Beginning January 1, 2021, Mexico’s reportable transaction rules require either a taxpayer or a tax advisor to report to the Mexican tax authorities any transactions that are designed, marketed, organized, implemented or administered to provide a tax benefit to the taxpayer.
What is a Reportable Transaction?
A reportable transaction is considered to be any transaction that generates or may generate, directly or indirectly, a tax benefit in Mexico and has any of the following characteristics:
Prevents foreign authorities from exchanging tax or financial information with Mexican tax authorities.
Avoids the application of the preferential tax regime (“REFIPRE”) or of transparent tax entities and foreign instruments.
Shifts tax losses to people other than those who generated them.
Consists of a series of interconnected payments or operations that return all or part of the amount of the first payment that is part of said series, to the person who made it or one of its partners, shareholders or related parties.
Is a hybrid structure that applies a tax treaty signed with Mexico.
Involves operations between related parties in which:
Intangible assets difficult to value are transferred in accordance with The Organisation for Economic Co-operation and Development’s (OECD) Transfer Pricing Guidelines for Multinational Companies and Tax Administrations;
Business restructurings with no consideration paid have the effect of reducing operating profit by more than 20%;
The use of goods and rights are transferred or granted without consideration;
No reliable comparables exist, as they are operations that involve unique or valuable functions or assets; or
A unilateral protection regime granted in terms of foreign legislation is used in accordance with OECD’s Guidelines on Transfer Pricing for Multinational Companies and Tax Administrations.
Avoids establishing a permanent establishment in Mexico under Mexican income tax law and the treaties to avoid double taxation signed by Mexico.
Involves the transfer of a fully or partially depreciated asset, which allows its depreciation by another related party.
Involves a hybrid mechanism defined in accordance with a particular section of Mexican income tax laws.
Avoids the identification of the beneficial owner of income or assets, including through the use of foreign entities or legal figures whose beneficiaries are not designated or identified at the time of its incorporation or at any time.
Are operations carried out to obtain tax benefits contemporaneous with the imminent expiration of tax losses.
Avoids applying the additional rate of 10% in certain cases provided in Mexican income tax law.
Exists certain related-party leases.
Exists certain operations in which there is a greater than 20% discrepancy between tax and accounting records.
Who is required to report?
Taxpayers and tax advisors have the obligation to report reportable transactions.
A tax advisor is any individual or entity that, in the ordinary course of its activity, carries out tax advisory services and is responsible for or is involved in the design, marketing, organization, implementation or administration of the entirety of a reportable transaction or who makes the entire reportable transaction available for implementation by a third party.
The tax advisers required to make disclosures are those who are considered residents in Mexico or residents abroad who have a permanent establishment in Mexico in accordance with Mexican income tax laws, provided that the activities attributable to said permanent establishment are those carried out by a tax advisor.
When a tax advisor residing abroad has a permanent establishment or a related party in Mexico, there is a rebuttable presumption that the tax advice was provided by the latter. This presumption will also be applicable when a third party who is a resident in Mexico or a permanent establishment of a resident abroad carries out tax advisory activities under the same trademark or trade name as the tax advisor residing abroad.
A reportable transaction must be disclosed regardless of the taxpayer’s tax residence, provided that the taxpayer obtains a tax benefit in Mexico.
If several tax advisors are obliged to disclose the same reportable transaction, they will be considered to have complied with the disclosure requirement if one of them discloses said transaction on their behalf. Additionally, such an advisor must issue a certificate to the other tax advisors who are released from the reporting obligation indicating that the transaction has been disclosed.
Alternatively, taxpayers are required to make the disclosure of reportable transactions when the tax advisor does not provide the taxpayer with the identification number of the reportable transaction issued by the tax authorities or does not provide a certificate stating that the transaction is not reportable.
A taxpayer must also disclose reportable transactions that the taxpayer designs, organizes, implements or administers. In certain cases, the tax advisers who are individuals may be exempt from the disclosure requirement provided that certain provisions of the Mexican tax code are met.
If a reportable transaction is designed, commercialized, organized, implemented or administered by a person who does not meet the definition of a tax adviser under Mexican laws or is a non-Mexican resident and has no permanent establishment in Mexico, then the taxpayer must disclose the reportable transaction.
Two other scenarios in which a taxpayer rather than the tax advisor is required to disclose the reportable transaction are when there is a legal impediment for the tax advisor to reveal the reportable transaction and when the taxpayer has entered into an agreement with the tax advisor to make the disclosure.
It is important to note that taxpayers obligated to disclose reportable transactions are tax residents of Mexico and non-Mexican tax residents that have a permanent establishment in Mexico, and they carry out transactions with non-Mexican, related parties that generate tax benefits in Mexico for the non-Mexican tax residents.
What information must be disclosed to the Mexican Tax Authorities?
Either the taxpayer or the tax advisor must disclose the name, address and tax identification number for the tax advisor or the taxpayer, as well as information related to other involved advisors, if applicable. In addition, the reporting must include (i) a detailed description of each of the steps of the transaction along with a technical explanation of the Mexican and foreign tax rules; (ii) a description of the tax benefit obtained or expected; and (iii) the tax years for which the transaction was or will be implemented. The tax authorities may request additional information after the initial filing is made. In which case, the tax advisor or taxpayer will have 30 days to respond to the information request, which must be made under penalties of perjury. The disclosure of a reportable transaction does not imply that the Mexican tax authorities have accepted or rejected the tax effects of the transaction.
Pursuant to the regulations issued on November 18, 2020, either the taxpayer or the tax advisor must report the following information: (i) a diagram detailing all the transactions (legal acts or facts) that are part of the plan, project, proposal, advice, instruction and/or recommendation that makes up the reportable transaction; (ii) the country or jurisdiction where the entities involved within the reportable scheme are or will be located, as well as the jurisdiction where the transactions (legal acts or facts) which make up the reportable scheme will take place; and (iii) the background and conclusions of the context of the reportable transaction, as well as the legal arguments and the premises upon which the legal interpretation is based.
In addition, in the case of a customized transaction, the regulations require that tax advisors or taxpayers provide the Mexican tax authority the following information: (i) the exact date or approximate date on which the transactions (legal acts or facts), which integrate the reportable scheme, will take place; (ii) the estimated value or amount of such transactions (if the beneficiary taxpayers are assisted or will be assisted by individuals, entities or legal entities abroad or in Mexico, as well as their identification data including their tax residency or location; and (iii) indicate if the participants in the reportable scheme are considered as related parties in terms of the Mexican law.
When to report
Generalized reportable transactions must be disclosed no later than 30 days after the first contact is made for their commercialization. First contact is deemed to be made for commercialization when the necessary measures are taken so that third parties know the existence of the reportable transaction.
Custom-tailored reportable transactions must be disclosed no later than 30 days after the day the transaction is available to the taxpayer for implementation, or the first legal event or act that forms part of the transaction is performed, whichever comes first. Tax advisers and taxpayers obliged to disclose reportable transactions may do so from the moment they have finalized their design.
The rules provide a set of parameters designed to penalize tax advisors and the taxpayers that have infringed on their respective obligation to disclose a reportable transaction. Penalties imposed on tax advisors for such infringement can be as high as approximately USD 1 million (exchange rate being approximately 20 Mexican pesos per US dollar). Penalties imposed on taxpayers who infringe on their obligation are fined up to the value of the tax benefit received from the reportable transaction.
If a taxpayer does not disclose a reportable transaction or makes an incomplete disclosure or one with errors, the tax authorities may impose a penalty equivalent to an amount between 50% and 75% of the tax benefit obtained or expected to obtain.