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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Tax reform 2022 in Mexico: What were the changes?

The fiscal closing and what to take into account

Approval by the Senate of the Multilateral Agreement to Implement the Measures Related to Tax Treaties to Prevent Base Erosion and Profit Shifting (MLI), developed by the Organization for Economic Cooperation and Development (OECD). This according to official information from the Senate of the Republic.

Background that led to the approval of the agreement

Derived from Action 15 of the BEPS Report, which consists of developing a Multilateral Instrument (MLI) to amend tax treaties in order to effectively apply the measures to combat base erosion and profit shifting contemplated in tax treaties, the MLI was created to include in existing bilateral tax treaties measures to prevent treaty abuse by multinational companies and the artificial use of permanent establishment status, as well as to improve the dispute resolution mechanism of such treaties.

In this regard, it should be noted that Mexico signed the MLI in 2017 and on October 12, 2022 the Senate ratified the MLI, so it must be sent and deposited with the OECD for its signature and subsequent entry into force, with the expectation that it will be effective as of 2024.

The MLI will be included in each tax treaty entered into by Mexico (except for the United States of America and Germany) to form part of it, functioning as a protocol to interpret and execute the treaty in question and the MLI as a single document.

The entry into force of the MLI will have effects on transactions with foreign residents, so it is important to comply with its provisions in order to have access to the benefits of the treaties and at the same time not have contingencies to deduct the respective payments.

Objectives of the Multilateral Convention

• To clarify the concepts of the treaties for a better application and to avoid abuse, among others, in matters of residence, benefits and permanent establishment.
• Efficient mechanisms for disputes that may arise between governments.
• Simplify benefits
• Establish mechanisms to avoid treaty shopping, or the search for structures whose sole purpose is to benefit from the treaty without any justification of the need for the operation or without a business reason.

Highlights of this document

• Establish requirements for people to be able to apply for treaty benefits, under the concept of "eligible persons", so that residency will not be sufficient.
• It may involve changes in domestic legislation regarding methods to avoid double taxation.
• It may involve planning constraints for people who have investments abroad.
• Addresses issues of dual residence, beneficial ownership, related third parties, split contracts for permanent establishment issues.
• The principle of good faith is maintained, but this does not prevent the analysis of income that is not taxed at source (business profits), in order to review whether or not the benefits of the treaties are applicable.
• Each country may establish its own reservations, and information exchange and information sharing agreements between authorities should be considered.
• It incorporates sections for arbitration in case of disputes.

At Ecovis Mexico we are part of this global network and have more than 30 years of local experience; we focus on creating reliable solutions in the areas of finance, audit and tax consulting, providing services of the highest quality.

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The SAT expands its opening hours and service spaces for taxpayers.

Economic Package 2023

The Tax Administration Service (SAT) by means of communication 049/2022 dated October 2 has determined to extend the hours and space of attention for taxpayers, especially to legal entities which will be attended on "Fridays, from October 7 to December 30, 2022, from 9:00 a.m. to 4:00 p.m., by appointment", unfortunately this wording causes confusion, since it is not understood if Monday to Thursday will be attended to legal entities, being Fridays exclusively for them; the above would be inappropriate:00 to 16:00 hours, by appointment", unfortunately this wording causes confusion, since it is not understood if from Monday to Thursday it will attend to legal entities, being Friday exclusive for these; the above would be nonsense, because it would reduce the effective attention times. Now, if in addition to the normal schedule from Monday to Thursday, the SAT will provide extraordinary service on Fridays only to legal entities, it will be relieving a severe delay in the procedures of these persons, which has accumulated since 2020, however, individuals would be affected by not having service on Fridays.

Use of a mobile office by the Tax Administration Service (Servicio de Administración Tributaria)

In a second point, SAT has decided to use again the mobile office mechanism, bringing the services and procedures of the institution in remote areas to the taxpayer service offices; this plan will begin at first for the entities of Oaxaca, Quintana Roo, Sinaloa and Veracruz to serve individuals, mainly; in a second stage, Monterrey, Guadalajara, Cancun, Merida, Tijuana, Ciudad Juarez and Mexico City, being again the legal entities the most benefited.

It is correct to reduce the severe backlog in terms of taxpayer service, which was affected by the pandemic, but the SAT must take care that this plan does not severely affect the services to individuals and above all, it must improve in the final attention to the taxpayer, since many times the officials themselves do not know in depth the procedures they are receiving.

Click here to read the press release.

By: Benjamín Segura | Sr. Legal Tax Consultant

Source: https://www.gob.mx/sat/prensa/el-sat-amplia-sus-horarios-y-sus-espacios-de-atencion-para-los-contribuyentes-049-2022

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Economic Package 2023

Senate approves the Multilateral Convention

The Secretary of Finance and Public Credit delivered the 2023 Economic Package to the Congress, which includes the Expenditure Budget Bill (PEF), the Federal Income Law Initiative (LIF) and the General Economic Policy Criteria.

Initiatives in this package

Among the initiatives in the 2023 package are the following: 

• Gaceta Parlamentaria, Chamber of Deputies, FINANZAS PÚBLICAS (hacienda.gob.mx)
• Annex A of the Federal Revenues Law for Fiscal Year 2023 (LIF)
• Annex B With the proposed Budget of Expenditures of the Federation for Fiscal Year 2023 (PEF)
• Annex C General Economic Policy Criteria for the initiative of the Revenue Law and the proposed Budget of Expenditures of the Federation for the fiscal year 2023
• Annex D Amending, adding and repealing various provisions of the Federal Law of
• Annex E Adding various provisions of the Federal Budget and Fiscal Responsibility Law
• Annex F Methodological note on the identification of priority attention zones 2021; and proposal for the declaration of priority attention zones 2023.
• Annex G Report on the use of the power conferred to the Federal Executive in tariff matters, submitted in accordance with Article 131 of the Political Constitution of the United Mexican States.
• Annex H List of Rural Priority Focus Areas 2023
• Annex J List of urban priority focus areas 2023
• Annex K Estimated amount of federal resources to comply with the housing subsidy policy for fiscal year 2023

From the above, it is clear that this year there are no initiatives by the Executive with proposals to change or reform laws on tax collection matters such as the Income Tax Law (LISR), Value Added Tax Law (LIVA) and the Federal Tax Code (CFF) that make up the Tax Miscellaneous, which will only update fees and rates for inflation, so taxpayers will not face structural reforms for 2023, and there will be no tax increases either.

The deadlines for approval of the LIF are October 20 and 31, by the Chambers of Deputies and Senators, respectively, and for approval of the PEF by the Chamber of Deputies on November 15.

Highlights to consider

Among the highlights of the package are the following:

It was noted that the PEF for Fiscal Year 2023 has been carried out under the principles of austerity, efficiency and rationality in spending, being congruent with income and macroeconomic variables, all in sustainable balances, presented in the General Economic Policy Criteria 2023, prioritizing social programs with a base of healthy public finances and without macroeconomic imbalances.

It was also emphasized that the tax base will continue to be strengthened through measures against tax evasion and avoidance, as these measures have increased revenues without the need to create new taxes or increase existing ones.

Finally, it is estimated that public debt will remain on a stable and sustainable trajectory, respecting the fiscal targets and debt ceilings established by Congress, to reach 49.4% of Gross Domestic Product in 2023.

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SAT expands its hours and spaces for taxpayers

Senate approves the Multilateral Convention