On December 9, 2019, the Decree that amends, modifies and repeals provisions of the Income Tax Law, the Value Added Tax Law, the Excise Tax Law and the Federal Tax Code was published in the Federal Official Gazette.
The amendments published and generally enforceable as of January 1, 2020, have as their main objective to incorporate into Mexican tax law the recommendations issued by the Organization for Economic Cooperation and Development (OECD) in the BEPS Project, with the purpose of tackling tax avoidance and evasion at an international level.
In addition, the tax reform seeks to establish a new regulatory framework to reinforce the ability of the tax authority to prevent tax evasion that results from aggressive tax planning, use of fraudulent invoices and outsourcing. Finally, the reform sets forth a new tax regime applicable to the digital economy in Mexico, by including measures to tax those who perform activities in Mexico through technological platforms and digital applications, particularly those who operate from abroad. The most important amendments of this Tax Bill are described below.
BEPS: Base Erosion and Profit Shifting
CFDI: Digital Invoices
Comments: OECD Commentaries on the 2017 Model Tax Convention
FLL: Federal Labor Law
FTC: Federal Tax Code
ITL: Mexican Income Tax Law
MLI: Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
BEPS Model: 2017 OECD Model Tax Convention on Income and on Capital
OECD: Organization for Economic Co-operation and Development
PE: Permanent Establishment
REFIPRES: Preferential Tax Regimes
RFC: Federal Taxpayers Registry
SAT: Tax Administration Service
SHCP: Ministry of Finance and Public Credit
VAT: Value Added Tax
VATL: Value Added Tax Law
Income Tax Law
Permanent Establishment Following the recommendations of Action 7 of BEPS, which were adopted by Mexico as signatory to the MLI, the definition of PE is updated to include additional cases in which a foreign resident will be deemed to have a PE in Mexico, as well as to limit the applicable exceptions to such cases.
Agency PE: Dependent Agent
The ITL already established that foreign residents would constitute a PE in Mexico when they act in the country through a dependent agent that concludes contracts in their name or on their behalf.
However, it is now also established that a dependent agent will trigger a PE in Mexico for the foreign resident if such agent concludes contracts, or habitually performs the main role that leads to the conclusion of contracts by the foreign resident, and they:
are entered into in the name or on behalf of the foreign resident; relate to the transfer of ownership of, or grant the temporary use of property owned or temporarily under the use and control of the foreign resident; or bind the foreign resident to perform a service. Before the tax reform, in order for a foreign resident to trigger a PE in Mexico it was required that the dependent agent through which it was acting had the legal ability to execute contracts in its name or on its behalf. However, it will now be sufficient that the dependent agent concludes or habitually performs the main role leading to the conclusion of such contracts, which does not necessarily require that such agent holds a power of attorney from the foreign resident.
The purpose of this amendment is to tackle tax schemes through which a dependent agent habitually negotiated contracts that benefited a foreign resident but such activity did not amount to a PE by itself because the dependent agent did not conclude or execute such contracts though a power of attorney formally granted by the foreign resident.
Important new terms are included in the ITL, such as the "conclusion of contracts" and "performing a main role" that leads to the conclusion of contracts in an "habitual" manner.
The scope of such terms is analyzed in the Commentaries, which already incorporate the recommendations of Action 7 of BEPS. However, the ITL reform does not establish the specific scope of such concepts, which suggests that the Commentaries could be relevant to interpret them. How these concepts are interpreted by authorities and courts will have relevant tax implications.
Agency PE: Independent Agent
The current ITL establishes how a foreign resident triggers a PE in Mexico by acting through an independent agent, i.e. when such agent does not act within the scope of its ordinary activities. However, before the tax reform, no specific parameters were in place to determine whether an agent was, in fact, independent.
Hereinafter, an agent will not be deemed to be independent when it acts "exclusively" or "almost...