No substantial tax reforms in Mexico’s 2018 proposed economic plan is not necessarily good news

Following the different structural reforms enacted during the early stages of President Enrique Peña Nieto's presidential term – most of which pointed towards attracting foreign investment for important economic sectors such as the energy industry – it was natural for his administration to refrain from enforcing any amendments to Mexican tax laws in order to provide investors with legal certainty and tax stability prior to committing important amounts of capital into Mexican ventures, and so the government did this through a tax certainty agreement issued back in 2014.

Consistently, the proposed economic plan by the Ministry of Treasury for 2018 includes no proposals to amend the Income Tax Law, Value Added Tax Law (VAT), Excise Tax Law (IEPS) or even the Federal Fiscal Code (FFC), which is why, in general terms, the fiscal framework for 2018 should remain stable compared to that applicable in 2017.

This contrasts with the Mexican Employers Confederation’s (COPARMEX) tax reform proposal (not considered under the Economic Plan), which includes important but rather ambitious initiatives to further promote investment and competitiveness in Mexico to enhance economic growth. The proposal intends to address issues that would create jobs and improve social welfare, boost investments, strengthen tax revenues, and provide legal certainty to taxpayers by simplifying tax laws and reducing excessive compliance formalities through specific measures, which include:

• Allowing taxpayers a full deduction on employee benefits;

• Reducing the income tax rate to the OECD member countries’ average of 24.66%;

• Allowing a credit on dividend withholding taxes for Mexican individuals (10%);

• Broadening the VAT taxpayers’ base by significantly reducing exemptions;

• Broadening the permitted tax deductions for individuals; and

• Reducing discretionary measures that enable tax authorities to act subjectively.

The Federal government, however, did not consider any of these issues. In fact, the economic plan only includes a report describing the economic policies and criteria under which the Federal Revenue Act and the Federal Budget Project for 2018 shall rely upon; the 2018 federal budget project and the 2018 Federal Revenue Act (FRA), which suffered the most relevant changes discussed below.

The Mexican government has been generally proactive when it comes to the implementation of OECD's proposed measures to avoid base erosion and profit shifting (BEPS). An example thereof is the implementation of measures that allow tax authorities to obtain information to effectively perform their tax recollection duties. The proposed FRA incorporates a new article requiring taxpayers to file information related to certain transactions considered as “relevant” for tax purposes. Although this requirement is already included under Article 31-A of the FFC, it only contemplates the obligation to file the return in case a relevant transaction is undertaken, without specifying or describing the nature of the transactions that trigger the obligation of filing the return itself and the specific information that has to be filed.

This has been declared as unconstitutional by the Supreme Court and therefore, in order to provide taxpayers with legal certainty, the proposed article now describes the nature of the transactions that would trigger this requirement, which include, among others:

• Related party transactions;

• Corporate restructures or reorganisations;

• Sale and contribution of goods or financial assets;

• Transactions entered into with residents of a territorial tax system jurisdiction;

• Capital redemptions; and

• Dividend payments.

It is expected that such transactions will only be reportable to the extent that, individually or cumulatively, they represent more than MXN 60 million ($3.4 million).

For previous fiscal years, tax incentives have been included in order to promote investments under certain strategic sectors, which it appears has proven effective considering that these incentives were preserved for the 2018 FRA. For income tax purposes, the preserved incentives include, among others:

• The creditability of toll expenses for the automotive industry;

• The creditability of special mining duties for low income miners;

• Profit sharing (PTU) reduction in advance monthly income tax payments; and

• The requirement to issue a withholding tax certificate when retaining professional services, which could be waived under certain conditions.

For IEPS, preserved incentives include:

• The deduction of IEPS paid upon the acquisition of diesel, biodiesel and other blends thereof used on marine vehicles;

• Creditability/reimbursement of IEPS paid upon the acquisition of diesel, biodiesel and other blends thereof used in agriculture or forestry activities;

• Creditability of IEPS paid upon the acquisition of diesel, biodiesel and other blends thereof used on automobiles; and

• IEPS reduction for taxpayers using fossil fuels on their goods’ productive processes, to the extent not destined for combustion.

For the hydrocarbon exploration and extraction industry, the FRA provides that in case a favourable balance is derived from the payment of hydrocarbon exploration and extraction activities tax (EET), such could be offset against subsequent EET payments made by the relevant taxpayer.

Recent technologic developments are allowing the use of fossil and non-fossil fuel blends, which have different applicable excise tax rates, to power all kinds of vehicles, which makes it unclear for both taxpayers and authorities as to how they should compute their corresponding excise taxes. Therefore, the FRA proposes excise taxes on blended fuel products to be computed by considering the amount of each type of fuel included in a blended fuel product. Likewise, the proposal establishes that the amount and type of fuels included in fuel blends should be specified upon the importation or sale thereof in the corresponding import request or tax invoice, respectively. The proposal also includes a definition of ethanol.  

To further develop measures adopted to avoid BEPS, the Ministry of Treasury, through the Tax Service Administration, will issue a tax evasion report by February 2019. It is anticipated that in preparing the report, both foreign and domestic prestigious academic institutions, research organisations and other tax specialists will participate.

Oscar López Velarde (olopezvelarde@ritch.com.mx)

Santiago Llano Zapatero (sllano@ritch.com.mx)

Juan Jose Paullada Eguirao (jpaullada@ritch.com.mx)

Ritch, Mueller, Heather y Nicolau, S.C.

www.ritch.com.mx