic property, as well as on businesses.
Abandonment of goods
In cases where the goods will be deemed abandoned in favor of the federal tax authority, the possibility of notifying that the term of abandonment has already elapsed in any of the forms provided under Article 134 of the CFF is included. With this, in cases where no data is available to notify the taxpayer, notices will be served through notice in the courts.
*This article is authored by Asia Leaños León, Carlos Jiménez Mendoza and Oscar Josafat Leyva and it may reflect their personal opinions independently from the law firm they work for. Shall you intend to apply any of the debated interpretations within the article, we highly recommend to formally consult Jáuregui y Del Valle, S.C. or any other qualified tax advisor.