Comments

The article 28, section XXVII, fifth paragraph of the ITL establishes a new mechanic to opt to consider as equity account in the corresponding tax year with the purpose to determine the exceeding amount regarding the taxpayer’s debts that exceed the triple of his equity account that proceed from contracted debts with related parties that are foreign residents.

Basically, such option consists of that the amount that results from adding up the initial and final balances of the tax year of the capital contribution account, the net tax profit account and the reinvested net tax profit account, must be reduced with the tax losses that are pending of amortization that were not considered in the tax result of that tax year, and divide the outcome of the operation by two, establishing in which scenario the option may not be carried out.                        

The article 28, section XXVII, seventh paragraph of the ITL states that the debts contracted by members of the financial system that carry out its operations in accordance to their social purpose will not be included among the debts that accrue interests in charge of the taxpayer for the calculation of the exceeding amount that results three times its equity account; nevertheless, the its eight paragraph provides that the foregoing will not be applicable to Non-regulated Multiple Purpose Financial Institutions (SOFOMES ENR) that carry out activities mainly with their national or foreign related parties in pursuit of their social purpose.

This limitation was imposed to the SOFOMES ENR under the questionable statement that diverse business groups seek the benefit of the exclusion of the thin capitalization by incorporating SOFOMES ENR into their structure, which perform operations with their national or foreign related parties, mainly located in preferential tax regimes, without complying the purpose for which they were established.

We consider that the article 28, section XXVII, eight paragraph of the ITL will result in a negative impact for the determination of debts that accrue interests for the calculation of the thin capitalization, violating various human rights in detriment of the SOFOMES ENR that perform operations with their related parties, which will not happen to other institutions of the financial system set forth in article 7 of the ITL.

Recommendations

Once an analysis and valuation of the operations that perform the SOFOMES ENR with their related parties is done, and if applicable, these may file an amparo lawsuit against the article 28, section XXVII, eight paragraph of the ITL as deemed unconstitutional.

If you have any questions regarding the foregoing, please do not hesitate to contact us.          

Mexico City, January 18, 2022

Comments

Until December 31^st, 2021, the article 146-B of the FTC stated that regarding of those taxpayers subject to an insolvency proceeding, the tax authorities may partially cancel or forgive the tax debts related to taxes that should have been paid before the date in which the referred proceeding initiated, provided that the taxpayer (i.e. trader) has entered into an agreement with his creditors under the terms of the Commercial Bankruptcy Law (CBL), and as long as:

• The amount of the tax debts represents less than the 60% of the total of the recognized debts in the insolvency proceeding. In this case, the cancellation cannot exceed of the minimum benefit among those granted by the creditors that are not related parties and represent the 50% of the recognized amount to the non-tax creditors at the very least.
• The amount of the tax debts represents more than the 60% of the total of the recognized debts in the insolvency proceeding. In this case, the cancellation determined in terms of the previous paragraph cannot exceed the amount that corresponds to the updates, interests and fines of the taxes owed.

Nonetheless, with the referred Decree such provision was repealed under the lax and questionable argument that it is consistent with article 28, first paragraph of the Federal Constitution, which was amended by means of the Decree published on March 6^th, 2020, in the OGF, with the purpose of banning tax cancellations or tax forgiveness.                                                                

We consider that the repeal of article 146-B of the FTC is totally unreasonable regarding the elimination of the possibility to partially cancel or forgive tax debts, since the purpose for companies to initiate and undergo an insolvency proceeding is to preserve them and avoid that the general non-compliance of its payment obligations jeopardize its viability, as well as of those companies with whom they have a business relation, violating various human rights and fundamental principles to its detriment, and contravenes the public interest set forth in article 1º of the CBL.

Recommendations

Those companies that are subject to an insolvency proceeding or are about to undergo such proceeding, must refine, analyze, and promptly value their situation and, as the case may be, an amparo lawsuit may be filed against the repeal of the article 146-B of the FTC as deemed unconstitutional.

If you have any questions regarding the foregoing, please do not hesitate to contact us.

Mexico City, January 10, 2022

Comments

The aforementioned provision warns that, it is considered that there is a notorious practical non-recovery, among others, when in the case of credits whose principal amount in its due date is greater than 30,000 UDIS, the creditor complies with the following: (i) obtains a definitive resolution which proves that the necessary recovery efforts were exhausted, or (ii) when applicable, it is proven that the enforcement of the resolution was not possible.

It is important to state that the referred provision is related to the last paragraph of the subsection a), section XV, article 27 of the ITL, therefore, the creditor must also comply with the following requirements: (i) inform by written notification to the corresponding debtor that he will deduct the non-recoverable debt for income tax purposes, in order for the debtor to accumulate the income that results from the non-covered debt, and (ii) inform the tax authorities no later than the 15th of February of each year the non-recoverable debts that were deducted.

When complying with the referred requirements, it will be considered that there is a notorious practical non-recovery and thus, the corresponding debt will be non-recoverable.

We consider that article 27, section XV, subsection b) of the ITL will result in a negative impact on  the deductibility of the non-recoverable debts, violating various human rights to the detriment of the taxpayers (i.e. creditors), since there are occasions in which it is not even possible to summon the debtor to trial due to disappearance or non-localization, which could result in the absence of a definitive resolution that prove that the recovery efforts were carried out.

In order to proceed with the deduction of non-recoverable debts that are greater than 30,000 UDIS[1] (MXN $ 212,366.25), the claim filed against the debtor for lack of payment will not be sufficient. The creditor will also have to obtain a definitive resolution in which it is proven that the recovery efforts before the debtor were carried out or, as the case may be, prove that it was impossible to execute said resolution, regardless of the other requirements stated in such provision, or else, such scenario will not be considered as a notorious practical non-recovery.

Recommendations

It will be necessary to review and analyze the status regarding the non-recoverable debts that overrun the referred threshold and also, those claimed to the debtor for lack of payment and, as the case may be, an amparo lawsuit may be filed against article 27, section XV, subsection b) of the ITL as deemed unconstitutional.

If you have any questions regarding the foregoing, please do not hesitate to contact us.

[1] The value in Mexican pesos of an UDI as of December 14^th, 2021, is 7.078875, in accordance with the last publication of the Bank of Mexico in the OGF.

Mexico City, December 14, 2021

On November 12^th, 2021, the Decree that amends several provisions, among others, the article 27, section X of the Income Tax Law (ITL) was published in the Official Gazette of the Federation, which establishes modifications in the requirements for the deduction of technical assistance, technology transfer or royalties. Said modifications will enter into force on January 1^st, 2022.

The aforementioned provision warns that, in cases of technical assistance, technology transfer or royalties, it must be verified before the tax authorities that whoever provides the knowledge has the technical elements for it and that they are provided directly. They can only be provided through third parties, when they are registered in the Register for Individuals or Legal Entities that provides Specialized Services or Specialized Works (REPSE) before the Ministry of Labor and Social Welfare, meet other requirements established by the ITL and the Value Added Tax Law, and that it does not consist in the simple possibility of obtaining it, but the services are effectively carried out.

Comments

In terms of such provision, only those third parties who comply with the provisions set forth in the third paragraph of article 15-D of the Federal Tax Code (FTC), may provide technical assistance or technology transfer services, as well as grant the use or temporary enjoyment of patents, certificates of invention or improvement, trademarks, trade names, etc., that is, that they are registered in the REPSE in accordance with the new legal provisions on labor subcontracting.

The article 15-B, first paragraph of the FTC states that royalties’ payments are those for the temporary use or enjoyment of several intangible goods indicated in such provision. On the other hand, the fourth paragraph of article 15-B of the FTC states that payments for technical assistance derive from the provision of independent personal services through which non-patentable knowledge is provided and its application is intervened, and never involve transmitting confidential information related to industrial, commercial, or scientific experiences.

Therefore, payments for royalties and technical assistance come from acts of a purely civil nature; however, article 27, section X of the ITL incongruously alters the origin of said payments by requiring third parties to comply with provisions of a merely labor nature, that is, it is distorting the legal nature of the provision of services, as well as the granting for the use or temporary enjoyment of goods.

As a consequence, article 27, section X of the ITL would presuppose those own workers are provide or make available for the benefit of the taxpayer, when on many occasions it will not imply that the service provider provides or makes his own workers available for the benefit of the taxpayer, and much less, if the act carried out will involve the payment of royalties.

We consider that article 27, section X of the ITL will result in a negative impact on the deductibility of expenses for the aforementioned concepts, violating various human rights to the detriment of both those who make the payments (i.e. taxpayers) and those who provided technical assistance or technology transfer services or granted the temporary use or enjoyment of intangible assets in accordance with article 15-B of the FTC.

Recommendations

It will be necessary to review and analyze the acts that provoke the payments for technical assistance, technology transfer or royalties and, as the case may be, an amparo lawsuit may be filed against article 27, section X of the ITL as deemed unconstitutional.

If you have any questions regarding the foregoing, please do not hesitate to contact us.

Mexico City, November 22, 2021

On October 18^th, 2021, the “Federal Executive Branch Agreement by which several actions were instructed to indicated government agencies in connection to the definitive importation of used vehicles” (Agreement) was published in the Official Gazette of the Federation (OGF), whose purpose is to provide legal security for the regularization of used vehicles of foreign origin interned in national territory and whose legal stay in the country (i.e. definitive importation) has not been processed in accordance to the applicable legal provisions.   

Comments 

By means of said Agreement the Federal Executive Branch instructed to the Ministry of Treasury and Public Credit, of Economy, and Security and Citizen Protection, to elaborate a Program that are encourages individuals residing in the states of Baja California, Baja California Sur, Sonora, Chihuahua, Coahuila, Nuevo León and Tamaulipas to regularize their used vehicles of foreign origin and located in those states (Program), based on the Decree in force by which the definite importation of used vehicles is regulated. 

It should be noted that there was a relatively similar precedent with the Decree published on August 22^th, 2005, by which the former Executive Federal Branch established the conditions for the definite import of used motor vehicles, arguing that the temporal internment of automobiles that are not returned abroad causes a social problem for Mexico and an important legal problem for the owners of such vehicles; nevertheless, said Agreement lead to violations to the tax principles of equity and proportionality, among others, to the detriment of the Mexican automotive industry of new and used vehicles.

The Agreement is highly questionable and regrettable, since once the pending Program is performed and implemented the regularization of used vehicles will be promoted, that on one side are illegally interned in national territory, since they lack of the import previous authorization, have not paid taxes (tax evasion), do not have the environment certificates and the ownership titles (e.g. invoices), and on the other hand, their owners and/or holders have committed the offence of smuggling by introducing to Mexico those used vehicles in terms of the Federal Tax Code.   

We estimate that both the Agreement and the pending Program will provoke a considerable negative impact to the Mexican automotive industry, from both manufacturers of vehicles and dealers of new and used vehicles, because the intention of providing legal security to the owners of illegal interned vehicles in the country will cause the violation of diverse human rights in detriment of the members of such industry, such as the free competition and concurrence, and they will have a legitimate interest protected by the national legal system.

Even through the aforementioned Agreement and the pending Program, several provisions set out in the United States-Mexico-Canada Agreement (USMCA), among other commercial agreements entered into by Mexico will be violated.

Recommendations

It will be necessary to analyze the terms and conditions of the Program that is pending in order to identify the aspects of vulnerability of the legitimate interest of the Mexican automotive industry, from both manufacturers of vehicles and dealers of new and used vehicles.

If you have any questions regarding the foregoing, please do not hesitate to contact us.

Mexico City, October 29, 2021

Comments

Such limitation will be applicable to taxpayers whose interest accrued during the tax year derived from their debts exceed MXN $20’000,000.00. Said amount will be jointly applicable to all legal entities that pay taxes in accordance with Title II of the ITL, as well as to permanent establishments of residents abroad that belong to the same Group or that are related parties.

Said provision establishes the mechanics through which both the net interest and the adjusted tax profit (i.e. EBITDA) will be determined, so once the amounts of said concepts have been calculated, will have to determinate the new interests limit that may be deduct. In the event that the amount of non-deductible interest is “zero” or negative, the deduction of all the interest accrued by the taxpayer will be allowed in accordance with such provision.

It should be noted that the amount of net interest of the tax year that is not deductible in accordance with the aforementioned provision may be deducted during the following 10 tax years until it is exhausted, and for this purpose, a record of the net interest pending for deduct must be kept and the same tax losses rules set forth in article 57 of the ITL must be observed; that is, a deferred deduction of said net interest may be made.

Finally, said limitation will only be applicable when the amount of non-deductible interest calculated in accordance with such provision is higher than the amount determined in accordance with section XXVII of article 28 of the ITL; that is, to the so-called “thin capitalization”, in which case, the latter section will not be applicable.

Although the aforementioned provision pretends to find a supposed concordance with Action 4 of the Framework against the Base Erosion and Profit Shifting or BEPS that seeks to combat the practices detected in certain Multinational Groups where they have eroded the income taxable basis through the implementation of financing structures that generate deductions of interests, we estimate, among others, that the considerations expressed by the Federal Executive Brach in the Explanatory Statements that originated the provision in question suffer from several constitutional deficiencies.

Recommendations

We consider that article 28, section XXXII of the ITL violates different human rights and fundamental principles, so an amparo lawsuit may be filed against it on the occasion of its first concrete application action, that is, within a 15 business-day-term following the submission of the annual income tax return for fiscal year 2020.

If you have any questions regarding the foregoing, please do not hesitate to contact us.

Mexico City, March 29, 2021