In compliance with commitments assumed in the context of BEPS, Mexico adopted legislation requiring the mandatory disclosure of tax planning schemes (MDR). The new legislation was adopted from January 1, 2020; however, the effective application of the obligation to disclose tax schemes starts as from as of January 1, 2021. In practical terms, therefore, the new MDR legislation will see its first results starting on January 1, 2021.
The MDR rules require the disclosure to the tax authorities of specified tax planning schemes, referred to as tax transactions. Reportable arrangements are those (i) executed prior to 2020 with tax effects reflected or ongoing in 2020, or (ii) organized or implemented as from January 1, 2020.
The exclusive responsibility to identify and disclose arrangements that were implemented prior to 2020 but with ongoing tax effects in 2020 rests with the taxpayer. The latter is, therefore, well advised to use the little remaining time to investigate and identify any such reportable arrangements. This is a delicate exercise requiring a joint effort by the taxpayer's administration and its tax advisor, and the identification and use of the technological solutions capable of discharging the compliance requirements efficiently and cost-effectively.
Non-compliance with this obligation is severely sanctioned both for the taxpayer and the tax advisor. For the taxpayer, the sanction consists of the denial of the tax benefit that was obtained through the implementation of the reportable arrangement plus an additional economic penalty ranging from 50% to 75% of the amount of the tax benefit obtained or expected to be obtained.
Compliance with the new obligations requires the issuance of Administrative Rules on the operation, official formats, and other procedural aspects. The "official formats" for filing the required information with the tax authority have been issued, but many rules that will make compliance with this new tax obligation more understandable and operative, are still pending. Therefore, we expect that before the end of the year or on the first days of January 2021 the administrative rules that clarify many existing doubts would be issued for the correct compliance with this new obligation. There is also a possibility that the Mexican tax authority extends the term to comply with this obligation in spite of the delay in the issuance of the administrative rules. This of course would be welcomed by the taxpayers in view of the imminent compliance obligation with these new provisions.
The Mexican tax authority has modernized its IT infrastructure and the majority of transactions and procedures are made electronically or online. The various information-supply channels available to the tax authority and the quality of information it obtains, allow it to have the taxpayer's situation and any modifications thereto, almost in real time. This means that the taxpayer is obliged in various ways to file information on its tax situation and such information is complemented with the information filed by various third parties related with such taxpayer, including public notaries, public brokers and specially the financial system and other tax authorities (i.e. social security).
In this context, the public administration's challenge is not to obtain more information on the tax situation of taxpayers but to adequately analyze and use such information. Undoubtedly this is being achieved specially with the aid of artificial intelligence.
With respect to "early warnings" on modifications to the tax situation of the taxpayer, the tax administration currently receives diverse information supplied to it by the taxpayer itself including the quarterly returns on "relevant operations" and notices of spin-offs, mergers and corporate restructures. It also received information supplied by third parties which participate in the advising or implementation of such operations. The new obligation to disclose reportable tax planning transactions is a complement to the existing early warning system.
The Mexican tax authority expects that the introduction of the new disclosure obligation will also have a deterrent effect on the implementation of aggressive tax schemes with the certainty that the tax authority will be able to act quickly and review in detail the acts performed by the taxpayer.
Persons Required to Disclose Reportable Arrangements
The primary obligation to disclose reportable arrangements lies with. Under certain circumstances, however, the obligation is shifted to the relevant taxpayer Most notably, the law allows the advisor and taxpayer to mutually agree to shift the reporting obligation to the taxpayer and waive the advisor from the obligation. Whilst advisors have in theory the primary responsibility to report, we observe in Mexico a general tendency to shift the responsibility to the taxpayer. The tendency is generally fueled by a desire to put the taxpayer in control of what is reported and of the events and circumstances supplied in the relevant report.
The concept of tax advisor is very broad and includes: (i) any individual or legal entity providing tax advise on a regular basis, and involved or responsible for the design, marketing, organization, implementation or management of a reportable transaction, or making it available for its implementation by a third party; as well as (ii) a foreign tax advisor (international firm) deemed to be providing tax advise through a tax resident when legally or commercially related to it. There are also special rules for situations involving multiple advisors.
The taxpayer may be primarily obligated to disclose the reportable transaction when such taxpayer is the one designing the reportable transaction (and therefore there is absence of an external tax advisor). Likewise, the taxpayer will be primarily or solely obligated to disclose the reportable transaction when (i) the reportable transaction is counseled by a foreign tax advisor without presence of any sort in Mexico, (ii) there is a legal impediment for the tax advisor to disclose the reportable transaction, or else (iii) the Mexican taxpayer performs operations with a related third party abroad that implies a reportable transaction and that generates benefits in Mexico to that foreign related third party. Finally, as mentioned above, the reporting obligation is shifted to the taxpayer if mutually agreed with the advisor.
Statement Issued by the Tax Advisor
In case of tax schemes that generate tax benefits in Mexico, but which are not to be "disclosed", the tax advisor is required to issue a statement to the taxpayer reasonably justifying the non-reportable nature of the tax scheme. The tax advisor shall also comply with the same requirement in the case of a reportable schemes which it is prevented from disclosing due to legal impediments, such as client-attorney privilege. This statement shall be delivered within five days following the date on which the corresponding tax transaction is made available to the taxpayer.
Annual Informative Returns by the Tax Advisor
The tax advisors shall file an informative return during the month of February of each year that includes the names and tax identification numbers of the taxpayers to which it rendered professional services regarding reportable transactions in the immediately preceding tax year. Where the taxpayer is a non-resident, the return is required to include the taxpayer's country of tax residence and other identification data.
Multiple Tax Advisors Involved in one Reportable Arrangement
In situations where multiple tax advisors are involved in and, therefore, required to disclose the same reportable arrangement, the obligation of all of them will be deemed to have been complied with if one of them discloses the reportable transaction in the name and representation of all the others. This implies that there has been an agreement between all the tax advisors for one of them to make such disclosure in the name and representation of all the others, for which the name and tax identification of each of the tax advisors involved will be indicated. The tax advisor that discloses the reportable transaction shall issue and deliver a statement to the other tax advisors attaching a copy of the informative return through which the tax transaction was disclosed, a copy of the receipt of such return and a copy of the certificate in which a confirmation of receipt was granted by the tax authorities in respect of the arrangement.
Notification to the Taxpayer
The tax advisor that disclosed a reportable arrangement is required to supply the taxpayer with the identification number that was attributed to the disclosed arrangement by the tax administration. Similarly, the taxpayer implementing the arrangement shall include the identification number of the advisor in their annual tax return for the tax year in which the first implementation acts of the corresponding arrangement took place as well as for subsequent years as long as the arrangement still produces tax effects.
A tax arrangement is deemed to be a reportable arrangement if it meets the following cumulative tests:
- It is a tax scheme;
- It produces direct or indirect tax benefits in Mexico; and
- It meets any of the hallmarks provided for in the fourteen paragraphs of article 199 of the Federal Tax Code.
Both national and international arrangements are potentially reportable. There are at the moment no effective de minimis rules exempting arrangements below a specified monetary threshold from the reporting obligation, but the tax authorities are expected to issue such de minimis thresholds shortly.
In order for an arrangement to be characterized as a tax scheme, it is necessary that there is a plan, project, proposal, advice, instruction or recommendation aimed at the materialization of a "series of legal acts".
In this context and pursuant to a strict interpretation of the tax norm, when a tax advisor merely expresses its opinion on the correct interpretation of tax provisions or on events that have materialized in the past and that are submitted for its review, this should not be considered as a "scheme" and therefore the disclosure obligations do not apply.
The concept of direct or indirect tax benefit in Mexico is very broad and is not limited to benefit related to the income tax. Benefits related to indirect taxes such as value added tax or the special tax on production and services or even to social security payments are also covered by the tax benefit test. Therefore any reduction, elimination, deferral or non-recognition of an income or profit is considered a tax benefit.
The third indispensable test for an arrangement to be reportable is meeting any of the specified hallmarks. These hallmarks are listed in the 14 paragraphs of article 199 of the Federal Tax Code and may be classified under five broad categories:
- Arrangement which use or exploit tax attributes of the taxpayers;
- Operations between related parties that include intangibles or goods that are hard to value or that are unique, valuable goods that have no viable comparable, as well as corporate restructuring operations or sale and leaseback transactions;
- Operations with non-residents in Mexico that involve the avoidance of a permanent establishment in Mexico or imply hybrid operations or operations that avoid the triggering of the 10% withholding on dividends;
- Arrangements which impede the effective exchange of tax information or the identification of the effective beneficiary of income or assets; and
- Arrangements that avoid the application of the CFC rules or the application of anti-deferral or transparent norms because of the use of transparent foreign entities or foreign vehicles without legal capacity.
Finally, there is a last broad basket of "other" hallmarks focusing on effects produced. Arrangements falling under this basket include notably:
- Transactions with differences between book and tax value greater than 20%;
- Transactions that involve a non-resident applying a tax treaty with Mexico regarding income that is not subject to tax or that is subject to a reduced rate compared to the statutory rate of the country of residence;
- Transactions consisting of a series of interconnected payments or transactions that return a portion or all of the amount of the first payment to the original payer or its members, shareholders or a related party; and
- Transactions that avoid transactions being reportable under the MDR provisions
Generic and Customized Reportable Transactions
Mexican law classifies the reportable transactions in generic and customized transactions defining them as follows:
- Generic transactions: those that aim to be promoted massively to all type of taxpayers or to a specific group that require minimum adaptation to obtain the tax benefit.
- Customized transactions: those that are designed, marketed, organized, implemented or managed to the specific circumstances of a particular taxpayer.
Substantial Information Required to be Reported
Reportable arrangements are required to be filed with the tax authorities within the set deadline in a PDF format. The reporting must include a detailed description of the transaction, the national or foreign applicable provisions, and a detailed description of the tax benefit obtained or expected to be obtained.
The detailed description of the transaction includes each of the stages that integrate the plan or project, a diagram presenting all the operations that form part of such plan or project, the country or countries where the participants are located, the laws that are applicable to each of the acts integrating the plan or project, the background and conclusions that form part of the context of the plan or project and a precision of the operation or series of operations that produce the tax benefit, if there are third parties that assist in obtaining such tax benefit, as well as the sequence of acts that form part of the plan. Additional detailed information is also required which is specifically related with each hallmark. This information is intended to clarify the characteristics of the reported arrangement.
The detailed description of reportable arrangements applies to both generic and customized arrangements.
Part of the substantial information to be reported about a tax arrangement includes the "business reasons and motives", if any, that the taxpayer had in performing the arrangement. This requirement was added in administrative rules recently issued by the tax authority. In those rules, the tax authority cautioned taxpayers about the care that must be taken regarding this item because as of January 2020 Mexico incorporated a general anti-avoidance rule (GAAR) which precisely applies to avoidance schemes that lack a "business reason". The tax authorities have, thus, established a link between the MDR rules and the newly introduced GAAR.
Reportable tax arrangements under the Mexican MDR rules include national and international transactions. The legal norms and administrative regulations are very broadly drafted and potentially cover a multitude of transactions, including transactions that could be considered as routine operations that do not involve aggressive tax planning or warrant an early warning to the tax authority. It is desirable that the Mexican tax authority issues rules identifying the operations that must be reported under a more selective criterion and through the elimination of operations of low tax risk or low economic relevance.
In any case, it is imperative that taxpayers identify and prepare the human and technological resources needed for complying with the MDR requirement. This is all the more crucial given that the first reporting must be made by February 15, 2021 at the latest. Such reporting will require the identification of all the tax positions the taxpayer performed prior to 2020 but that produce ongoing tax benefits in 2020, as well as those tax positions taken or implemented in 2020. Obviously, this entails an extensive work of identification and preparation of the information that shall be delivered and the technological means to do that in the most effective and efficient manner.