On September 8, a draft decree was submitted to the Mexican Congress, among other documents, which amends, adds and repeals several provisions of the Income Tax Law, the Value Added Tax Law, the Law of the Special Tax on Production and Services, the Federal Law of the Tax on New Automobiles, the Federal Tax Code and other laws (the “Decree”).

The following is a summary of the proposed changes that we consider most relevant.

Income Tax

• Backed Loans
  Credit operations (that do not meet the requirements and characteristics of a supported credit), from which interest is derived by persons or permanent establishments of foreign residents, when such operations lack a business reason, will be considered as supported credits.

• Property and Usufruct
  The consolidation of the bare ownership and the usufruct of a property is established as accruable income. The income will be the value of the usufruct right determined by an authorized expert, being the obligation of the bare owner who acquires the usufruct to calculate the tax.

• Corporate Restructuring
  It is proposed that the tax authorities, in the exercise of their verification powers, may revoke the authorization previously granted if they consider that the restructuring carried out lacks a business reason.

• Non-recoverable credits
  The requirements to deduct uncollectible credits greater than 30,000 UDIS (approximately $207,000.00 pesos) are modified to now include the existence of a final resolution issued by a competent authority, which demonstrates that collection efforts have been exhausted or, if applicable, that it was impossible to execute the favorable resolution. Currently, the only requirement is to initiate the process for the collection of the loan.

• Centralized Treasury Interest
  For purposes of calculating the limit of deductible interest under the terms of article 28, section XXVII of the Law (thin capitalization), unregulated SOFOMs that carry out activities mainly with domestic and foreign related parties are included.
  
  Currently, these companies do not have to include their debts for this calculation since they are considered part of the financial system. If this change succeeds, in order to be able to deduct the interest payable by them (arising from loans contracted with related parties resident abroad), these companies (which usually operate as centralized treasuries in large groups) must include all of their debts to calculate the deductible amount of interest. 

• Losses on spin-off of companies
  It is established that, in the case of a corporate spin-off, losses pending application must be divided between the spin-off and spun-off companies engaged in the same line of business, which must be credited in the event of a review by the tax authorities.

• Simplified trust regime for individuals.
  It is proposed to repeal the tax incorporation regime and include a new one called simplified trust regime, applicable to individuals engaged in business, professional or leasing activities whose income in the immediately preceding fiscal year, for the aforementioned activities, has not exceeded $3,500,000.00.
  
  In general terms, this is a regime in which a progressive rate of 1% to 2.50% will be applied on the income obtained each month, without any deduction.
  
  People who (I) are partners or shareholders of legal entities, (II) are residents abroad with a permanent establishment in Mexico, (III) have income subject to REFIPRES, or (IV) receive income similar to salaries may not participate in this regime.

• Simplified Trust Regime for Legal Entities
  This regime is not optional for corporations whose partners are exclusively individuals and whose income in the immediately preceding fiscal year (or the estimated income in the case of starting activities) does not exceed $35,000,000.00 pesos.
  
  The tax regime does not apply to corporations (I) when some of their partners participate in other corporations, (II) who carry out activities through trusts or joint ventures, (III) those who have opted for the optional regime for groups, (iv) companies that are considered coordinated, (v) members of the financial system and (vi) those who engage in agricultural, livestock, forestry or fishing activities.
  
  In general terms, a simpler regime is proposed with fewer deductions, faster depreciation of investments (e.g., constructions at a rate of 13% per year instead of 5% under the general regime), which recognizes income and expenses at the flow rate.

Federal Fiscal Code

• Tax residence.
  It is proposed to establish that individuals or legal entities will not lose their status of resident in Mexico if they do not prove such change or, proving such change, transfer their tax residence to a country that is considered a Preferential Tax Regime.
  
  If the new tax residence is transferred to a country or territory considered as a preferential tax regime, the status of resident in Mexico will be maintained for a period of five years (instead of three years); unless it is a country with which a comprehensive information exchange agreement and a treaty in force for mutual administrative assistance in the notification, collection and recovery of taxes has been entered into.

• Corporate Spin-off.
  In order for a spin-off not to be considered a disposal, the transfer of capital stock must be carried out, so that the shareholders of the spin-off company must maintain the same proportion in the capital stock of the spun-off companies as they had in the spun-off company.

• Advanced electronic signature and digital seal certificate.

It is proposed to add the following as grounds to temporarily restrict the CSD:

• To those taxpayers who pay taxes under the New Income Tax Law Regime, when they fail to file three or more monthly payments in a calendar year, or when they have not filed the annual tax return.

• To those taxpayers who oppose a home visit, or do not completely provide the data or information requested by the authorities to verify compliance with tax obligations or those of third parties; provided that there has been a repeat offense and the authority has notified the corresponding sanction. 

• To those taxpayers that have not accredited the materiality of the transactions entered into with the taxpayers that are in the case established in article 69-B.

• To those taxpayers whose declared value of taxable acts or activities do not match those indicated in the CFDIs or with the information in possession of the tax authorities or to which they have access.

• Those taxpayers that have a partner or shareholder with effective control, whose CSD has been terminated and has not corrected its tax situation. This cause also applies when the partner or shareholder has effective control of another legal entity.

• Refund of credit balances.

It is proposed to establish a new option for the offsetting of contributions, in which taxpayers may request the tax authority to correct their tax situation, by applying the amounts they are entitled to receive against the omitted contributions -with the exception of those derived from compliance with a resolution issued in an appeal or trial-. Such option would become effective as of January 1, 2023.

• Federal Taxpayers Registry.

With respect to the registration, obligations and powers related to the Federal Taxpayers Registry, the following is proposed:

• Establish the obligation of persons of legal age to request their registration in the Federal Taxpayers’ Registry.

• The obligation to disclose the percentage of ownership of the partners, shareholders, associates or any person that forms part of the organizational structure of a legal entity, their corporate purpose – in the case of legal entities – and who exercises effective control.

• In the event that the legal entity is listed on a stock exchange, it is intended to establish that the information to be provided to the tax authority is that which corresponds to the persons having control, significant influence or commanding power with respect to the legal entity in question.

• It is intended to grant powers to the tax authorities to cancel or suspend the RFC registration of taxpayers who have not carried out any activity, have not issued tax receipts or have died. 

• It is proposed to establish the power of the tax authority to use any georeferencing tool to verify and update the information related to the taxpayers’ tax domicile.

• For the cancellation of the Federal Taxpayers Registry, it is necessary to have a positive opinion on the compliance with social security obligations.

• Tax receipts.

It is proposed that, in order for the expense receipts to be deducted from the taxpayer’s income, it will be necessary for the taxpayer to have the documentary support that accredits the refunds, discounts or rebates.

It is proposed that CFDI’s may only be cancelled in the fiscal year in which they were issued with prior acceptance by the receiver. Likewise, the issuer must have the information and documentary support that justifies the reasons for the cancellation. In the event that a CFDI is cancelled after the deadline, the taxpayer will be subject to a fine.

• Financial Statements.

In connection to the opinion on the financial statements:

• It is proposed to reestablish the obligation of taxpayers to have their financial statements audited by a registered public accountant, for those taxpayers who, in a fiscal year, have obtained accruable income for an amount of $876’171,996.50 pesos (updateable in each fiscal year); maintaining the option for those taxpayers who are not required to have their financial statements audited.

• The deadline for the presentation of the report on the financial statements shall be no later than May 15 following the fiscal year audited. In the event that the report is not filed or is filed after said term, the taxpayer will be subject to a fine.

• When the preparation of the report reveals the omission in the compliance of tax obligations or the possible commission of a tax offense, the registered public accountant who prepares the report must inform the tax authority, under penalty of incurring in violations or making him/her responsible for the crime of concealment.

• Controlling Beneficiary.

It is proposed to establish the obligation of corporations, trustees, settlors or trustees, as well as the contracting parties of any other legal entity, to obtain and provide -prior request of the tax authority- the information related to their controlling beneficiaries, in a reliable, complete and updated manner.

Likewise, it is proposed that notaries, notaries public and any person involved in the incorporation of legal entities or trusts, as well as members of the Financial System, are obliged to collect information that allows the identification of the controlling beneficiaries, in order to provide it to the tax authority, when required.

A controlling beneficiary is understood, in general terms, as the individual or group of individuals who effectively control or benefit economically from a person or legal entity; when such control or benefit is exercised by holding a significant percentage of the shares or when such percentage represents a significant participation in the decision-making process.

• Verification Powers.

• It establishes the possibility that, within the authority’s powers of verification, it may carry out the appraisal of intangible assets and all kinds of services.

• Powers are granted to the tax authorities in order to verify compliance related to the obligation of controlling beneficiary and automatic exchange of financial information.

• It is proposed that the tax authorities, in the exercise of their verification powers, may determine the simulation of legal acts between related parties, solely for tax purposes.

In this regard, in the resolution derived from the exercise of the verification powers, the authority must identify which is the simulated act and the one actually executed, the tax benefit obtained and the elements that allowed it to determine the existence of a simulation.

• Procedures against EFOS and EDOS

It is proposed to establish the presumption of non-existence of transactions entered into by taxpayers whose Digital Seal Certificate has been restricted or suspended, which are covered by CFDI issued by another taxpayer.

• Garnishment of assets.

It is proposed to establish the possibility for the authorities to carry out the seizure of assets through tax mailboxes, edicts or strados, with respect to -among others- bank deposits, shares, bonds, securities, real estate and intangible assets.

Value-Added Tax.

• 0% rate.

It is proposed, for clarification purposes, to expressly state that the 0% rate for food is applicable to both human and animal food products.

It is also proposed to modify the tax treatment for menstrual management products, so that they are taxed at a 0% rate, with the intention of reducing the sale price of these products.

• Tax credit.

It is proposed to establish as a requirement to credit the tax for the import of merchandise, that the import customs declaration must be in the name of the taxpayer who intends to make the credit.

• Obligations in the pre-operating period.

It is proposed that taxpayers inform the tax authority the month in which they start their activities, in order to correctly determine the adjustment of the credit for value added tax purposes in the pre-operating period.

• Temporary use or enjoyment of tangible assets.

For clarification purposes, it is established that the temporary use or enjoyment of tangible goods in Mexican territory is subject to the payment of value added tax, regardless of whether such goods are delivered outside of Mexican territory.

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We will keep you informed of the progress of the corresponding legislative process in due course.

Ruiz, Ahumada, Palazuelos