Beginning January 1, 2021, Mexico’s reportable transaction rules require that either a taxpayer or a tax advisor must report to Mexican tax authorities any transactions that are designed, marketed, organized, conducted or managed to provide a tax advantage to the taxpayer.
What is a Reportable Transaction?
A Reportable Transaction is a transaction that directly or indirectly generates, or may generate, a tax benefit in Mexico and has any of the following characteristics:
- Prevents foreign authorities from exchanging tax or financial information with Mexican tax authorities.
- Avoids the application of the preferential tax system (“REFIPRE”) or transparent tax authorities and foreign instruments.
- Shifts tax losses to people other than those who generated them.
- Consists of a series of interrelated payments or operations that return all or part of the amount of the first payment that is part of this series to the person who made it or to any of their partners, shareholders or related parties.
- Is a hybrid structure applying a tax treaty signed with Mexico.
- Covers operations between related parties where:
- Difficult-to-value intangible assets are transferred in accordance with the Organization for Economic Cooperation and Development (OECD) transfer pricing guidelines for multinational corporations and tax administrations.
- Business restructuring for no consideration results in a reduction in operating profit of more than 20%.
- The use of goods and rights is transferred or granted without consideration;
- There are no reliable comparisons because they are operations that involve unique or valuable functions or assets. or
- A unilateral regime of protection granted under foreign law is applied in accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
- Avoids establishing a permanent establishment in Mexico under Mexican income tax laws and the double taxation treaties signed by Mexico.
- Covers the transfer of an asset that has been depreciated in full or in part, allowing it to be depreciated by another related party.
- Includes a hybrid mechanism that is defined under a specific section of Mexican income tax laws.
- Avoids identifying the beneficial owner of any income or assets, including through the use of foreign companies or legal entities whose beneficiaries have been named or identified at the time of their incorporation or at no time.
- Are operations being carried out to obtain tax benefits concurrently with the impending expiration of tax losses?
- Avoids applying the additional 10% rate in certain cases provided for in Mexican income tax law.
- Has certain rental agreements with related parties.
- Are there certain operations where there is a discrepancy between tax and accounting records of more than 20%.
Who has to report?
Taxpayers and tax advisors are required to report reportable transactions.
A tax advisor is a natural or legal person who provides tax advisory services in the course of their normal activity and is responsible for the design, marketing, organization, implementation or management of the entire reportable transaction or is involved in it or who provides the entire reportable transaction available for implementation by third parties.
The tax advisors required to disclose are those who are resident in Mexico or those overseas who have an establishment in Mexico under Mexican income tax laws, provided that the activities attributable to that establishment are carried out by a tax advisor.
If an overseas tax advisor has a permanent establishment or a related party in Mexico, there is a rebuttable presumption that the tax advice was provided by them. This presumption also applies if a third party resident in Mexico or a permanent establishment domiciled abroad performs tax advisory activities under the same brand or the same trade name as the tax advisor resident abroad.
A reportable transaction must be disclosed regardless of the taxpayer’s tax residence if the Mexican taxpayer receives a tax advantage.
If multiple tax advisors are required to disclose the same reportable transaction, they will be deemed to have complied with the disclosure requirement if one of them is disclosing that transaction on their behalf. In addition, such an advisor must issue a certificate to the other tax advisors who are exempt from the reporting requirement, stating that the transaction has been disclosed.
Alternatively, taxpayers are required to disclose reportable transactions if the tax advisor fails to provide the taxpayer with the identification number of the reportable transaction issued by the tax authorities or does not provide a certificate that the transaction is non-reportable.
A taxpayer must also disclose reportable transactions that the taxpayer designs, organizes, executes or manages. In certain cases, tax advisors, who are natural persons, may be exempt from the disclosure requirement, provided certain provisions of Mexican tax law are met.
If a reportable transaction is designed, commercialized, organized, conducted, or administered by a person who does not meet the definition of a tax advisor under Mexican law or who is not resident in Mexico and does not have a permanent establishment in Mexico, the taxpayer must disclose the reportable transaction .
Two other scenarios where a taxpayer, instead of the tax advisor, is required to disclose the reportable transaction is that the tax advisor has a legal obstacle to disclosing the reportable transaction and the taxpayer has an agreement with the tax advisor to disclose.
It is important to note that taxpayers who are required to disclose reportable transactions are Mexican tax residents and non-Mexican tax residents with permanent residences in Mexico and who conduct transactions with non-Mexican related parties that are generated in Mexico for tax benefits that are non- Mexican tax residents.
What information must be given to the Mexican tax authorities?
Either the taxpayer or the tax advisor must disclose the name, address and tax identification number of the tax advisor or taxpayer and, if applicable, information about other advisors involved. In addition, the report must (i) contain a detailed description of the individual steps of the transaction as well as a technical explanation of the Mexican and foreign tax regulations; (ii) a description of the tax benefit obtained or expected; and (iii) the tax years for which the transaction was or will be conducted. Tax authorities may request additional information after the initial filing. In this case, the tax advisor or taxpayer has 30 days to respond to the request for information, which must be made under penalty of perjury. Disclosure of a reportable transaction does not mean that Mexican tax authorities have accepted or disapproved of the tax effects of the transaction.
According to the regulations enacted on November 18, 2020, either the taxpayer or the tax advisor must report the following information: (i) a diagram listing all the transactions (legal acts or facts) that are part of the plan, project, proposal, advice , Instruction and / or recommendation making up the reportable transaction; (ii) the country or jurisdiction in which the entities involved in the reportable system are or will be located and the jurisdiction in which the transactions (acts or facts) that make up the reportable system take place; and (iii) the background and implications of the context of the reportable transaction and the legal arguments and premises on which the legal interpretation is based.
In addition, the regulations require that tax advisors or taxpayers provide the Mexican Tax Authority with the following information in the event of a custom transaction: (i) the exact date or approximate date that the transactions (acts or facts) will be incorporated into the reportable system will take place; (ii) the estimated value or amount of such transactions (if the beneficiary taxpayers are assisted or assisted by an individual, entity, or corporate body overseas or in Mexico) and their identification information including their tax residence or location; and (iii)) indicate whether the participants in the Reportable System are related parties for the purposes of Mexican law.
When to report
Generalized reportable transactions must be announced no later than 30 days after the initial contact for their marketing. The first contact for marketing is deemed to have taken place when the necessary measures are taken so that third parties can find out about the existence of the reportable transaction.
Custom Reportable Transactions must be disclosed no later than 30 days after the day the transaction is available to the taxpayer to conduct, or the first legal event or act that is part of the transaction is performed, whichever comes first entry. Tax advisors and taxpayers who are required to disclose reportable transactions can do so from the time they have completed their design.
The rules contain a number of parameters intended to penalize tax advisors and taxpayers who have breached their respective obligations to disclose a reportable transaction. The penalties imposed on tax advisors for such violations can be up to USD 1 million (exchange rate approx. 20 Mexican pesos per US dollar). Sanctions against taxpayers who fail to comply with their obligation will be punished with the value of the tax benefit resulting from the reportable transaction.
If a taxpayer fails to disclose a reportable transaction or makes incomplete or incorrect disclosure, the tax authorities may impose a penalty ranging from 50% to 75% of the tax benefit received or expected.