On November 5, the Congress approved the draft decree reforming the Income Tax Law (LISR), Value Added Tax Law (LIVA), Law of Special Tax on Production and Services (LIEPS), Federal Tax Code (CFF), and Federal Law of Rights (LFD), the Federal Income Law (LIF) and the Federation’s Expenditure Budget for the tax year 2021, to later deliver it to the executive for approval and publication.
Below, we share our analysis of the most relevant changes established to each of the tax provisions for the tax year 2021.
The labor reform initiative will be addressed in a separate bulletin to be published in the coming days.
Federal Income Law (LFI) Initiative
It is proposed that surcharge rates will be amended as follows:
Withholding of interest by financial institutions
Institutions that make up the financial system must withhold from individuals an ISR rate of 0.97%, instead of 1.45% (during the 2020 tax year), applicable to capital that gave rise to interest payment.
In principle, the 2021 Federal Income Law maintains the tax incentives granted to date. However, it specifies that the same be considered cumulative income for the purposes of Income Tax, in which case they must be acknowledged as such when they are actually credited.
Listed below are the tax incentives for each said case:
• Deduction of the Special Tax on Production and Services [in Spanish: el Impuesto Especial sobre Producción y Servicios], (IEPS), incurred by the purchase of diesel or biodiesel that is utilized exclusively in machinery (except vehicles), by individuals who carry out commercial activities.
• A credit for an amount equivalent to the IEPS incurred by the import or purchase of diesel or biodiesel and its mixtures for those individuals engaged exclusively in agricultural or forestry sector activities.
• A credit for an amount equivalent to the IEPS incurred by the import or purchase of diesel or biodiesel and its mixtures for those individuals engaged exclusively in public and private transport or freight transport, as well as tourism transportation.
• A credit for an amount equivalent to the IEPS caused by the acquisition of fossil fuels used in production processes for producing other goods, without the purchased fuels being destined for combustion.
• Accreditation of the special right on mining referred to in article 268 of the Federal Law of Rights (LFD) for those taxpayers holding mining concessions and assignments.
Amendments to the Income Tax Law
A) Authorized non-profit legal entities.
1. It is noted that the revocation of the authorization to receive tax-deductible donations, for any of the following reasons, means exiting Statute III:
a. If more than 50% of the income is derived from activities that differ from the purpose for which the recipient institution was authorized.
b. Allocation of assets that differs from the corporate purpose for which the authorization was obtained.
c. Not issuing tax receipts or issuing them as donations that cover transactions that are distinct from a donation.
d. Being on the definitive list of fictitious transactions per Article 69-B of the Federal Tax Code.
2. Upon leaving Statute III, the donee that lost its authorization must allocate its assets in their entirety to other entities authorized to receive donations.
3. The certification concerning the fulfillment of tax obligations, transparency, and the social impact assessment is repealed.
4. Expenditures not covered by digital tax receipts and the loans that legal entities make to their partners or members, or the ascendant or descendant spouses in a straight line of said partners or members, will be considered part of the distributable remainder.
5. To pay taxes under Statute III, the following must have authorization to receive deductible donations:
• Associations or companies that award scholarships.
• Those engaged in scientific or technological research.
• Those engaged in the research and conservation of flora or wildlife species, terrestrial or aquatic, and environmental protection activities.
• Entities engaged in the breeding of protected or endangered species and habitat conservation.
6. If, as of July 1, 2021, the entities mentioned in the previous numeral do not have the authorization to receive deductible donations, from then on, they must pay taxes under Title II of the LISR, having to determine the distributable remainder generated as of July 31 December 2020, in which case, its partners and members must accumulate it for ISR purposes.
7. Likewise, the cooperative integration and representation bodies referred to in the General Law of Cooperative Societies are incorporated into the non-taxpaying regime.
B) Non-employees regime
Individuals who pay taxes under the regime of non-employees (Chapter I of Title IV of the LISR) must cease to pay taxes under this regime when the income received by such individuals is for the concepts referred to in sections IV, V, and VI of article 94 of the LISR and their income has exceeded 75 million pesos.
Individuals who are in the case mentioned in the preceding paragraph must:
• Pay the tax in terms of the chapter of Title IV that corresponds as of the following month in which the income exceeded the amount of 75 million pesos.
• Inform of their situation in writing to the service providers or the people who make the payments.
C) Digital Economy
i. Withholding rates
The withholding rate that digital platforms must retain from individuals who dispose of goods or provide services through them was reduced as follows:
ii. Reasons for blocking the internet access infrastructure
Legal entities residing abroad, as well as foreign legal entities, will be temporarily restricted from using the internet access infrastructure, in the terms established by the Value Added Tax Law (LIVA), when they fail to comply with the Obligations to retain and pay income tax for three consecutive months.
D) Manufacturing companies (maquiladoras)
An adequation to the wording of the third paragraph of Article 182 of the Income Tax Act was made to avoid different interpretations and to clarify that maquiladora companies can only comply with their obligations concerning transfer pricing by obtaining an APA (Advance Pricing Agreement) (Article 34-A of the Federal Tax Code) or through a Safe Harbor calculation provided for by the article above.
E) School business programs
The school business program is eliminated, and thereby the possibility of deducting donations submitted by individuals and legal entities.
Amendments to the Value-Added Tax Law
A) Digital economy
i. Foreign residents without PE released from obligations of the Digital Economy
Residents abroad without permanent establishment (PE) in Mexico who dispose of goods or provide digital services to recipients located in the national territory through intermediary platforms will be released from complying with the following obligations:
a) Registering in the Federal Registry of Taxpayers (RFC);
b) Calculating, withholding, and paying of VAT attributable to their activities in Mexico;
c) Submitting a quarterly information return of their users;
d) Issuing a Digital Tax Receipt (CFDI);
e) Appointing a legal representative in Mexico;
f) Designating a tax address in Mexico
To this end, digital intermediary platforms will be obligated to carry out the withholding and payment of 100% of the Value-Added Tax on behalf of the providers of digital services and to provide the recipient of the service the corresponding CFDI, to either the person they are withholding to, or to their own name.
Additionally, intermediaries will be relieved of including the information of digital service providers in their informative return.
ii. Grounds for blocking the internet access infrastructure
For those residents abroad without a permanent establishment in Mexico who:
• Sell or provide services through digital platforms to recipients located in national territory; or
• Provide digital intermediation services
The use of the Internet access infrastructure will be temporarily restricted when any of the following obligations are breached:
• Registration in the Federal Registry of Taxpayers (RFC);
• Appointment of a legal representative and tax domicile in Mexico;
• Obtaining the Advanced Electronic Signature (FIEL);
• The omission of withholding and reporting of the corresponding withholdings during three consecutive months; and/or
• Filing the monthly informative returns for three consecutive months or quarterly returns during two successive periods (in which case the penalty will also carry a cancellation of the Taxpayer ID Number [RFC] and the removal from the list of registered digital service providers).
iii. Explanatory procedure
• The SAT will announce the breach of the obligations in question through a resolution.
• Both digital service providers and intermediaries will have 15 business days (with the possibility of requesting a 5-day extension) to provide the documentation and information appropriate to their right to disclaim the facts detected by the tax authority.
• The evidence provided will be assessed within a maximum period of 15 business days. However, during the first 5 business days of this period, the SAT may require additional information, which must be provided by the taxpayer no later than within the following 5 business days.
• If the taxpayer does not prove compliance with its obligations per the terms mentioned above, the SAT will issue the temporary blocking order.
• The concessionaire of the public telecommunications network will have 5 working days to carry out the blockade and must inform the SAT within the following 5 business days that it has complied with the instruction.
• Once the digital service providers and intermediaries regularize their situation, the SAT will issue the unblocking order so that the concessionaire of the public telecommunications network can execute it within a maximum period of 5 business days.
iv. Fines for concessionaires of public telecommunications networks
• Concessionaires of a public telecommunications network in Mexico who fail to comply with the following will be penalized with a fine ranging from MXN 500,000.00 to MXN 1’000,000.00:
• Failure to comply within a maximum period of five days, with the order to block access to the digital service of the provider of said services.
• Failure to comply within a maximum period of five days with the order to unblock access to the digital service of the provider of said services.
Said sanction will also be imposed for each calendar month that elapses without complying with the orders mentioned above. The referred sanctions are independent of those corresponding to the omission in tax payment, full withholdings, and filing of payment and informative returns.
v. Option of including VAT in the price
As a concession to the intermediaries of digital services, they will not be required to disclose the VAT expressly and specifically on their webpage, provided that prices already include VAT with the caption “VAT included.”
vi. Used goods sold through digital intermediation platforms
It is established that used personal property sold through technological platforms are considered acts subject to the payment of VAT; that is, their exemption status would be eliminated.
B) Private charitable institutions or agencies
Professional medical services provided by civil societies or private welfare institutions, authorized by the laws on that matter, are added as VAT-exempt services.
Amendments to the Federal Tax Code
A) General anti avoidance rule (Mexican GAAR)
It is specified that the expression business reason will be applicable regardless of the laws regulating the economic benefit expected by the taxpayer. If the acts lack such a business reason, the legal effects that the tax authorities grant will only be limited to the tax area, without prejudice to the investigations and criminal liability that may arise.
B) Tax Mailbox Hours
The Tax Mailbox hours will be governed according to the Central Time Zone of Mexico.
C) Sales with deferred payments or in installments
It will be understood that there is a sale with deferred payments or in installments when tax receipts are issued, per Section VI of Article 29-A of the Federal Tax Code, even when they are carried out with clients that are the public in general, and as such, more than 35% of the price is deferred after the sixth month, and the agreed-upon term exceeds twelve months. Likewise, they will be deemed transactions carried out with the public in general when simplified tax receipts are issued as referred to in the Federal Tax Code.
D) Corporate spin-off
The corporate spin-off will have the character of sale, even if the requirements indicated in article 14-B of the CFF are met, provided that the spin-off gives rise to the creation of concepts or items that did not exist before the division of the spun-off companies.
E) Recognized markets.
The concept of “recognized markets” was broadened to include not only the Mexican Stock Exchange but also any other corporation granted a concession by the Ministry of Finance and Public Credit [in Spanish: SHCP] to act like a stock exchange.
F) Cancellation and temporary restriction of Digital Stamp Certificates [in Spanish: Certificados de Sello Digital] (CSD)]
Two new assumptions are added for the cancellation of CSDs:
1) As soon as it is detected that the taxpayer that is issuing tax receipts is in a situation in which there is a lack of transactions, or is on the definitive list issued by the Tax Administration Service (SAT), according to Article 69-B of the Federal Tax Code, or
2) The taxpayer is on the definitive list, as referred to in Article 69-B Bis, for having transferred tax losses unlawfully.
Likewise, the period in which the tax authority can make known the resolution on the procedure to correct detected irregularities for which the CSD has been canceled, and the taxpayer can process a new one is extended from three to ten days.
Within a period of no more than forty business days, taxpayers may submit a request for clarification; in the case of not doing so, the authority will cancel the CDS.
G) Refund of balances in favor.
• It is established as a cause for the authority to consider refund requests as not filed when the taxpayer or the address stated before the RFC [Federal Registry of Taxpayers] cannot be located.
• When the refund request is considered as not submitted, it will not be viewed as a collection procedure that interrupts the limitation period of the authority’s obligation to return the balances in favor; since these promotions do not meet the necessary requirements for the tax authority to determine the origin of the return of a balance in favor.
• In case there are several refund requests from the same taxpayer concerning the same contribution, the tax authority may exercise verification powers to countercheck each or all of the requests issuing a resolution.
• The authorities’ period to issue their resolution is extended from 10 to 20 days once its powers of verification have concluded. If it is favorable, the SAT will make the corresponding refund within ten days of the notification of the authorization resolution.
H) Joint and several liability
The following assumptions are incorporated:
• Partners or shareholders in the case of spin-off of companies that give rise to the transfer of new items that did not exist before the division.
• Spin-off companies, concerning the transfer of assets, liabilities, and capital transferred by the spin-off company up to the amount of each company’s capital at the time of division.
• Entities resident in Mexico that maintain operations with related parties resident abroad when the latter constitute a permanent establishment in Mexico.
I) The Federal Registry of Taxpayers [in Spanish: RFC]
• It is a stated obligation that those individuals who are registered in the Federal Registry of Taxpayers provide the related information such as their identity, address, and in general, their tax situation, as well as register and maintain current the contact information of the taxpayer (only one e-mail address and phone number).
• Regarding the notification of a change in partners or shareholders, it clarifies that the notice submitted by legal entities must include the information of its partners, shareholders, or associates, mentioning that it must also include the information of those individuals that, as a matter of course, are part of the organic organizational structure and are vested with the said capacity, according to the statutes or legislation under which the company is incorporated. This information must be submitted when there is some amendment or incorporation of the same.
• The authority is granted the power to suspend, or where appropriate, decrease taxpayer obligations when confirmed in their systems or with the information provided by other authorities and third parties that taxpayers have not engaged in any activity for the previous three tax years.
• In the case of taxpayers who submit a cancellation notice in the RFC due to a total liquidation of assets, because of a complete cessation of operations or due to merger of companies, they must comply with the requirements established by the SAT through general rules, within which will be the following:
a) They must not be subject to the exercising of the powers of verification, nor have tax debt for which they are responsible for.
b) They must not be in the lists that are referred to in Articles 69, 69-B, and 69-Bis of the Federal Tax Code;
c) That there is consistency between the reported income as well as the tax withheld, along with the issued tax receipts, and the information that the authority has.
In addition, through regulations of a general nature, the Taxpayer Administration Service will allow taxpayers who request the cancellation of the Taxpayer ID number [in Spanish: RFC] not to submit periodic tax returns or to continue complying with their formal obligations.
J) Digital Tax Invoices [in Spanish: CFDI]
• The obligation to issue a CFDI is incorporated to the Federal Tax Code for those cases in which partial or deferred payments are made that settle balances from Digital Tax Receipts that gave rise to the payment obligation when merchandise is exported, which is not intended for sale, or whose sale is under a gratuitous title.
• Legal certainty is provided regarding that the digital stamp incorporated into digital tax receipts over the Internet is the one issued by the SAT.
• Operations carried out with the general public are understood to be those for which there is no RFC of the voucher’s recipient, and the possibility of granting facilities to them is foreseen.
• The quantity, unit of measure, and type of the goods or merchandise or description of the service or the use or enjoyment they cover will be recorded in the digital tax receipts using the catalogs published by the SAT for these purposes.
K) Period for keeping accounting records
• An exception was incorporated to the period of 5 years to keep the information and documentation necessary to implement the agreements reached due to the dispute resolution procedures provided in treaties to avoid double taxation to which Mexico is a party. Therefore, such information must be kept for as long as the company subsists.
• In the case of capital increases, the following documentation must be kept:
a) The account statements issued by financial institutions, in the event that the capital increase has been in cash.
b) The corresponding appraisals, in the case of contributions in kind or due to a surplus derived from the revaluation of fixed assets.
c) In the case of capitalization of reserves or dividends, the meeting minutes in which such acts are recorded, and the corresponding accounting records must also be kept.
d) When the capital increase derives from the capitalization of liabilities, the meeting minutes in which said acts are recorded, as well as the document certifying the accounting existence of the liability and the corresponding value thereof, must be kept.
• In the case of capital decreases, the following documentation must be kept:
a) Meeting minutes stating the decrease in share capital through reimbursement to partners, also, the account statements issued by financial institutions stating said situation must be kept.
b) Meeting minutes of subscription, release, and cancellation of the shares, as appropriate, when the decrease in capital derives from the release granted to the partners
• For cases in which the minutes record a merger or spin-off of companies, the statements of financial situation, statements of shareholders’ equity and the work papers for the determination of the net tax profit account, and the capital contribution account, corresponding to the immediately preceding and subsequent tax years to that in which the merger or spin-off had occurred, must also be kept.
• It specifies that the control of the origin and movements of the net tax profit account, [in Spanish: CUFIN], the capital contributions account, [in Spanish: CUCA], or any other related tax account or book account in the tax years in which the said balance reduces tax losses, distributed dividends or profits, reduced or reimbursed capital, or remittances on capital, under the Income Tax Law, also form part of the accounting records.
L) Obligations for financial entities and cooperative societies
The date is modified from June 30 to August 31 for the delivery of information on high and low-value accounts, as well as new and pre-existing accounts that are reportable.
M) Assistance for Taxpayer’s
The powers of the tax authorities are expanded so that they may carry out the following functions:
• Provide free assistance to not only taxpayers but all citizens in general.
• Inform about the possible consequences in the event that taxpayers do not comply with the fiscal provisions.
• Undertake actions that foster a culture of contribution, as well as promote formalization and compliance.
• Invite taxpayers to come to their offices to guide them in correcting their tax situation for the correct fulfillment of their tax obligations.
• Issue invitations to taxpayers to guide them on the correction of their tax situation, without this implying the exercise of verification powers, by sending:
a) Payment proposals or pre-filled returns;
b) Official releases to encourage taxpayers to comply with their tax obligations; and
c) Official releases reporting inconsistencies or atypical behavior.
N) Precautionary seizure of assets
• The application of the said measure is extended not only to taxpayers or joint and several guarantors but also to “related third parties” with the same, to prevent the aforementioned third parties from opposing the authorities’ powers, which will allow the authorities to obtain the information needed to know the tax situation of the taxpayer under review.
• The total amount of the precautionary seizure applicable to third parties related to the taxpayer will be up to one-third of the total amount of the operations, acts, or activities that the said third parties engaged in with the taxpayer.
• Moreover, it adjusts the order of precedence indicating, firstly, bank deposits and subsequently, accounts receivable, shares, bonds, coupons that have reached maturity, etc., cash and precious metals, property, movable goods, and taxpayer’s business activities; as well as copyrights and artistic works, scientific collections, jewelry, etc.
• It establishes that financial entities or savings and loan cooperatives can in no way deny taxpayers information about the authority that ordered the application of the seizure.
• It clarifies that the assets are considered seized from the moment in which they are designated as such in the proceeding by which the precautionary seizure is carried out, even when afterward they are ordered, noted, or registered with other institutions, agencies, registries, or third parties.
• Lastly, through a transitional provision, it clarifies that precautionary seizure processes pending resolution upon the entry into force of the decree must be substantiated and resolved in terms of the provision in force as of December 31, 2020.
O) Visits to verify taxpayers’ fiscal domicile
• Concerning verification visits whose objective is to review that products are in the country legally, and where it may not have been possible to prove such a condition, they will be seized according to the procedures set forth in Customs Law.
• Conversely, concerning the closure of records of the visited party, the individual who received the notice, or the witnesses who refuse to sign the record or accept a copy of the same, such events will be registered in the same record without it affecting the validity or probative value of the same.
• There is a proposal to use technology tools such as cameras and video, recorders, cell phones, or other devices that allow images or material to be collected that serve as a record of the facts detected by the tax authorities in the exercise of their actions.
• It seeks to consider offices, warehouses, stores, and places where administrative activities are carried out as places where house calls can be carried out.
• In turn, the wording of article 49 of the CFF is adjusted to clarify that visits can be exhausted in more than one diligence when the authorities need to return to the address where the visit is being carried out to make a second or subsequent proceeding under the protection of the same order.
P) Tax Opinion
As part of the verification powers, it is proposed that, in the case of a sequential review of opinions formulated by public accountants on financial statements and sale of shares, the examiners should be in charge of appearing before the tax authority to be able to make the necessary clarifications.
Likewise, it endeavors not to limit the authorities’ actions for reviewing opinions for cases of reviews to tax districts and foreign trade fines since the opinions contain no rulings on those matters.
The review will be carried out exclusively with the public accountant who formulated the opinion so that the legal representation will no longer proceed.
Q) Deadlines to meet requirements
In the case of difficult-to-obtain documents, the period to provide information in inspection acts is extended from 6 to 10 days.
R) Electronic Reviews
It proposes that electronic reviews must be concluded in a maximum period of six months from notification of the provisional ruling, except concerning foreign trade, in which case it will not exceed two years for those cases in which an international verification has been requested.
S) Unlawful transfer of tax losses
• When the taxpayer receives a notification from the authority derived from the transmission of a tax loss, for the taxpayer to make the declarations that are appropriate to his right, he will indicate the purpose of the legal acts that gave rise to the transmission of the right to decrease in tax losses; for the authority to be able to determine that this transfer had as its main objective the development of its business activity and not that of obtaining a tax benefit.
• It specifies that when taxpayers submit a petition to refute the assumption of wrongful tax losses upon notification by the authority, they must indicate what purpose these legal acts had that gave rise to the transfer of the right to reduce losses so that the authorities may verify that the purpose of these actions was to develop entrepreneurial activities, and not to obtain a tax benefit.
T) Conclusive agreements
• Taxpayers may request them within 20 business days following the notification of the observation letter or provisional resolution, or the final act has been drawn up and provided that the reviewing authority has already made a qualification of facts or omissions.
• The conclusive agreement will not proceed when:
a) It concerns verification powers in the matter of refunds of balances in favor or of undue payments;
b) It involves orders to third parties, the execution of sentences or resolutions;
c) Verification powers are initiated concerning the issuance of tax receipts or when there is a presumption that a tax offense has been committed.
• Contrary to the conclusive agreement, the dispute resolution procedures provided for in an international treaty to avoid double taxation signed by Mexico will not proceed.
U) Fines related to transfer pricing
• It seeks to consider as aggravating circumstances to impose fines, the breach of tax obligations regarding transfer prices, referred to in articles 76, sections IX and XII, 76-A, 90, penultimate paragraph, 110, section XI, 179, 180, 181 and 182 of the Income Tax Law.
• Additionally, the possibility of reducing fines originated by non-compliance with transfer pricing obligations, referred to in articles 90 and 179 of the LISR, by up to 50% is eliminated.
V) Presumption of smuggling
It includes as a presumption of the crime of smuggling the omission to return, transfer or change the customs regime of merchandise temporarily imported under maquila or export programs whose permanence in the national territory is subject to the validity of the program.
W) Revocation appeal
• The documentation referred to in Article 123 of the CFF, which is attached to the revocation appeal, must be accompanied by its respective translation if it is presented in a language other than Spanish.
• In the case of the term that the authorities have to resolve the appeal for revocation, it will begin to run as of the thirty days to challenge it unless the taxpayer demonstrates that he has filed a defense.
X) Notifications made by Tax Authorities
• The procedure for the realization of personal notifications is modified, establishing that if the notifier does not find whom he must notify at the address, there is no one with whom he can understand the diligence or whomever he meets refuses to receive the summons, this must be affixed at the main access of the address, and the notifier must record it.
Additionally, it is established that if the recipient of the notification does not wait at the tax address on the day and time indicated in the summons, the diligence will be carried out with whoever is at the address or with a neighbor, and if they refuse to receive the notification, it will be carried out by any of the other means provided for the realization of notifications.
• In the case of notifications by podiums, the term is reduced from 15 to 6 days in which the tax authorities affix the document that is intended to be notified, either in places open to the public or on the electronic page designated for these purposes by the tax authority.
Y) Tax interest guarantee
• The administrative process’ seizure only proceeds concerning tangible and immovable personal property, except for rustic or negotiations, since it is considered difficult to sell.
• Intangible assets, such as trademarks, will not constitute a means of guarantee as they are not considered an ideal means for the recovery of a tax credit.
Amendments to the Federal Law of Rights (LFD)
A) Mining rights
• The acquirers of rights related to mining concessions that obtain income derived from the extractive activity’s alienation or sale will pay the special mining right annually, applying the 7.5% rate. To determine the basis of this right, the intangible assets that allow the exploitation of assets in the public domain or the provision of a concessioned public service, among others, the titles of mining concessions or assignments, as well as the rights acquired for the exploitation and exploration of minerals or substances of the Mining Law, will not be deductible.
• It is established that the extraordinary mining right will be calculated by applying the rate of 0.5% for the income obtained from the sale of gold, silver, and platinum.
B) The Official Gazette
It is established that there will be no payment for publishing in the Official Gazette when it is determined as obligatory and has been ordered, or expressly regulated in any federal legal norm, in an international treaty, or by any other provision or body indicated in Article 19 -B of the FLR.
C) Fees for passport processing
A 30% increase in fees for ordinary passport processing when required to be issued urgently.
If you have any questions in this regard, J.A. del Río is at your service, making its experts available so that they can advise you on the compliance with legal and tax provisions.