Tax Trends in Mexico 2020-2021
In this guest post, Jorge Montes and Germán Becerra explain the Tax trends in Mexico for 2021. Both contributors discuss the potential effects of the labor outsourcing reform and its effects on the Income Tax Law (ISR) and the Value-Added Tax (VAT), tax refunds, and other tax trends.
There are companies that misused the outsourcing agreements, which is why this reform initiative is being proposed by the government. The Labor outsourcing reform, if adopted, not only impacts the labor relations, it also has a very important tax aspect implications.
The labor outsourcing reform could have an effect on the Income Tax in Mexico, known as ISR. The reform would limit the labor outsourcing expenses as deductible expenses for income tax purposes. In advance, we know that the reform is aimed at eliminating this labor outsourcing scheme.
The new concept: Specialized Services
The reform introduces the concept of specialized services or specialized work as part of the reforms in the field of ISR, where deductions for this type of labor outsourcing expense are limited. In addition, these specialized services and service providers must meet certain requirements for the purposes of making deductible expenses such expenses.
Possible new tax obligations in Mexico
Previously, all taxpayers that concluded labor outsourcing or recruitment operations through a third party had the obligation to collect certain information of said third party. At first, it had to be in print and later through the e-tax platform. However, we are aware that this procedure was never fully implemented in practice, due to problems in the systems in which the taxpayer had an obligation to collect the information aimed at verifying compliance with social security and ISR obligations in respect of those workers who were employed by a third party.
Currently, with the new concept of specialized services, it seems that we may return to the same previous scheme. Under this scheme, specialized services, e.g. cleaning service, can be deductible provided that we must have information proving that the taxpayer with which that service is contracted has complied with the following obligations: social security, INFONAVIT, ISR and VAT.
The labor outsourcing reform, if adopted, would also have an impact on the Value Added Tax (VAT). Companies that abused the outsourcing agreements mainly omitted the entire VAT. Therefore, the proposed reform provides that any tax invoice that has the concept “outsourcing” (or that closely related to outsourcing of personnel) will not have a tax effect.
Crediting VAT for “Specialized Services”
Of course, this means that the person will neither be able to deduct the expenses for the income tax matter and will not be able to credit the VAT. In addition, a company will only be able to credit the charged VAT when the specialized work services providers meet a handful of requirements.
Beneficiaries Jointly and severally liable?
The tax authority is trying to close the circle to prevent taxpayers from avoiding taxes that originate from labor outsourcing. In addition, the Tax Code provides that anyone that receives specialized works and services will be jointly and severally liable of all taxes. In other words, the contractor must make income tax withholding on wages, and if the contractor does not carry out such task, the beneficiary will have to pay such taxes.
Pending Developments
In short, this law reform presents a troubling issue. The legislative analysis was postponed to February 2021, even though the draft project was intended to enter into force in January 2021.
More information on the Labor Reform:
Currently, another important issue is the reform to Federal Tax Code and the imminent tax trends in Mexico. The reform is focused on adjustments to the tax reform approved by 2020, i.e. anti-avoidance rules as well as suspension and cancellation of digital stamp certificates (known as CFDIs), and tax refund provisions.
For more information about taxes in Mexico, visit DBM’s Tax Guide.
Today, we know that requesting a tax return or refund in practice is a complex issue, regardless of the amount. The tax authority (SAT) has some measures in place so that the taxpayer does not opt to apply for a refund of taxes. The tax authorities have the practice to defer as much as possible the tax refund, even if the request is legitimate and there is no mistake in the application.
The Problem of Tax Refunds
Needless to say, some taxpayers often request tax refunds with evidence such as documents that consist of “simulated operations”. This situation is noted in the president’s memorandum that submitted this reform. In this sense, we agree that there must restrictions to prevent taxpayers from applying for illegitimate or illegal VAT refunds.
The Tax Address Issue
In addition, if the domicile of a taxpayer is not located by the tax authorities, the authorities will argue that the tax refund request has been withdrawn. This cause will not interrupt the limitation period to request a refund. Indeed, there are some legal precedents that have established that the 5-year period to request the tax refund is interrupted when the request is considered abandoned, but under other grounds or circumstances not relating to the tax address.
Powers of the SAT to review the Tax Refund Requests
Likewise, we highlight that the authority has powers to review and/or verify each application submitted by the taxpayers. However, if a taxpayer submits two or more procedures for the same tax, the tax authority has the powers to review all applications at the same time and issue a single resolution, according to the explanatory memorandum. The purpose of this reform is to administratively simplify the procedures.
Mergers and spin-offs entail a transfer of ownership. However, article 14-B of the Tax Code provides for exceptions to consider mergers or spin-offs as a sale.
In practice, we note that there have been some spin-offs cases where the financial statement of the split company includes items that were previously not included. It is, therefore, established that a spin-off will be deemed a sale for tax purposes when items appear in the accounting records that were not previously recorded.
On the cancellation of CFDIs, the tax authority can suspend temporarily a company’s ability to issue tax invoices or CFDIs under a number of situations. The taxpayer will have the possibility to provide clarifications so that the SAT can lift the suspension at least temporarily while it considers the taxpayer’s explanations.
With the tax reform, if a taxpayer has not established the veracity of the invoiced transactions or does not prove the source of the transfer of tax losses, the authority will definitively cancel the CFDIs without going through the process of temporary suspension.
We deem relevant the tax reform relating to maintaining or keeping the accounting books. The reform entails that a company has to keep, forever, the bank statements where it is shown capital repayments, payment of dividends, and capital contributions.
Another tax reform is that relating to related parties. Although it is true that Article 40 of the Tax Code envisaged related third parties as joint and several liable, now a rule is established so that the precautionary assurance is also applicable to related third parties. We consider this to be an important issue since a third party related to a defaulted taxpayer could be affected with a precautionary lien.
The President of Mexico announced the extension of the validity of the Decree granting benefits in the northern border area. In addition, it is noted that the benefits of the northern border area will also be extended to the southern border area, i.e. the decrease to income tax from 30% to 20%, the decrease in the VAT rate from 16% to 8%, and some subsidies applicable to petrol. Of course, interested companies and individuals must meet and comply with several requirements.
Free Trade Zone in Chetumal
In addition, the government announced that a free trade zone would be created in Chetumal, the decree was published on December 31st, 2020. Certain goods are exempted from tariffs, but the benefits are limited to the companies of the region.