On May 5^th, 2023, a Ruling entered into force delegating powers to several officials of the Tax Administration Service in order to verify the fulfillment with the obligations related to the identification of the Controlling Beneficiaries (CBs).

Comments

With such Ruling, powers are delegated to both the General Administration of Federal Tax Audit and to the General Administration of Major Taxpayers, to carry out audits, as well as requests for information with the purpose of verifying that taxpayers comply with the obligations to identify, obtain, and conserve, as part of its accounting records, reliable, complete, and updated information on its CBs.

Remember that on January 1^st, 2022, the addition of articles 32-B Ter, 32-B Quáter, 32-B Quinquies, 42, section XIII, 48-A, 84-M y 84-N of the Federal Tax Code entered into force, through which the aforementioned obligations were incorporated to the legal entities, trustees, settlors, fiduciary and/or the contracting parties or members regarding any legal entity.

The rules 2.8.1.20., 2.8.1.21. and 2.8.1.22. of the Miscellaneous Tax Resolution for 2022, states the criterion for the determination of the CB condition, as well as the mechanisms and parameters to identify, obtain and conserve the necessary information that must be included in the accounting records.

Such mechanisms include the implementation of all those internal control procedures that are reasonable and necessary for the obtainment and conservation of the information regarding the identification of the CBs.

In case of committing an infringement deriving of the breach of the referred obligations, the penalties will vary from MXN $500,000.00 and MXN $2’000,000.00, for each CB, depending on the case.

Pursuant to said Ruling, we consider it imminent that the tax authorities will start in a generalized and massive way with the exercise of their powers of verification in order to prove the fulfillment with the referred obligations and impose the corresponding sanctions, as appropriate.

Recommendations

It is of prime importance that all legal entities, trusts or other legal figures have the corporate and legal information that evidences their CBs, and such information is certain, complete, and up-to-date and within reach of the tax authorities through the implementation of the internal controls that result necessary in order to prevent and mitigate whichever contingency in tax matters.

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

Mexico City, June 1, 2023

The rule 2.1.52. of the Miscellaneous Tax Resolution for 2023 establishes the integration and operation of the Collegial Body upon whom the tax authorities will submit certain cases that they know because its verification powers (i.e. tax audits) to obtain a favorable opinion about the lack of business reason in the legal transactions of the taxpayers and thus determine the corresponding tax credits. Said provision entered into force since January 1^st, 2023.

Comments

For the tax authorities two concepts have gained importance that invariably must be permeated in the daily operations carried out by the taxpayers; these are: the materiality of the operations and its business reason.

The materiality of the operations finds its legal basis in the article 33, letter A., section VIII of the Federal Tax Code (FTC) regulations in connection with article 28, section I, letter A. and section II of the FTC, which state that those who are obliged to keep accounts, will be considered as an integral part of it, all the documentation and information of the records of their operations, acts and/or activities carried out; that is, the documentation and information that demonstrates the existence of such operations.

The article 5-A, first paragraph of the FTC sets forth that legal transactions with no business reason which generate a direct or indirect tax benefit, shall have the tax effects corresponding to the transaction that would have been executed to obtain the economic benefit reasonably expected by taxpayers.

The fourth paragraph of the referred article 5-A states that the tax authorities may presume, unless proven otherwise, that there is no business reason: (i) whenever the quantifiable economic benefit reasonably expected is lower than the tax benefit, and (ii) whenever the economic benefit reasonably expected could be reached by executing a lower number of legal transactions and the tax benefit therefrom would have been more burdensome.

In such way, the referred Collegial Body may resolve the opinion requests formulated by the tax authorities when they question the existence of the business reason of those legal transactions of the taxpayers that are subject of tax audits and, if applicable, they determine the respective taxes, accessories and fines notwithstanding the criminal responsibilities that may result of the commission of the offences set forth in the FTC.

Recommendations

It is fundamental and indispensable that the operations, acts and/or activities for the achievement of the corporate purpose of the legal entities are duly documented in order to have all the sufficient elements and the reasonable evidence to prove their materiality (i.e. what, how and when of such operations) in addition to the prudent qualification and quantification of the business reason in connection with the economic benefit achieved and, in this way, prevent and/or mitigate tax contingencies and even criminal contingencies.

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

Mexico City, March 14, 2023

Comments

The ESG Criteria imply reviewing and analyzing the business model in order to draw up the appropriate strategy to develop the set of practices focused on Environmental, Social and Corporate Governance aspects, which will influence intangible assets and investments, among others.

Some of the indispensable actions to implement the ESG Criteria are:

a) Environmental Criteria

• Reduce the gas emission.
• Use renewable energies.
• Implement circular economies.
• Manage the natural resources.
• Responsibly manage hazardous substances.
• Streamline the life cycle of the products.

b) Social Criteria

• Provide labor well-being to human capital.
• Protect the human rights.
• Promote the diversity, inclusion, and equity.
• Connect with the community (social responsibility).
• Take measures related to clients and suppliers.
• Take care of personal data.

c) Corporate Governance Criteria

• Define the responsibilities of the three levels of the corporate structure.
• Prevent risks or contingencies in tax, corporate, criminal, operations with resources of illicit origin, etc.
• Fight corruption and undue practices.
• Guarantee the transparency of their actions.
• Eliminate conflicts of interest.
• Observe the market trends.

Recommendations

A legal entity with ESG Criteria, or that intends to implement them, must carry out permanent legal audits (due diligence), create, modify and/or improve its guidelines, measures, protocols and/or internal regulations, carry out training, drills, etc., which will add value to their daily activities, operations, and relationships.

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

Mexico City, March 8, 2023

Such draft Decree argues that, derived from a lack of regulation of the business sector, the Companies have been affecting and violating different aspects such as labor rights, environment, human rights, and international responsibility.

Comments

It is highly likely that the Law will be approved, published, and entered into force in 2021, as it intends to prioritize the figure of Corporate Responsibility, both in its social and human rights areas, creating a framework for comprehensive compliance with the purposes of a Company considering aspects in economic, social, and environmental matters.

Every Company must have a Corporate Social Responsibility Program duly registered before the Ministry of Economy, in order to prevent and mitigate any negative impact that may result from its activities and guaranteeing the promotion and protection of human rights through policies and proper procedures.

Likewise, Companies must adapt to the human rights paradigm to promote mutual respect among their members, making it necessary to develop a due diligence mechanism through the establishment of a specialized department that is responsible for the implementation and monitoring of policies and responsible business conduct measures.

Those Companies that incur corporate responsibility for human rights violations will be entitled to sanctions which will range from a warning, a fine and even ordering their dissolution, among others; however, the sanctions may be reduced by up to a third if, prior to the alleged act there was a permanent control body in charge of verifying compliance with the Law.

From a strictly legal perspective, it is questionable that a Company violates human rights when its activities are carried out exclusively in its private character; however, due to the new international practices around the figure of Corporate Social Responsibility the purpose of the Law is understandable.

Recommendations

The Law provides a considerable administrative burden for the Companies; therefore, it will be important to review and analyze that within their corporate governments there are mechanisms of analogous regulatory compliance and, in any case, modify, develop, and/or implement policies and procedures in accordance with the Corporate Social Responsibility standards required by Law, which will have to be registered in the National Registry of Corporate Responsibility.

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

Mexico City, January 18, 2021