Chronology

• Subscription: October 14, 2017
• Approval: June 18, 2022 DOF - Diario Oficial de la Federación (Official Gazette of the Federation)
• Entry into force: July 2, 2023
• SHCP Announcement: July 5, 2023
• Implementation: January 1, 2024

What is it?

The Pacific Alliance is made up of Chile, Colombia, Mexico and Peru, which signed the "Convention to Standardize the Tax Treatment provided for in the Double Taxation Avoidance Agreements signed between the States Parties to the Pacific Alliance Framework Agreement", with the purpose of modifying the bilateral double taxation avoidance agreements signed between countries, in order to contribute to the economic reactivation of the region.

What does it establish?

The convention establishes the following:

1. Pension Funds

It recognizes pension funds as residents for purposes of the application of the agreements to avoid double taxation, so that such funds may apply the benefits of such agreements and will be considered effective beneficiaries. For such purposes, the following are considered pension funds:

Interest and capital gains

Equalizes the tax treatment for interest income and capital gains from the sale of shares through a stock exchange that is part of the Latin American Integrated Market (MILA) and received by pension funds.

a) Interest: It is established that interest from any of the member countries whose recipient is a recognized pension fund also from any of the member countries, will be taxed in the country of residence of the recipient and not of the source; however, it may be taxed in the country of source, but the tax may not exceed 10% of the gross amount of the interest. However, the tax treatment of the treaties may be applied when the interest is taxed at less than 10% of the gross amount of the interest or is exempt in the member country from which the interest arises due to the legal nature of the debtor.

b) Capital gains: Capital gains obtained by a recognized pension fund of a member country from the sale of shares representing the capital of a company that is a resident of a country that is a Party to the Convention through a stock exchange that is part of the Latin American Integrated Market (MILA), can only be subject to taxation in the country mentioned first (residence).

It should be noted that, with respect to Peru and Mexico, the convention will apply, although the protocol to the double taxation avoidance treaty between those countries is not applicable when the recipient of the interest income or capital gains, as applicable, being a resident of one of those countries, is not subject to taxation or is exempt with respect to such income under the laws of the country of residence.

Source: Convention-para-homologar-el-tratamiento-impositivo.pdf (alianzapacifico.net)

Pacific Alliance Double Taxation Avoidance Convention entered into force and will start to apply as of January 1st - Pacific Alliance (alianzapacifico.net)

CONVENTION TO AVOID DOUBLE TAXATION OF THE PACIFIC ALLIANCE ENTERED INTO FORCE AND WILL BEGIN TO APPLY FROM NEXT JANUARY 1 | Secretaría de Hacienda y Crédito Público | Government | gob.mx (www.gob.mx)

Some background information

• 1996: Mexico "Code of Corporate Principles and Best Practices", (Consejo Coordinador Empresarial). 
• 1999: "Principles of Corporate Governance" (Organization for Economic Cooperation and Development (OECD)).

What is corporate governance and what is it for?

• Known as "corporate governance" or "good corporate practices".
• It consists of the rules, procedures, guidelines, manuals and in general regulations that a company implements internally for its operation as an individual legal entity and as that legal fiction that aims to perform a function within the society of a country and that its interaction is not only with other legal entities, but with governments, customers, suppliers in order to provide a service, products, economic or social activity that is used by them. 
• Through its self-regulation, it allows not only the correct operative functioning for which it was created, but also provides an element of trust, commitment, good practices, but above all responsibility of the moral entity, generating in the stockholders the confidence that the services or goods they offer or receive from the governed society are supported in their processes and that they have mechanisms to demand rights or settle their obligations, even for the governments of the countries they represent the certainty that these governed companies have mechanisms for the fulfillment of fiscal obligations, social security, responsibility before society and the environment.
• It regulates the vulnerable activities carried out by legal entities in the countries, as well as controls the reporting of these activities, holding accountable the legal entities and individuals that own, benefit from or control them.

Guiding principles of corporate governance a:

• Transparency: obligation to reflect with certainty the accounting, tax, legal and administrative information of an organization, on the one hand, for better decision making by internal agents (shareholders, partners, administrators and managers with decision-making powers) and, on the other hand, for the management of such information by obligation imposed by national legal frameworks, by external agents (investors, clients, suppliers and governments), through the implementation of clear, documented internal procedures, administered by specialized bodies for the best operation and practices of any area of the entity. 
• Responsibility: based on the operation of the members that integrate the directive, administrative or decision-making bodies within a company, which details the scope of the functions, self-regulation mechanisms of the interaction between the bodies and the individual responsibility of each person for the function he/she performs, without leaving aside the civil, commercial, ecological and even criminal responsibility of the entity or company. In this regard, it is convenient to have manuals of conduct, ethics, equality among people, as well as procedures that regulate the internal and external conduct of the entity. 
• Independence: vital for the self-regulation of the company's internal management bodies, containing the procedures and scope of activities, responsibility, but above all of the so-called "stockholders" or third parties who are not internal agents of the company, but who, due to their daily interaction and importance in the relationship with them, have or influence the life of the company, such as customers and suppliers. Legal certainty and clarity are sought for decision making in order to avoid pernicious elements such as corruption, bad practices and influences for the legal entity. 
• Administration: essential activity for the daily operation of legal entities; it refers to the implementation of operating rules that allow interaction in processes and procedures between the company's bodies, ranging from the rules for the board of directors, agreement between partners, governing bodies and all departments, from production, treasury, to human resources. The elaboration of codes and manuals is vital, but their implementation and supervision is complementary to effective governance.

Why do I need corporate governance?

To obligate and bind the legal fiction that is the entity with internal and external agents not only to respond in case of liability, but also to exercise rights affecting the negotiation. 

For the self-regulation of a legal entity for the benefit of its decisions and administration; operation and responsibility, as well as from an individual perspective, for the benefit of every human being who works, interacts or is linked for any reason to society, ensuring their human rights, personal information and the environment to improve opportunities with customers and international suppliers in the long term and intangible as a better organization in the short term.

Is it an investment or an expense?

It is an investment because, in spite of the economic and human resources required for its implementation, in the long run it will represent a tangible benefit for society, reflected in better business opportunities such as entry into regulated and strict markets where only certified companies participate and with controls inherent to corporate governance; It may also represent a lower grade or risk rating for the financing requested by the entity, since rating agencies and participants in the financial sector (with corporate governance) base the amounts available for credit on risk control, so that the lower the risk, the greater the opportunity for low-cost financing.

It is unquestionable that corporate governance is not only a tool that helps to maximize the operability of a company, but that guarantees its operation and viability over the people, this means that self-regulation is synonymous with a smooth operation regardless of the person in charge of decision making, because such decisions do not depend on the person who is in charge but on the internal procedures, or the corporate governance itself that will guarantee the jobs and operation of the company as well as its subsistence.

As part of the transfer pricing obligations, the following information returns must be prepared and filed:

• Annex 9 of the Multiple Informative Declaration (DIM)
• Local Declaration
• Master Declaration
• Country-by-Country Statement 

A brief explanation of each will be given below:

• Regarding Annex 9 of the DIM, this must be submitted by those taxpayers that carry out operations with related parties, regardless of their tax residence. This document includes information obtained from the transfer pricing analysis performed by the advisor, such as the number of comparables, market range, financial information, etc. This information must be submitted with respect to transactions carried out in 2022 no later than May 15, 2023.

• Taxpayers required to file the Local Return are those who have carried out operations with related parties and who have obtained in the immediately preceding fiscal year income in excess of $904,215,560. As part of this return, certain documentation related to the intercompany transactions carried out must be included, as well as additional information such as the value chain, description of the administrative structure, strategies and business restructurings, among others. This document must be submitted before May 15, 2023. It is important to mention that, according to the tax reform for 2022, the related parties of the companies that are obliged to file a tax return, will have to file the local return in the same manner, even if they have not exceeded the income limit mentioned above.

• The master statement includes certain information regarding the structure of the Multinational Group, such as the description of intangible assets, financial activities, etc. This information must be submitted no later than December 31, 2023.

• Finally, the country-by-country statement provides summary data for each jurisdiction in which the Group's companies are located, including revenues, profit, taxes, etc. This statement must be filed no later than December 31, 2023. 

New legal provisions for the obligation to file Annex 9 of the SID:

On December 27, 2022, the Miscellaneous Tax Resolution (RMF) for 2023 and its Annexes were published in the Official Gazette of the Federation (DOF), which is effective as of January 1, 2023. Rule 3.9.19 is incorporated, which states that taxpayers that carry out transactions with related parties may choose not to submit the information in Annex 9 of the Multiple Informative Declaration (DIM), as long as the taxpayers that carry out business activities do not exceed 13 million pesos in the immediately preceding fiscal year, or that they have not exceeded 3 million pesos in the rendering of professional services in such fiscal year.

In December 2022, the SAT released the application for the filing of the annual corporate income tax return for the year 2022, which underwent some modifications with respect to the version of previous years: 

In the "Income Tax for Legal Entities" section "Nominal Income" under the "Type of Income" item, the following concepts are included:

• Taxable income on disposal of foreclosed assets
• Gain on derivative transactions related to exchange rates
• Tax gain on sale or transfer of portfolio
• Loan portfolio recoveries
• Accrued income from release of reserves
• Premiums written
• Consolidation of the bare ownership and usufruct

On the other hand, under the heading "Income that only accrues in the annual tax return", several concepts are added, among others, gain from total asset disposal; income accrual option for total or partial collection of the price; income from real estate trusts; as well as several concepts of IEPS tax incentives. 

The following items are added to the "Authorized Deductions" section under the "Expenses" caption:

• Tax loss on disposal of foreclosed assets.
• Tax loss on disposal or transfer of portfolio
• Punishments
• Write-offs, rebates and portfolio discounts
• Loss on derivative transactions related to exchange rates
• Contributions to IPAB
• Commissions to agents
• Additional compensation to agents
• Reinsurance and reinsurance commissions taken.
• Ceded premiums
• Cleaning supplies
• Propaganda and advertising
• Stationery and supplies
• Maintenance expenses 
• Payments to individuals exempt from income tax who are engaged exclusively in agricultural, livestock, forestry or fishing activities. 
• Cost of books, newspapers and magazines
• Expenditures incurred in the payment of services for the use of road infrastructure
• Expenditures made during the year for investment and technological development projects
• Toll payment for public transportation of people
• Toll payment for public freight transportation
• Toll payment for tourist public transportation
• Toll payment for private transportation of persons
• Toll payment for private freight transportation
• Toll payment for private tourist transportation
• Payment of special mining duty

Finally, in the section "Administrative Facilities and deductible incentives" under the heading "Type of incentive", the deduction of the cost of land acquisition by taxpayers engaged in construction and real estate development is added.

The following changes are made in the "Financial Statements" section:

• The statement of cash flows and the statement of changes in stockholders' equity are added. 
• The four financial statements include the column for the fiscal year to be presented, i.e., 2022 as 2021, to show comparative figures between the current year to be reported and the immediately preceding year. 
• In each item to be filled in, a field for notes is added in which explanations of the variations from one fiscal year to another can be added. 
• In the "Reconciliation" subsection regarding the tax accounting reconciliation, columns are included to reflect information for fiscal years 2022 and 2021.
  • In the "Non-Accounting Tax Income" section, the following items are added: taxable foreign exchange gain; taxable gain on the sale of foreclosed assets; gain on derivative transactions related to exchange rates; taxable gain on the sale or assignment of loan portfolio and recoveries of loan portfolio and cumulative income from the release of reserves. 
  • On the other hand, "Non-tax accounting deductions" included provisions, accounting loss on disposal of foreclosed assets, allowance for loan losses and result from valuation at fair value.
  • Non-accounting tax deductions" include the following items: tax loss on disposal of foreclosed assets; tax loss on disposal or assignment of portfolio, write-offs; write-offs, allowances and discounts on the portfolio; losses on bad debts and loss on derivative transactions related to exchange rates. 
  • Finally, in the "Non-tax accounting income" section, the following items are added: accounting foreign exchange gain; accounting gain on disposal of land; accounting gain on disposal of foreclosed assets and gain or loss on valuation at fair value.

It is important to mention that other non-accounting tax income; other non-tax accounting deductions; other non-accounting tax deductions and other non-tax accounting income are not contemplated and should therefore be classified in one of the pre-established concepts.  

Important: Legal Entities that are obliged or choose to have their financial statements audited and those that are obliged to submit information on their tax situation or ISSIF (ISSIF) will only complete the "ISR Legal Entities" section, since the application will disable the "Financial Statements" section.

By Cristina Contreras, Fiscal Manager.

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Tax reform 2022 in Mexico: What were the changes?

General Anti-Abuse Rule in Mexico Regarding the Business Reason and Integration of the Reviewing Collegiate Body.

On February 3, 2023, the Ministry of Labor and Social Welfare (STPS) published in the DOF an agreement establishing several amendments and additions to the general provisions for the registration of individuals or legal entities that provide and/or perform specialized services or works (REPSE) that had been published on May 24, 2021 , in order to achieve greater efficiency in the development of the actions of surveillance and promotion of compliance with the labor regulations governing the subcontracting of specialized services or works.

Provisions for REPSE registration

The rules or provisions in question will become effective as of the day following their publication (as of February 7, 2023) and, in summary, are as follows:

• The application for registration in the REPSE must be accompanied by the last payroll voucher and the last voucher of the Single Determination System (SUA) issued by the Mexican Social Security Institute (IMSS).
• The cancellation of the registration may be requested at any time, when convenient and provided that the need to cancel it is justified; likewise, activities may be modified, updated and added, which must coincide with the corporate purpose and/or proof of tax status.
• The STPS will act through the Decent Work Unit and its Administrative Units, and the General Directorate of Federal Labor Inspection, to request information and documentation to verify the data provided by applicants, beneficiaries and government entities, as appropriate; as well as to monitor and promote compliance with labor legislation on subcontracting.
• Surveillance actions include verifying that the information in the registry coincides with the actual conditions of the work center, with the activities provided as services or specialized works, as well as with the respective contracts, in addition to reviewing compliance with the working conditions related to the registration of workers with the IMSS.
• On the other hand, the beneficiary companies of the services or specialized works will be checked to ensure that they have the respective contracts, that the subcontracted workers do not perform activities of the corporate purpose of the beneficiary and that they are duly identified by means of the image, name, badge or identity code that links such workers with the company that provides the specialized service or specialized work during the performance of their work at the facilities of the beneficiary company or the company that contracts the services.
• The surveillance actions and their results must be recorded, and in the event of detecting non-compliance with the applicable subcontracting regulations, the corresponding administrative procedure may be requested and initiated and, if applicable, the procedure for cancellation of the registration, which will proceed when the workers involved are not registered with the IMSS, when there are irregularities related to the salary of the workers and/or the contract for the provision of the specialized service or work and when there are discrepancies in the information in the registration and that verified during an inspection.
• The procedure will begin with the notification of the detected non-compliance, granting 5 business days to revoke it.

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Audit plans, strategies, objectives and criteria

General Anti-Abuse Rule in Mexico Regarding the Business Reason and Integration of the Reviewing Collegiate Body.

In accordance with Action 6 of the BEPS (Base Erosion and Profit Shifting) Plan, referring to the prevention of treaty abuse, in Mexico as of 2020, Article 5-A of the Federal Fiscal Code (CFF) was added to implement its general anti-abuse rule, which in conjunction with other procedures is used to disregard and disregard the tax effects of operations in which the use of deception or taking advantage of errors in the legislation or the non-application of a legal norm is attempted, justifying itself in another to reduce or eliminate the payment of contributions, for tax evasion and/or avoidance.

Objective of the General Anti-Abuse Rule in Mexico

In Mexico, the rule of article 5-A of the CFF seeks to prevent taxpayers' operations that do not have a business purpose from generating a tax benefit, so it is necessary to demonstrate that the economic benefit expected or obtained is greater than the tax benefit, as well as the justification and necessity of carrying out the operation in question, considering its economic utility in the generation of income, reduction of costs, increase in the value of the assets owned by the taxpayer, improvement of its position in the market and the development of relationships with customers and suppliers.

On the other hand, as of the 2022 tax reform in Mexico, the business rationale was established as an indispensable requirement in financing transactions deriving from carried interests, mergers or spin-offs of companies and corporate restructurings.

However, the application of the anti-abuse clause is only originated by the tax authorities in the exercise of their powers of verification through home visits, desk reviews and electronic reviews, so it is not applicable in management powers, audit planning, surveillance, assistance and control, such as, for example, letters of invitation or e-mails sent by the tax authority.

Integration of the Collegiate Reviewing Body

Within the procedure for the application of the anti-abuse of business reason clause, once the verification powers are initiated, the tax authority, based on the facts and circumstances of the taxpayer recognized under such powers, as well as the evaluation of the elements, information and documentation obtained during such powers, must send the case for review to a collegiate body, which had not been materially integrated until January 1, 2023, by means of rule 2.1.52. of the Miscellaneous Tax Resolution for the fiscal year 2023 (RMF), which establishes the integration of the collegiate body and its rules of operation, in order for such body, in the cases it is aware of, to issue a favorable opinion for the application of the anti-abuse rule. If the opinion of the collegiate body is not received within a period of 2 months from the presentation of the case by the tax authority, it will be understood to be negative. 

This collegiate body will be composed of a Coordinator, as chairman of the meetings, who in turn must appoint a Technical Secretary and an Assistant Secretary; On the other hand, the heads of the Tax Legislation Unit, the Tax Revenue Policy Unit, the Federal Tax Legislation and Consultation Sub-Administration, the General Administration of Federal Tax Audit, the Decentralized Administration of Tax Audit, the General Administration of Large Taxpayers, the General Administration of Hydrocarbons, the General Administration of Foreign Trade Audit, the General Administration of Foreign Trade Audit, and the General Administration of Tax Administration and Consultation will be part of the body, with voice and vote, General Administration of Hydrocarbons, General Administration of Foreign Trade Auditing and General Legal Administration, having as a minimum quorum to meet shall be integrated with the attendance of at least 5 of the heads of the above mentioned administrative units and the Coordinator or his alternate. The opinion of the collegiate body shall be formed with the vote of more than half of the officials present.

Conclusions

It is evident that for the fiscal year 2023 the tax authorities intend to exercise their verification powers by reviewing whether the taxpayers' operations have or lack business reason, therefore, in order to avoid contingencies, in which the tax effects of an operation are not recognized or it is re-characterized, it should not be lost sight of the fact that at the end of the day, there is already a body in charge of the business reason opinion, as well as the fact that such business reason is a tax requirement of the operations and that even if the operations are or are not subject to the opinion of the collegiate body, the tax authorities must integrate the opinion of the tax authorities, There is already a body in charge of the business reason opinion, as well as the fact that said business reason is a tax requirement of the operations and that even though the operations may or may not be subject to the opinion of the collegiate body, a file of evidence must be integrated to prove the before, during and after of any operation and demonstrate both its business reason and its materiality or effective realization.

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Changes in the vacation period for workers | All about this new reform

Senate approves the Multilateral Convention

On December 14, 2022, the Senate unanimously approved the amendments to the Federal Labor Law (LFT) to extend the vacation period for workers from 6 to 12 days from the first year of employment, and sent the ruling to the Federal Executive, pending only its publication in the Official Gazette of the Federation (DOF), with the expectation that it will become effective as of January 1, 2023.

What does the reform talk about in the workers' vacation period?

Article 76 of the LFT is amended by stating that employees who have more than 1 year of service will enjoy an annual period of paid vacation, which in no case may be less than 12 working days, and which will increase by 2 working days, until reaching 20, for each subsequent year of service; as of the sixth year, it adds, the vacation period will increase by 2 days for every 5 years of service. 

Likewise, Article 78 of the LFT is amended, establishing that of the total corresponding period, each employee shall enjoy at least 12 days of continuous vacation, and that such period, at the discretion of the employee, may be distributed in the manner and time required.

New vacation periods for workers

Vacation periods will be as follows:

Other points to consider regarding the reform for vacation periods for workers

The effects of the reform are not retroactive; therefore, there will be no increase in vacation days with respect to past vacation periods or those granted under current legislation; in other words, there are no debts for vacation days from past years; however, the vacation days corresponding to each employee must be increased in accordance with his or her seniority. 

In other words, for example, if a worker had 6 days of vacation in his first year of work, it does not mean that with the reform the employer will have to grant him 6 more days; but for his second year, he will no longer have 8 days of vacation, but 14.

Likewise, it is important to mention that vacation days can only be increased and not decreased, therefore, if an employment contract establishes vacation periods longer than those established in the reform, such periods cannot be reduced as a result of the reform.

In the case of employees who began their labor relationship in 2022 and complete their first year of work in 2023, the reform does not establish provisions for the respective transition; however, in accordance with Article 18 of the LFT, which establishes that in case of doubt regarding labor regulations, the interpretation most favorable to the employee must prevail, it is considered that the most favorable to the employee is to enjoy the 12 days in force in accordance with the provisions of the LFT at the time the employee completes the year of services.

On the other hand, if an employee completes his/her first year of work in 2022, but takes or enjoys the vacation period until 2023, his/her vacation period will be 6 days in accordance with the legislation in force in the year in which he/she generated his/her right to the vacation period.

Other practical points to consider are that it increases the amount of the vacation bonus and, consequently, the contribution base salary and payroll tax. Likewise, the effect of the increase in the vacation bonus on the amount exempt from income tax and the partial deduction of such benefit should be considered.

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The fiscal closing and what to take into account