Mexican Mandatory Disclosure Regime Under BEPS Action 12

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Over the past several years tax authorities around the world have been concerned about aggressive and abusive tax planning. In view of this, the G-20 (group of 20, which brings together the world’s major advanced and emerging economies, comprising the EU and 19 country members) and the Organization for Economic Co-operation and Development (OECD) issued Base Erosion and Profit Shifting (BEPS) Action 12, which provides recommendations for the design of rules to detect aggressive tax planning arrangements and requires taxpayers and advisers to disclose information in connection thereof.

In this regard, certain countries, including the EU, the U.K., U.S., Canada, Saudi Arabia, have implemented domestic legislation to introduce mandatory disclosure rules in an effort to deter aggressive tax planning schemes, as well as to drive behavioral change.

These types of measures enable tax authorities to identify arrangements early on that could become aggressive, from a tax perspective, and provides them with the possibility to better target their audits or propose changes to their domestic law.

Mexico has been active in the early adoption of its interpretation of the various recommendations under the BEPS Action Plans in the past. This trend continues with the 2020 tax reform which included reforms largely based on BEPS in areas related to permanent establishment definitions, interest deductions, anti-hybrid rules, among others. In an important policy reform, Mexico adopted mandatory disclosure requirements for tax advisers and taxpayers.

In line with the recommendations of BEPS Action 12, Mexico introduced mandatory disclosure rules to its tax legislation as part of its 2020 tax reform (the Mexican MDR). This was done as part of a broader reform which included rules related to various of the BEPS Action Plans.

Under the new rules in Mexico, disclosure is required with respect to transactions, where a taxpayer, regardless of its tax residence, directly or indirectly obtains a Mexican tax benefit, to the extent it meets any one of the specific 14 characteristics listed in the law or consists of a transaction that involves a mechanism to avoid reporting such transactions. For this purpose, a transaction is defined to include any plan project, proposal, advice, instruction or recommendation expressly or tacitly provided to materialize a series of legal acts.

Characteristics

As mentioned, the Mexican MDR provides 14 characteristics to be considered in determining whether a transaction is reportable. These characteristics can be classified in the following categories:

Avoids

the exchange of tax or financial information between foreign and Mexican tax authorities;
paying taxes in Mexico on income obtained through transparent foreign tax entities or through entities subject to a preferential tax regime;
the disclosure of the beneficial owner of assets or income; and
the creation of permanent establishment in Mexico.

Transfers

allows for the transfer of tax losses to a party that did not generate such loss; and
involves the transfer of depreciated assets to a related party that will depreciate them.

Related Parties

consists of a series of interconnected payments or transactions that return a portion or all of the amount of the first payment of the series to the original payer or its members, shareholders or a related party;
transactions made to obtain profits to amortize tax losses when the time to carry them forward has almost elapsed and such transactions involve a deduction to the taxpayer that generated the tax losses or to one of its related parties;
transactions where the temporally use or enjoyment of an asset is granted and the lessee in turn also grants the use or temporary enjoyment of the same asset to the lessor or to a related party of the latter; and
transaction related to transfer pricing issues:
- transfer of hard to value intangible assets;
- restructures in which assets, functions or risks are transferred without any consideration in connection thereof or by which the Mexican taxpayer reduces its tax profit in more than 20%;
- transfer or granting the temporally use or enjoyment of assets and rights without any consideration or when services are rendered, or functions are carried out for free;
- when there are no reliable comparables, as they consist in operations involving unique or valuable functions or assets; and
- when a unilateral protection regime, granted in terms of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, is used.

Nonresidents

involves a nonresident applying a tax treaty with Mexico with respect to income that is not subject to tax or to a beneficial rate compared to the rate of the country of residence;
involves a hybrid mechanism; and
involves avoidance of application of withholding tax on dividends.

The reporting obligations per se for advisers apply to transactions implemented in 2020 with a timeline beginning in January 2021. However, transactions performed in previous years should be reported by taxpayers if the tax effects are carried forward in 2020 or subsequent years.

The obligation to report transactions performed in 2020 and thereafter falls mainly on tax advisers. However, there are some cases in which taxpayers (instead of tax advisers) will be responsible to disclose the reportable transactions in future years, such as when:

the transaction has been designed, organized, implemented and managed by the taxpayer or by a person that is not considered as a tax adviser in terms of the law;
the tax adviser is a foreign tax resident;
there is a legal impediment for the tax adviser to disclose it;
by mutual agreement between the taxpayer and the tax adviser; and
when the tax adviser does not provide to the taxpayer the identification number of the reportable transaction or the statement indicating that it is not to be reportable, as explained below.

The obligation to report transactions applies to taxpayers receiving a Mexican tax benefit regardless of the residence of the taxpayer and to advisers, even if not resident in Mexico. The process for Mexico to monitor and determine compliance on these aspects of the rule remains to be defined.

For purposes of the above, the law defines a “tax adviser” as any individual or legal entity that in the ordinary course of its activities performs tax advisory activities and is responsible for or is involved in designing, trading, organizing, implementing or managing the entire reportable transaction or who makes the entire reportable transaction available for its implementation by a third party.

Based on the above definition, the key element to determine whether someone providing tax advice should be considered as a tax adviser for purposes of disclosing a reportable transaction is whether it has been involved or not in the entire transaction; this is, if it only had a partial participation in the transaction, it should not be responsible to report the transaction, since the tax adviser definition should not be met.

If several tax advisers are bound to report the same transaction, they can agree that only one of them discloses the information in the name and on behalf of the others.

Moreover, it should be clarified that in cases were a foreign tax adviser has a Mexican related party or a third party in Mexico shares the same brand or commercial name with it, the law presumes, unless proven otherwise, that the tax advice giving rise to the reportable transaction was performed by the Mexican adviser and they will be obligated to meet the reporting requirements.

As mentioned, the Mexican MDR have been recently introduced and there are still many items pending to be clarified, since the Mexican tax authorities have not issued any rules or regulations to provide further details on how the disclosure should be made. The law contemplates that there will be an exception based on amounts.

With regards to the timing to disclose the information, the law distinguishes between two types of reportable transactions:

those transactions that are generalized for all kinds of taxpayers or for a specific group of them and that consequently are marketed widely, as their implementation requires no or fast modification to obtain the corresponding tax benefit; and
those transactions that are customized for a specific taxpayer, as they are designed, commercialized, organized, implemented or managed to meet or be adapted to the particular circumstances of the taxpayer to achieve the tax benefit.

In view of this, the law provides that generalized reportable transactions must be disclosed within the following 30 days as of the date in which measures are taken to make third parties aware of the corresponding transaction for its commercialization. Customized reportable transactions must be disclosed within 30 days as of the date in which the corresponding scheme is made available to the taxpayer for its implementation or the first legal acts for its implementation are performed (whichever occurs first).

As can be observed, further rules have to be issued with regards to the deadlines, since the wording of the law is ambiguous and consequently it is uncertain what date should be counted as the starting point to determine the deadline.

As mentioned above, the transitory rules provide that the timeline related to these rules should begin as of January 1, 2021. As such the 30-day period should start running on that date for the 2020 reportable transactions.

With regards to the information that has to be shared with the tax authorities in connection with the reportable transactions, the law provides the following:

name and tax ID number of the tax adviser or taxpayer disclosing the reportable structure;
name and tax ID number of the persons released from the disclosure obligation;
names of the tax advisers’ and taxpayers’ legal representatives;
in cases of customized reportable transactions, general tax information of the taxpayer who will benefit from the corresponding transaction (if the beneficiary is a foreign tax resident, the country or jurisdictions in which it resides, as well as its tax ID number and tax domicile, should be provided);
detailed description of the reportable transaction (by steps if applicable) and the domestic or foreign applicable provisions in which it is based;
a detailed description of the (obtained or expected) tax benefit;
the fiscal years in which a structure is expected to be implemented or the years in which it has been in place;
name, tax ID and any other relevant information of the entities or legal figures involved in the reportable transaction (for such purposes, it should be indicated which of them have been created or incorporated within the last two years, or whose shares or interests have been acquired or transferred within the same term); and
any other information deemed relevant by the tax adviser or taxpayer or requested by the tax authorities pursuant to the applicable provisions.

Upon disclosure, an identification number of the corresponding transaction will be issued, and taxpayers will be bound to include such number in their annual income tax returns. If the tax adviser discloses the reportable transaction it will have to provide the identification number to the taxpayer.

In addition to the above, tax advisers will have to file an informative return in February of each year, listing the name and tax ID numbers of the taxpayers to whom advice resulting in a reportable transaction even if their clients (i.e. taxpayers) are foreign residents.

Furthermore, it is worth mentioning that in cases where a transaction involves a tax benefit but is not considered as reportable in terms of the law or when there is impediment to report it, tax advisers will have to issue and provide to the taxpayer a statement summarizing the reasons why the transaction was considered as non-reportable or explaining why the transaction cannot be reported. This appears to be a very broad requirement which generally requires disclosure for all types of advice by an adviser as to whether or not the advice is reportable. The nature of the document to support this position is not defined in the law and no rules have been issued yet to clarify how this statement should be made. As such it is not clear whether the assurance to the taxpayer will have to be drafted as a tax opinion or rather filing a special form issued by the tax authorities.

The final version of the Mexican MDR did not include certain provisions that would have made the rules much more complicated to comply with. For example, the initial version of the rule would have required that the reporting be made to the tax authorities and approval of the transaction obtained after a committee ruled as to whether the transaction was valid. Earlier versions also had additional characteristics to be reported.

Even though Mexican taxpayers have had reporting obligations for certain relevant operations exceeding a monetary threshold (60 million pesos (approx. $2.5 million)) through a tax form that should be submitted to tax administrators on a quarterly basis (Form 76) and consequently, the Mexican tax authorities have had a general overview of certain activities carried out by taxpayers, the Mexican MDR obligation represent a watershed in the tax environment in terms of information available to the tax authorities as well as the nature of the rules.

Form 76 disclosure has been limited to certain transactions focused on financing, transfer pricing issues, shareholding changes and only requires limited reporting by the taxpayer. Meanwhile, the information to be shared in connection with the Mexican MDR is very broad and will provide the tax authorities a full overview or road map of the transactions. Furthermore, the obligation being extended to tax advisers represents a change in the relationship between the advisers and the taxpayer. This will enable the tax authorities the possibility to suggest amendments or inclusions to the law to prohibit certain conduct if considered aggressive.

Noncompliance with Mexican MDR obligations may result in penalties for the tax advisers and/or taxpayers. For instance, fines for tax advisers may reach up to 20 million pesos, meanwhile when the reporting obligation falls on the taxpayer, the tax benefit of the undisclosed transaction could be lost and a fine ranging between 50% and 75% on the amount of the tax benefit may be imposed.

Planning Points

Advisers and taxpayers will now have the challenge of identifying the tax benefit comprised in each proposed transaction to be carried out and analyze if it meets any of the characteristics provided in law to determine whether information in connection with it should be disclosed.

In this sense and regardless of whether or not a transaction is reportable in terms of the law, taxpayers will have to duly identify the corresponding tax benefit and the business reasons behind it. The foregoing not only for purposes of the statement that will have to be issued by the tax advisers in case the transaction is deemed as non-reportable, but also to be prepared upon a potential tax audit.

It should be noted that determining the tax benefits of a transaction is not always straightforward, since there are no clear parameters that define the scope of it and tax benefits may not always be measurable but rather broad and vague; however, taking into account the economic benefit expected to be received by the taxpayers, it should be considered.

Considering the importance of these new rules, as well as that not only transactions carried out as of 2020 but also those performed in previous years to the extent their tax effects are carried over to 2020 and subsequent years, are impacted by these regulations, it may be recommended that taxpayers take strategic coordinated actions with their tax advisers so that the latter can help them to identify the impact of the mandatory disclosure regime on their global tax management, whether such would have to be reported, as well as any potential risk in connection with it.

The approach to MDR reporting obligations should be a multidisciplinary and multi-department one. This should include educating the executive-layer teams (e.g., tax, mergers and acquisitions, internal compliance, transfer pricing, human resources and law) through workshops and training on how to evaluate the day-to-day particular transaction.

Moreover, it might be advisable to work with tax advisers in the deployment of reporting policies, guidelines and processes of internal control that could help taxpayers to identify the transactions that would have to be reported up to the data submission to the tax authorities and hence minimize any potential adverse tax consequences or sanctions both to the taxpayer and the tax advisers.

Terri Grosselin is an Executive Director, Fernando Junco is a Senior Manager and Sabrina Hernandez Schetelich is a Senior at Ernst & Young México.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.