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New anti-abuse rule for tax losses schemes

New anti-abuse rule for tax losses schemes
junio 08

Mexican tax authorities have observed an increased use of tax losses by corporate groups and MNE’s. In response, the government issued a new anti-abuse rule to inhibit improper transfer of tax losses.

The use of corporate losses through aggressive tax planning schemes has been widely discussed amongst tax administrations. In fact, in 2011 the OECD published a comprehensive study that mainly addressed policy issues regarding the tax treatment of losses, besides strategies for detecting and responding to schemes involving tax losses. As a result, on June 1, 2018, Mexico included a new anti-abuse rule (article 69-B Bis) in its Federal Tax Code with the intention of deterring the improper transfer and use of tax losses in groups of companies.

Mexican rules on corporate tax losses

Since 1965, the Mexican tax legislation has allowed the use of corporate tax losses to offset profits. The general rule states that the use of losses follows a personal principle and excludes the possibility of its transfer, even in a merger. In other words, the loss relief is granted exclusively to the taxpayer who incurred economically in such tax loss. However, the legislation provides specific exceptions to this general rule, in the case of spin-offs and surviving entities in a merger who carry out the same business activities.

The tax treatment of losses in Mexico allows the taxpayer a carry-forward period of ten years, considering inflation adjustments. If the taxpayer fails to apply a tax loss when entitled to do so, the right to use such amount in subsequent years is forfeited. Limitations also apply in case of direct and indirect changes of control in an entity.

Scope of the anti-abuse rule

Even though the Mexican legislation already included specific rules to limit the transfer and use of tax losses, a new provision aimed at inhibiting improper transfer of losses has been added to the Federal Tax Code. According to the legislative initiative, the Mexican tax authorities have observed an increased use of tax losses by corporate groups. This anti-abuse rule is expected to reduce tax erosion practices carried out by groups of companies.

The anti-abuse rule is only applicable when the tax authorities detect that certain conditions are fulfilled. The rule applies to taxpayers with the right to use tax losses, which have left a corporate group due to a corporate restructure, a spin-off, a merger or a change of ownership.

In addition to the conditions mentioned above, the applicability of the rule is limited to six scenarios related with deductions, asset transfers, depreciation of investments, use of negotiable instruments, and transactions with related parties, among others.

Administrative proceedings

If the taxpayer falls into the scope of this anti-abuse rule, the tax authorities will send an electronic notification. The taxpayer is granted a twenty-day period in order to provide relevant information and supporting documentation. Afterwards, the tax authorities have a six-month period to render a decision on whether or not the taxpayer reverted the observation of improper transfer of tax losses.

The taxpayer who obtains an unfavorable resolution, will be listed on the tax authorities website (http://www.sat.gob.mx) and on the Official Federal Gazette. The effect of this publication is to confirm that the taxpayer made an improper transfer of tax losses and as a consequence, the offset of such tax losses is prohibited.

 Final remarks

Although the purpose of the new anti-abuse rule is to inhibit the improper transfer and use of tax losses, the scope of the rule may exceed its original objective. Legitimate business reorganizations could fall into the scope of this rule that categorically forbids the use of the transferred losses.

The constitutionality of this anti-abuse provision remains to be validated by the Mexican Judicial branch. In the meantime, corporate groups should be cautious regarding the transfer and use of tax losses.

Lic. Adriana Higuera Ornelas, LL. M.
Senior Associate at JCH Abogados
Member of the Comisión Fiscal 2 at Colegio de Contadores Públicos de México

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