If enacted, the proposal would establish additional reporting requirements for certain taxpayers and require taxpayers to have a valid business purpose for restructurings, mergers and spin-offs to remain tax free. Taxpayers should continue to follow the progress of the proposal through Congress.

On September 8, 2021, Mexico's President submitted to Congress the economic proposal for 2022 (the Proposal). Although the Proposal does not include any new taxes or rate increases, it would change certain provisions to curb perceived abuses by taxpayers.

Mexico's Congress still has to debate and vote on the Proposal, which could change as it moves through the legislative process.

Once Congress approves the Proposal (no later than November 15, 2021), it will be sent to the President for his signature and published in the Mexican Federal Official Gazette. The Proposal will become law on the date of publication and should generally be effective January 1, 2022.

A detailed Tax Alert will be issued shortly, but below are highlights of the Proposal that are relevant for foreign investors.

Intercompany financing issues

Back-to-back loans

The Proposal would expand the definition of back-to-back loans to include financing operations that lack business purpose.

Non-regulated Special Purpose Financial Institutions (SOFOMs)

The Proposal would eliminate certain benefits applicable to non-regulated SOFOMs, such as the exception from the thin capitalization rules (when foreign related parties carry out the majority of the financial transactions) and the reduced 4.9% withholding tax rate for payments made by an intra-group SOFOM to a nonresident creditor.

In addition, the Proposal would modify the thin capitalization rules to require taxpayers to include net operating losses, in addition to paid-in capital and previously taxed earnings, when determining whether to use the tax-basis-equity option to calculate their limitation on interest deductions. To the extent book and tax accounts differ by more than 20% for purposes of the thin capitalization rules, the Proposal would allow taxpayers to use the tax-basis option if there is a business purpose for the difference and other requirements are met. The Proposal also would impose additional requirements on taxpayers that may exclude debt for certain activities, such as infrastructure and electricity, from the thin capitalization calculation if the taxpayer has an agreement with the government for these activities.

Capital gains

The Proposal would modify the requirements nonresidents must satisfy for electing to be taxed on a net basis, including the requirements for appointing a legal representative. In addition, the Proposal would expand the information auditors must include in tax audit reports. Under the Proposal, auditors would have to include information on transfer pricing in the reports, as well as other information.

The Proposal would establish additional reporting requirements for taxpayers requesting an advance ruling from Mexico's tax authorities (SAT) on share-for-share reorganizations that involve domestic transfers at tax basis or international transfers with deferred gain. To obtain an advance ruling, taxpayers would need to identify certain relevant transactions over the five years preceding the reorganization, as part of their ruling request. After the reorganization, additional reporting requirements would apply for certain transactions, including additional transfers of shares, increases or decreases in capital, and sales of business segments.

Restructurings, spin-offs and mergers

The Proposal would require taxpayers to have a valid business purpose and meet other requirements for restructurings, spin-offs and mergers to remain tax-free.

To verify whether the merger or spin-off has a valid business purpose, the SAT would consider the taxpayer's relevant transactions that related to the change of control and were carried out within the five years immediately preceding and following the merger or spin-off. Transactions that the SAT would consider as relevant transactions include reductions or increases in ownership and the shareholders' change of residency.

Maquiladora transfer pricing rules

The Proposal would eliminate the option for maquiladoras to request an advanced pricing agreement (APA) to comply with maquiladora transfer pricing rules, thereby requiring maquiladoras to meet the safe harbor method. The Proposal also would repeal the APA option for nonresidents operating through "shelter" companies.

Additional obligations for legal representatives of non-Mexican residents

The Proposal would include additional obligations for legal representatives of nonresidents. For example, the Proposal would require a legal representative to voluntarily assume joint and several liability up to the amount of the tax liability and to have sufficient assets to cover a possible assessment.

Value-added tax

The Proposal would clarify that a value-added tax (VAT) credit would only apply for the importation of goods if the importation documents (pedimento) were in the taxpayer's name.

Additionally, the Proposal would:

• Modify the "sourcing rule" for determining when the leasing of property is subject to VAT in Mexico
• Require nonresident digital service providers to submit information returns monthly rather than quarterly
• Impose penalties on digital service providers that fail to file tax returns and pay taxes for three or more consecutive months

Other provisions

Other changes in the Proposal include:

• Requiring taxpayers to file an annual tax report
• Expanding joint liability for taxes
• Changing the depreciation rate for usufruct, which would be considered a fixed asset
• Excluding the inflationary adjustment and exchange fluctuation from the determination of a Mexican controlled foreign corporation's income

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