Mexican Tax Reform has been approved and enacted for starting in 2020
by Mauricio Escandon - ITTS Manager EY Latin America Business Center NY & Enrique Perez Grovas - ITTS Partner EY Latin America Business Center NY
The Mexican Tax Reform has been signed and approved by Mexico’s President Lopez Obrador and entered into force January 1st, 2020, with some provisions that will take effect until 2021 such as digital services provisions and certain rules on tax transparent entities. The Tax Reform was published in the Mexican Official Gazette (Diario Oficial de la Federación) on December 9, 2019.
Below is a summary of the approved and final tax measures that the 2020 Tax Reform in Mexico contains and have an impact on cross-border transaction and to foreign investors:
Interest expense limitation based on profit levels
An additional interest deductibility requirement is introduced consisting of limiting the net interest expense incurred in a fiscal year to 30% of the Adjustable Taxable Base (similar to EBITDA). There is an exemption for interest expense lower than MXN $20 million and this provision applies both to related and non-related party debt acquired by taxpayers.
Non-deductible interest expense calculated under this new provision may be carried forward for 10 years.
There are also some activities exemptions such as interest incurred to finance public infrastructure projects, construction in Mexican territory and projects related to the exploration, extraction, transport, storage or distribution of hydrocarbons, electricity or water. This interest limitation rule is also not applicable to financial institutions. Through administrative rules the tax authorities will provide for an alternative method of calculation based on a group basis instead on an individual basis.
Payments to Low Tax Jurisdictions (LTJs) and Anti-Hybrid rules
The Tax Reform modifies the tax treatment of payments made, directly or indirectly, to residents of an LTJ. These new provisions would deny the deduction for payments made directly, indirectly or through a “structured agreement” to related parties’ residents of an LTJ, including payments for cost of goods sold and services.
The non-deductibility provision would also cover payments made to a related party that do not reside in an LTJ, to the extent the recipient makes payments to another related party that is a resident in an LTJ (The rules do not contain further guidance on how the tracking of the payments shall be performed).
An LTJ is defined as a jurisdiction with an Income Tax triggered that is less than 75% of the Income Tax that would be triggered in Mexico (The Mexican Corporate Income Tax rate is 30% thus, the 75% threshold would be 22.5%). All levels of tax imposed on the income (e.g. federal and state) should be considered, as long as the tax is considered an Income Tax.
The LTJ rules shall not be applicable for payments arising from a business activity performed by the LTJ resident as long as it has the required assets and personnel to operate the business.
General anti-avoidance rule (GAAR)
The Reform introduces a GAAR that allows the Mexican Tax Authorities the ability of recharacterizing a transaction for tax purposes if such transaction lacks a business purpose. It would be assumed that a transaction lacks a business purpose when the tax benefit is greater than the reasonably expected economic benefit in a transaction. In addition, a series of legal acts would be assumed to lack business purpose when the desired economic benefit could have been achieved through fewer transactions with a higher tax cost.
To challenge a transaction through the application of the GAAR, the tax authorities must follow certain procedures which include having their position evaluated and approved by a Committee within the tax authority and including their argument in the observation and assessment documents, as part of the tax audit process.
The Reform introduces a mandatory reporting scheme for tax advisors and taxpayers. Taxpayers would be required to report transactions not otherwise reported by their tax advisors. Reportable transactions carried out in 2020 would be reportable beginning in 2021. In case a transaction was performed before 2020 but a tax benefit is obtained in 2020 and later years, taxpayers would be obligated to report such transactions directly.
Reportable transactions are defined to include transactions that generate or may generate, directly or indirectly, a tax benefit in Mexico and has 1 of the 14 characteristics included in the new provisions or a mechanism that results in avoiding the reporting obligation. Some of these characteristics are; a transaction that avoids the exchange of tax or financial information between tax authorities, allows the transfer of tax losses to a party that did not generate such loss, involves
transactions between related parties which consist in transferring hard to value intangible assets, involves a hybrid mechanism, avoids the creation of a permanent establishment in Mexico, among others.
Permanent Establishment (PE) amendments
The Reform expands the PE concept contained in the Mexican tax provisions to align it with the recommendations of Action Plan 7 of the Base Erosion and Profit Shifting (BEPS) project and the provisions of Articles 12 to 15 of the Multilateral Instrument (MLI) for implementing the BEPS provisions.
These new provisions would strengthen the PE rules and are aimed to capture specific situations in which taxpayers have structured transactions and arrangements that have allowed them to avoid creating a PE in Mexico.
The new PE concept would also include: i) independent agent (even if there is no fixed place of business) that habitually concludes contracts or habitually acts in the primary role that gives rise to the conclusion of contracts which relate to the sale of property rights, or the temporary use of goods or obligates the non-resident to render a service, ii) an individual or legal entity acting exclusively or almost exclusively for a non-resident related party would be presumed not to be an independent agent and iii) list of exempt activities for creating a PE in Mexico should not be considered to give rise to a PE, only, when they are considered as preparatory and/or auxiliary (antifragmentation rule).
Tax transparent entities
The Reform introduces a new rule for entities or legal arrangements with no legal personality treated as tax transparent under foreign tax regulations. Absent a Tax Treaty, the new rules would treat foreign tax transparent entities and vehicles as separate taxpayers for Mexican tax purposes (no look-through in order to see the owners/beneficiaries above the entity/figure).
The rules for payments made by a Mexican resident to a fiscally transparent entity will become effective 1 January 2021.
A tax incentive was introduced for private equity funds by granting them a look-through provision for dividends, interest, capital gains and real estate leasing income, to the extent that they comply with several reporting and filing requirements in Mexico.
There are new rules introduced in Mexico in terms of digital economy. From an Income Tax perspective, operators of digital platforms would be required to withhold Income Tax on payments to Mexican individuals that sell goods or render transportation, lodging or other services through their platforms. Such withholding tax rates will depend on the amount and nature of the payment, but they could go from 0.4% to 8%. This withholding tax obligation will apply to all operators, either Mexican residents as non-residents with or without a PE in Mexico.
From a VAT perspective in Mexico, there is an amendment to the Law for expanding the definition of services performed in Mexico to those provided through a digital platform. Non-residents without a PE in Mexico providing services through digital platforms to customers in Mexico would be subject to VAT at the 16% rate. Digital services are considered to be rendered in Mexico when the recipient is linked to Mexico by address (physical or IP) or by the use of Mexican intermediaries.
Digital platform operators, including non-residents without a PE in Mexico would be required to register with the Mexican Tax Authorities, calculate, withhold the corresponding tax and collect the VAT in Mexico and file certain informative tax returns in Mexico regarding the number of transactions performed.
Finally, the Tax Reform also covers another important amendment to the tax system in Mexico in terms of new rules for the Controlled Foreign Corporation (CFC) regime, jointly tax liability in Mexico, among others.
Mexico's Energy Update: Still Open For Business
by Carlos A. Chavez, Senior Associate
Six years after the enactment of the Constitutional Reform that overhauled Mexico’s energy sector and now under a new federal administration, the country’s energy sector is still open for business. Nonetheless, new investments have been impacted by the misunderstandings on the current administration’s stance, due mostly to the nationalist agenda publicly championed by some of its top officials, mixed with the cancellation of the oil bidding rounds and clean energy auctions held in previous years.
A staple of this administration is the reconfiguration of the “old ways”, in some cases returning to schemes that were employed decades ago in the country’s energy sector, as briefly explained below:
Oil & Gas
The oil & gas bidding auctions have been halted, and while their reactivation is expected, their suspension hinders the development of Mexico’s conventional and unconventional resources. At the moment, a secondary acreage market is being developed as the industry becomes more consolidated with M&A, partnerships and joint ventures between upstream companies looking to maximize their assets.
Oilfield services companies continue to grow as private operators develop their plays, while Pemex will now make use of the Exploration and Production Integral Services Agreements (Contratos de Servicio Integral de Exploración y Extracción or “CSIEE”). The CSIEE will be awarded through public tenders and are E&P services agreements in which Pemex maintains the ownership of the oil blocks and the service provider receives a cash consideration subject to the delivery of the hydrocarbons and availability of cash flow.
The downstream and midstream sectors will also see more services demand from Pemex, as the company seeks to modernize its infrastructure and build state-of-the-art facilities, including refineries, pipelines and storage terminals.
Through clean energy auctions, Mexico emerged as one of the foremost examples of energy transition. Having been indefinitely suspended, these auctions face three probable outcomes: (i) reactivation with certain caveats; (ii) private replication; or (iii) both.
In the meantime, activity will continue with CFE’s plans of expanding its power plant portfolio and transmission grid, mainly through the scheme of Productive Infrastructure Investment Projects with Deferred Impact in the Expenditure Registry (Proyectos de Inversión de Infraestructura Productiva con Registro Diferido en el Gasto Público or “PIDIREGAS”). Through this scheme, power plants and transmission lines may be built by private companies under the instructions provided by CFE, who will in turn pay the projects in full and assume risks as owner of the assets.
Services demand will predictably grow as CFE looks to modernize its infrastructure, and as new private players kick start and take their projects to the finish line. Likewise, as the energy market matures, it is expected that merchant projects and bilateral PPAs will become more frequent, and more EPC and BOT projects will be commissioned by public and private companies alike.
JATA is a Mexican law firm with offices at Monterrey, Mexico and Houston, Texas.
For more information on the Mexican Energy Sector, please read our Energy Handbook.
Affirmation of Powerful State Tax Planning Using Trusts
by Bridgeford Trust Company
In a unanimous decision, the Supreme Court in the Kaestner case struck down North Carolina’s attempt to tax undistributed income of a resident trust properly sitused and administered in a no income tax state like South Dakota. In the same session, the Supreme Court denied cert in Fielding, upholding the Minnesota Supreme Court’s decision also striking down that state’s attempt to tax undistributed trust income within a resident trust.
The Court, in both cases, indicated that taxation of undistributed income within a resident trust is a violation of the United States constitution, affirming and validating powerful state tax planning tools available in non-income tax jurisdictions like South Dakota. The decisions underscore the vital importance of selecting the proper trust jurisdiction, and again accentuates that the choice of a state in which to establish a trust is as critical as the decision to create one in the planning process. Click here to watch a video to learn more.
The two cases addressed and confirmed that it is violation of both the Due Process and Commerce Clauses for states to tax undistributed income in a trust where the only contact with the state is the domicile of the beneficiary (Kaestner) or the settlor (Fielding). The holdings in both cases provide great clarity and guidance for planners and practitioners and affirms the power of modern trust law and trust jurisdiction selection. If you missed it, click here for a webinar discussing practical implications of the ruling. In addition, click here for information about compelling state tax planning opportunities using trusts properly sitused in top tier, no-income tax jurisdictions like South Dakota. You can also view an objective and well-researched chart comparing top tier U.S. jurisdictions by clicking here.
Choosing the Correct Jurisdiction: An Objective Comparison
by Bridgeford Trust Company
Given recent changes in the tax code, concerns around asset protection and privacy, and the huge influx of international families coming to the United States, selecting the proper U.S. trust jurisdiction in the planning process is more important now than ever. Below is an objective and well-researched chart comparing the leading U.S. trust jurisdictions, with a particular emphasis on areas and planning nuances that distinguish South Dakota as the superior trust jurisdiction in the overall analysis. Click here to view the chart in PDF format and click here to watch the video to learn more.
Noting that Delaware, long considered to be a leading U.S. trust jurisdiction, is not keeping pace with other progressive U.S. trust jurisdictions, Trusts & Estates magazine stated in its January 2018 edition that, “While Delaware has been in the top 4 jurisdictions consistently for the past ten (10) years, we think that its asset protection laws still need to be strengthened for it to remain competitive.”
Alternatively, South Dakota has long been considered to be among the best trust jurisdictions in the nation because of its cutting edge laws around asset protection, dynasty and directed trusts, and privacy.
As illustrated by the shaded areas on the chart, there are six specific areas where South Dakota excels, rendering that state as the overall trust jurisdiction of choice for advisors across the country and around the world. South Dakota is generally regarded by most practitioners and academics, including Steve Oshins, a Nevada attorney, as being the best Dynasty Trust state and having the best Decanting Statute in the nation. Also, South Dakota unequivocally has the most robust privacy laws in the country, as pointed out by a recent article appearing in the January 2018 edition of Trusts & Estates magazine comparing U.S. trust jurisdictions wherein the authors note, “Of the top tier trust jurisdictions, South Dakota has the best privacy laws in the nation.”
In addition, South Dakota is one of only three states with a Community Property Trust, a compelling tax planning tool for spouses. Finally, South Dakota is the only state in the nation with a Special Purpose Entity legislation, a powerful planning nuance used in conjunction with directed trusts and trust protectors, and is also the only state with a Family Advisor statute, a non-fiduciary role similar to the trust protector.
Tax and Privacy Haven – A Look at The U.S., CRS, and FATCA
by Bridgeford Trust Company
Common Reporting Standard (CRS) has had a tremendous impact on planning for both domestic and international families with asset protection and privacy concerns. Very similar to FATCA, CRS is a powerful tool that is designed to reduce tax evasion and illegal financial activity by imposing very strong transparency rules and disclosure requirements relative to financial transactions.
While the reporting requirements of CRS and FATCA are similar, FATCA focuses on collecting information from individuals only holding U.S. based accounts, and such information is not shared with other countries. CRS is broader in scope, seeking global cooperation and the sharing of financial information between and among participating jurisdictions, with enhanced transparency in multi-national business and investment reporting. To date, well over 100 countries have committed to implement CRS, including jurisdictions traditionally used by families with privacy and asset protection concerns such as Switzerland, Cooks Islands, BVI, Nevis, and New Zealand.
The United States has not signed on to CRS, prompting many planners, academics, and industry publications to consider the United States as both a tax and privacy haven. On May 16, 2016, Financial Times stated “America is the new Switzerland,” and the Washington Post stated on April 5, 2016, that “The United States is now becoming one of the world’s largest tax and secrecy havens.” The Daily Business Review, on April 25, 2017, stated that “The United States has become a place of choice for foreign investors.”
Because of CRS, and a myriad of other reasons, the financial services industry has seen a tremendous influx of international families coming to the Unites States, and to South Dakota in particular, to avail themselves of very strong privacy and asset protection provisions, and to take advantage of South Dakota’s status as a no state income tax state. This reality places a tremendous responsibility on financial institutions to perform very thorough due diligence, and to put very copious Know Your Customer (KYC) programs in place. In addition, it is imperative that the U.S. financial planning industry, as a whole, act responsible when planning for and working with international families, clearly differentiating between providing privacy solutions and NOT secrecy, and engaging in appropriate tax planning and NOT tax evasion.
Understanding the importance of issues around international families coming to the United States, the South Dakota Division of Banking is working very closely with trust companies such as Bridgeford Trust working in the international space to develop uniform regulations designed to protect against nefarious actors and to protect the overall integrity of the South Dakota trust industry. Bret Afdahl, Director of the South Dakota Division Banking stated, in a May 16, 2017, Financial Times article, “We are the chartering authority and, if something goes wrong, we own it. From a reputational standpoint, no one benefits from having something bad happen.”
Click here to watch a video about CRS and how Bridgeford Trust is well positioned to responsibly and diligently work with international families.
For more information, please visit our website at www.bridgefordtrust.com or contact us at firstname.lastname@example.org.
Increase On Minimum Wages For 2020
By Jaime Rodríguez Eguiarte - Partner, Labor and Employment (L&E)
On December 17, 2019, the Federal Government announced the increase on the minimum wages for year 2020.
The Minimum Wage Commission determined that the increase on the minimum wage will be of 5% as a real salary increase, plus an increase of $14.67 Mexican Pesos as a “Independent Recovery Figure” designed to improve the minimum wage in Mexico. Therefore, the daily general minimum wage for 2020 will increase from $102.68 Mexican Pesos (approx. US $5.50) to $123.22 Mexican Pesos (approx. US $7). For the northern border area, the daily general minimum wage will also increase 5% (five percent), from $176.72 Mexican pesos (approx. US $9.30) to $185.56 Mexican pesos (approx. US $9.8).
The 5% increase to the minimum wage would likely be used as a reference when negotiating collective bargaining agreements during 2020.
Do not hesitate to contact us, if you require further information regarding this matter +52 (55) 5202-0717 or email@example.com
SENER publishes modification to the Criteria for granting CEL and the requirements for its acquisition
By Jose Antonio Postigo Uribe & the Energy Industry Group
On October 28, the Ministry of Energy (SENER) published in the Official Gazette of the Federation the Document amending the Guidelines that establish the criteria for the granting of Clean Energy Certificates (CEL) and the requirements for their acquisition, published on October 31, 2014 (the Guidelines), which will take effect the day after its publication.
SENER considered that, derived from the commercial speculation of the CEL, there have been increases in the price of the electricity produced by Clean Energies and as a consequence there has been an increase in the electricity tariffs that affect the economy of end users. Likewise, SENER considered it necessary that among the participants of the electric industry equal and equitable treatment be given to obtain CEL.
Based on the foregoing, SENER carried out a modification to the Guidelines to establish that, for a period of up to 20 years, the Clean Generators representing the Legacy Power Plants (being electricity power plants owned by State organizations, entities or companies), established in the Electricity Industry Law, which generate electricity from Clean Energy sources, will be entitled to receive CEL.
Prior to this modification, the Guidelines established that the right to receive CEL for a period of 20 years corresponded to the Clean Generators representing the Legacy Power Plants that generated electricity from Clean Energies with the condition that they had entered into operation before August 11, 2014, as long as they had carried out a project to increase their Clean Energy production. With the modification, such condition was removed.
To know if the modification to the Guidelines can generate any impact on the CEL market, as well as its side effects, or simply if you require more information on the matter, please contact us. It would be a pleasure to provide you advice.
Our Energy, Natural Resources, and Environmental practice leads a larger Energy Industry Group comprised of a talented team of lawyers from several practice areas at the firm who specialize in the energy sector. As a multidisciplinary group, we are in a unique position to provide comprehensive and diverse legal advice on matters relevant to energy businesses, including in particular the Mexican energy reform, its implications, and the multiple business opportunities it brings.
Our Energy Industry Group provides full-service advice, including corporate, transactional, and M&A; public bidding; contractual; tax; regulatory; international trade; labor; dispute resolution; and corporate governance and regulatory compliance matters.
CRE allows Pemex TRI to freely determine gasoline prices of first hand sales and discounts
By Jose Antonio Postigo Uribe, Max Hernandez and Tania Trejo
On December 16, 2019, the governing body of the Energy Regulatory Commission ("CRE"), by ordinary session, terminated Document A/057/2018 that established Pemex Transformación Industrial ("Pemex TRI"), the methodology for determining the prices of First Hand Sales ("VPM") and at the storage terminals (the "Document").
The Document essentially established the following: (i) that Pemex TRI would determine, according to a certain methodology, the maximum price of VPM and the corresponding price in the storage terminals. Once the CRE determined that economic agents other than Pemex TRI supply at least 30% of the combined supply of gasoline and diesel in the country, Pemex TRI would be able to freely determine these prices; and (ii) that Pemex TRI would establish a single price for each VPM point and a single list price in each storage terminal. On these it could grant discounts based on volume, term and payment conditions, and it must submit to CRE criteria for granting discounts.
With the resolution of the governing body of the CRE, all of the above is abrogated. Therefore, Pemex TRI may, at its discretion, determine VPM prices and those that apply to its storage terminals (without the intervention of the CRE), as well as grant or not, discounts on its sales. Given this situation, a clear disadvantage could be created for the other competitors in the fuel market, since they do not have the substantial power in the market, the volumes, infrastructure and points of sale that Pemex TRI has. In addition, given the change, Pemex TRI could decide to whom and to how many to sell the product at its discretion. Pemex TRI being the preponderant competitor, this could trigger a series of behaviors with anti-competitive effects that could affect the market.
Given this, the Document could injure various members of the industry. If you require more information regarding this subject or a legal strategy for the defense of your interests, please contact us. It would be a pleasure to provide you advice.