mexican tax update new compliance obligations for immex...mexican tax update new compliance...

Mexican Tax Update New Compliance Obligations for IMMEX July 19, 2016

Deloitte - OMCHC © 2016 Galaz, Yamazaki, Ruiz Urquiza, S.C. 2

Discussion Topics

•  Base Erosion and Profit Shifting (BEPS)

•  Value Added Tax (IVA) Certifications

•  Annex 24 and 31

•  Advanced Pricing Agreement Update

•  Value Added Tax Refunds

•  Notice for Manufacturers & Exporters (DIEMSE)

Content


Base Erosion and Profit Shifting (BEPS) Simón Somohano Transfer Pricing Partner

1


The OECD/G20 BEPS Project: Background

•  Work began in 2012 –  Commenced following 2012 meeting of G20 Leaders –  Political response to growing perception that governments lose substantial corporate

tax revenue because of base erosion and profit shifting (“BEPS”) –  Involves governments of 44 countries: ◦  34 OECD member countries, ◦  2 OECD Accession countries, and ◦  the remaining G20 countries The OECD issued a report, “Addressing Base Erosion and Profit Shifting,” in February 2013, and an “Action Plan on Base Erosion and Profit Shifting” in July 2013 •  The Action Plan: –  Identifies 15 key actions needed to address BEPS –  Sets deadlines to implement the actions –  Identifies resources needed –  Identifies the methodology to implement the actions •  Final Reports were released in 2015 on –  Country by Country Reporting –  Transfer Pricing of Intangibles –  Hybrid Mismatch Arrangements –  Preventing Treaty Abuse –  Digital Economy


Action 13

New guidelines adopt 3—tiered approach

Country-by-Country Template • Key financial information on all group members on an aggregate country basis with an activity

code for each member

Master File • Key information about the group's global operations including a high-level overview of a

company’s business operations along with important information on a company’s global transfer pricing policies with respect to intangibles and financing

Local File • Information and support of the intercompany transactions that the local company engages in

with related parties

Local law will determine the language in which the documentation must be submitted. Countries are encouraged to permit filing in commonly used languages and request translation after submission


Country-by-Country (CbC) template

•  Information required by tax jurisdiction (aggregate for all entities including PEs):

ü  Revenues (related, unrelated, total) ü  Profit/loss before income tax ü  Income tax paid (cash) ü  Income tax accrued ü  Stated capital ü  Accumulated earnings ü  Number of employees (includes independent contractors doing ordinary

operating activities) ü  Tangible assets other than cash and cash equivalents

•  Mexico − Article 76-A of the MITL incorporates the CbC report

•  US − CbC is required by Form 8975

•  Thresholds: ü  CbC – MEXICO: MXN 12Bn. (~ $ 665 million) / US: $850 MILLION ü  Master File – MXN 644 million (~ $36 million) ü  Local File – MXN ($725,000)


Intangibles Definition

•  Separate transferability not required

•  Legal protection not required but may impact value

•  Accounting and legal definitions not controlling

Intangibles

Broad definition •  Not a physical or financial asset •  Capable of being owned or controlled for use in

commercial activities •  Transferred would be compensated between unrelated

parties

Does not include •  Group synergies •  Market specific characteristics •  Assembled workforce


Rights to returns for the development and exploitation of intangibles •  Controversial and could cause a significant change in TP outcomes •  Emphasis on functions performed, assets used and risk incurred •  TP outcomes in line with value creation

Identify legal owner

Identify party performing important functions

Confirm conduct of the parties

consistent with contracts

Identify the controlled transaction

related to the important functions

Determine the arm’s length price for the important functions

Design and control of

research and marketing

Management and control of

budgets

Control over

strategic decisions over

intangible development

Important decisions regarding

defense and protection

Ongoing quality control

Steps in determining intangible returns

Important functions


Intangibles (cont’d) Returns

•  Returns to intangibles are allocated to entities based on the functions they

perform, the assets used or and risks assumed.

•  Mere legal ownership of the intangible entitles the legal owner to payment for

use of the intangible but does not entitle the legal owner to any intangible

returns unless the legal owner performs functions, use assets or assume risks.

•  Returns are determined at the start of development activity (ex ante)


Operational functions

Intangibles (cont’d)

DEMPE Functions

Development

Enhancement

Maintenance

Protection

Exploitation


Important Functions Intangibles (cont’d)

•  Design and control of research and marketing programs;

•  Direction of and establishing priorities for creative undertakings, including determining the course of “blue-sky” research;

•  Control over strategic decisions regarding intangible development programs;

•  Management and control of budgets;

•  Important decisions regarding defense and protection of intangibles; and

•  Ongoing quality control over functions performed by independent or associated enterprises that may have a material effect on the value of the intangible.


Valuation of functions Intangibles (cont’d)

•  Important functions should be compensated with an appropriate share of the returns derived from the exploitation of intangibles

•  Because it is difficult to find comparables it may be necessary to use the profit split method or valuation techniques

•  The reliability of one sided methods will be reduced if the party performing important functions is considered the tested party

•  Must consider options realistically available to both parties.

•  One sided analysis or methods such as TNMM does not provide sufficient basis to evaluate the transaction.

•  Guidance sets a high bar for use of CUP

•  Profit split and valuation techniques are preferred methods

•  Profit split guidance in 2016/2017


Value Added Tax (IVA) Certifications Jorge Ferreira Int´l Trade & Customs Consultor

2

Deloitte - OMCHC © 2016 Galaz, Yamazaki, Ruiz Urquiza, S.C. 19 19

FTGR 7.1.2.Requirements that the Companies need to qualify, in order to obtain VAT IEPS Certification for

modality A

FTGR 7.1.3.Requirements that the Companies need to qualify, in order to obtain VAT IEPS Certification for

modality AA and AAA

FTGR 7.2.1. Obligations/maintenance VAT IEPS

Certification

FTGR 7.2.2. Cause of requirement for VAT IEPS Certification

FTGR 7.1.1 General requirements for obtaining the VAT IEPS Certification 1

2 3 4

5

Grants 100% credit to the VAT and IEPS duties for

temporarily imported goods.

VAT IEPS Certifications Foreign Trade General Rules

FTGR 7.2.2.Cause of requirement for VAT IEPS Certification 5

FTGR 7.2.3. VAT IEPS Certification Renewal 6 FTGR 7.2.4. Cause for cancellation for VAT IEPS

Certification 7


•  7.3.1. FTGR:

1.  Refundable VAT duty that corresponds:

•  A: 20 days

•  AA: 15 days

•  AAA: 10 days

•  2. Automatic registry within the importer’s license for the paragraph A, of the Annex 10 and 11

•  3. If the Authority detects irregularities that cause suspension of your importer’s registry, it will notify you so you can correct such irregularities.

•  4. Excempts the obligation of presenting value manifestation and calculation sheet for temporarily imports.

•  5. It will grant a period of 36 months for the temporarily imported goods.

•  6. Grants the benefit of not requiring authorization for a rectification within the first three months (AA).

•  7. They have the benefit of requesting customs clearence for import and export operations.

•  © 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 20

General Benefits VAT IEPS Certification


•  FTGR 7.1.1, 7.1.2, 7.1.3, 7.2.1. (A, AA, AAA):

•  Be updated with your fiscal obligations.

•  That your personnel is registered in IMSS.

•  Have all your establishments registered before SAT.

•  Have an e-mail account registered before SAT.

•  Have an active importer’s registry.

•  Allow access at all times to SAT authorities.

•  Have a legal document that proves that you are the owner/renter of the Company’s premises, for at least one year.

•  Make sure that the Company doesn’t have a law sue against their partners, legal representative, or members of the Company’s administration in the last three years.

•  Good control of materials and equipments.

•  Good control of the Annex 31.

•  Have the proper infrastructure for the Company’s services/production.

Obligations VAT IEPS Certification


•  FTGR 7.1.1, 7.1.2, 7.1.3, 7.2.1. (A, AA, AAA):

•  Prove that you return abroad at least 60% of value of the temporarily imported goods within the last 12 months.

•  Prove that you return abroad at least 80% of value of the temporarily imported goods within the last 12 months (Companies that export products such as metals and textiles).

•  The use of Single Virtual Pedimento for operations within Mexico (consolidated virtual transfers, weekly or monthly).

•  Monthly report to the Authority through Single Window within the firs days of each month, if any modifications are made with the Company administration, partners, and legal representatives.

•  Every three months you will have to report all your supplier’s from which you obtain the raw materials.

•  In AA modality you will need to prove that at least 40% of your mexican suppliers have a positive opinión from SAT Authority.

•  In AAA modality you will need to prove that at least 70% of your mexican suppliers have a positive opinión from SAT Authority.

Obligations VAT IEPS Certification


VAT IEPS Certification

© 2016 Galaz, Yamazaki, Ruiz Urquiza, S.C. 23

What happens if you don´t comply with the Foreign Trade General Rules obligations?

7.1.1, 7.1.2, 7.1.3, 7.2.1 The following actions could lead up to a VAT and IEPS certification requirement. If you don´t provide the necessary information that the Authority requested in such requirement it may lead to a cancellation of your VAT IEPS Certification.

Penalties and sanctions


Annex 24 Annex 31 3

Jorge Ferreira Int´l Trade & Customs Consultor

Deloitte - OMCHC © 2016 Galaz, Yamazaki, Ruiz Urquiza, S.C. 25 © 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C. 25

Inventory Control System

Annex 24 Companies with an IMMEX program have the obligation to manage and

carry out an Inventory Control System.

According to Article 59, fraction I of the Customs Law


Annex 24

Benefits

1.  Have a correct order and management of the imported goods.

2.  The Company will be able to apply in the following modalities:

•  Industrial companies•  Service companies•  Shelter companies•  Usage of other company´s facilities (terciarización)


Obligations Annex 24 (cont’d)


To have a system that registers the

discharges of the imported goods,

as well as exportations.

Apply proper controls to the registry of the

imported goods, as well as

exportations.

Keep track of the temporarily

imported goods, making sure that

they are returned before

their time expires.

To be able to generate the

following reports (SAT Audit):

•  Import •  Export •  BOM •  Discharges •  Open Balance

It is an obligation to count with an automated Inventory Control System, that allows the compliance of the following requirements

and dispositions established within the Customs Law, Foreign Trade General Rules, and the IMMEX Decree.

1 4 3 2


Annex 24 (cont’d)


Consequences for

noncompliance with the

obligations

Article 185-B of the Customs Law

When the Company does not comply with an automated and updated Inventory Control System, this would cause a tax penalty of

$10,000 to a $20,000, this will depend on the Authority´s criteria.

Articles 176 Fraction X, 177 Fraction VIII, and 178 Fraction IX of

the Customs Law. When the Company does not comply with paying the amount from

import duties, this would cause a tax penalty between (138 and 150% of the value of the goods), this will depend on the Authority

´s criteria.

Article 178 Fraction III of the Customs Law When the Company imports prohibited goods, this would cause a tax penalty between (70% and 100% of the value of the goods) ,

this will depend on the Authority´s criteria.


1

2

3


------Companies with an IMMEX program, have the obligation to comply with the

16% of VAT payment of temporary imported goods since January 1st, 2015.

Companies certified in VAT and IEPS, have the exemption of this payment, which have to comply with Annex 31.


Annex 31

According to Article 28 of the mexican VAT Law

Annex 31


Annex 31

Have a correct order and management of:

•  Temporarily imported goods•  Exported goods (returns)•  Expired goods•  Definitive goods (change of regime).

Benefits

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Companies with VAT-IEPS

Certificate are obligated to present their

Initial Inventory Report (historical Open Balance).

Companies with VAT-IEPS

Certificate are obligated to present the

Discharge reports that affect their Initial Inventory

Report.

Articles 28-A from the Customs Law and the Article 15-A from the IEPS Law

Annex 31 is the system where SAT will control and watch the temporary imported

balances that were not returned on a timely matter.

1 2

Annex 31 (cont’d)

FTGR: 7.1.1, 7.1.2, 7.1.3:

Obligations


Annex 31 (cont’d)


There are no penalties in case of non-compliance with this obligation, but these are sanctions that

could be applied:

7.2.4. FTGR: The following actions could lead up to a VAT and IEPS certification cancellation:

1.  Non-compliance with the obligation of transmitting on time and formal manner the Initial Inventory and Discharge Reports.

2. Companies with an IMMEX program that don’t prove the following, within a timely matter: •  That their merchandise was temporarily imported •  Returned abroad •  Transferred •  Where destined to another customs’ regime (definitive)



Advanced Pricing Agreement Update Simón Somohano Transfer Pricing, Partner

4


Maquiladora (IMMEX)

Inventory

Management and Control

Foreign Principal

MEX 1

3

PE M&E

2

Company ABC

PE

Background Maquiladoras Advanced Pricing Agreements


1995 •  Enforcement of PE &

Double Taxation regulations

•  TP compliance/PE protection: Safe Harbor (5% ROA) or APA

1999-2000 / 2000-2003 •  Mutual agreement US-

Mexico •  TP compliance/PE

protection: APA or Safe Harbor (6.9% ROA or 6.5% Cost Plus)

2003-2013 •  TP compliance/PE protection:

•  Safe Harbor (6.9% ROA or 6.5% Cost Plus)

•  Cost-Plus + 1% / 1.5% ROA M&E

•  Cost-Plus + ROA M&E •  APA

•  Presidential decrees: October 2003 & November 2007

2014 - ? •  TP compliance/PE

protection: •  Safe Harbor (6.9% ROA

or 6.5% Cost Plus) •  APA (New

methodology) •  New definition of

Maquiladora (MITL)

Maquiladora

Maquiladoras Advanced Pricing Agreements

Transfer Pricing compliance/PE protection stages


Maquiladora operation structure according to definition of MITL

Maquiladora (IMMEX)

Maquila service income: Cost & expenses plus profit margin

Foreign Principal Foreign Principal

Mexico

Finished goods Total income of its “productive activity” of maquila operation.

Raw material Foreign & local M&E: at least

30% on consignment



PE protection and Transfer Pricing compliance options effective 2014

Article 182 of New MITL

Transfer Pricing Study (1) Return without foreign owned

assets + 1% of the M&E (2) Return considering foreign

owned M&E.

Article 182

Safe Harbor (Minimum Taxable Income) (1) 6.9% over Operating Assets

(2) 6.5% over Cost and Expenses

Advance Pricing Agreement (APA)

Methodology yet to be determined by SAT.

The 2014 Tax Reform eliminates the Tranfer Pricing Study option that has been largely used by Maquiladoras for the past 10 years.



Background Maquiladoras Advanced Pricing Agreements

•  In force starting January 1st 2014.

•  Definition of “maquila operation” within the MITL (Article 181):

ü Total income of its productive activity, should be related to the maquila operation.

ü The materials imported on a temporary basis would need to be returned abroad

including virtual exports.

ü Nonresident would have to provide M&E for maquila operations

ü A minimum of 30% is required and the M&E should not been owned before by the

maquiladora or a Mexican related party.

ü No M&E owned by a Mexican related party can be used.


Methodology Maquiladoras Advanced Pricing Agreements

•  The SAT is proposing an “expedite” methodology in order to resolve maquiladoras APAs

•  This methodology includes the following:

ü A differentiation between labor intensive maquiladoras and asset intensive maquiladoras

ü Asset intensity is determined by Maquiladora total assets relative to labor (payroll + operating expenses)

ü Labor Intensive Maquiladoras – A return on the maquiladora costs (Cost Plus) + a return on assets on foreign owned assets (M&E + Inventories)

ü Asset Intensive Maquiladoras – An asset-adjusted return on maquiladoras costs (Adjusted Cost Plus) + a return on assets on foreign owned assets (M&E + Inventories)

ü Adjusted Cost Plus varies according to industries – Automotive, Electric & Electronics and Other (Metal, Plastics, Medical Devices, Aerospace, Furniture, Textile, etc.)

ü Net Foreign Exchange Gains/Losses are subtracted/added from maquila revenue (neutralization of FX effects)


Methodology (cont’d)


•  The final “expedite” methodology will be published as part of the Fourth Miscellaneous Tax Rules

•  Ongoing discussions include the National Maquiladoras Association (INDEX) and the US IRS

•  Maquiladoras may apply a different methodology but the may expect longer time to conclude the APAs

•  Conversion into a Bilateral APA is possible


Value Added Tax Refunds Hector Vega Tax Partner

5


Automatic refund

New VAT refund process

Deposit within 5 business days (Misc. Resol. 2.3.17)

No greater than 1,000,000 Mexican Pesos

Non applicable for taxpayers who:

a)  Have no access to “buzón tributario” (it’s important for a fast and timely communication between SAT-taxpayer)

b)  Have not sent their electronic accounting information (except Constitutional Relief [Amparo])

c)  Have not been able to issue their electronic invoices (canceled certificate)

d)  Have suppliers who are not able to issue electronic invoices (canceled certificate)

e)  Have tax credits in process, tax due in courts (without Guarantee), the SAT has not been able to find, have been accused of a specific tax crime, or when the tax payer is characterized by the SAT as a tax payers that issues invoices for nonexistent operations.

f)  Same limitations from previous bullet point, but in regards to the suppliers of the taxpayer

The SAT will analyze the refund request in accordance to an “Automated risk model” in order to approve or deny the automatic refund process in accordance to this rule

If the process is denied (deposit not received within 5 business days), the Taxpayer will have the opportunity to request the refund by the normal process.


VAT refund process update

The SAT continues with a policy of tax symmetry

Partial refunds

Problems with suppliers (Outsourcing, construction, Individual services)

Transportation (Exportation and not subject to VAT)

VAT on import vouchers

Outsourcing (aggressive positions) SAT denied deduction and paid VAT

The SAT is not complying with the deadline according to “VAT Certification benefits”

Off setting process (same situation)


Outsourcing update

Recent court cases have established that if the outsourcing company does not comply with certain labor and fiscal requirements, then the employees must be considered as employees of the maquiladora company in which they perform their personal subordinate services. The requirements are as follows:

a)  The outsourcing employees may not have the total amount of activities, equal or similar in it’s whole, that are being developed in the working center.

b)  Their activities must be justified by its specialized nature.

c)   Their activities must not include the same or similar tasks as those activities that are being completed by the rest of the employees of the contracting company.

One of the consequence could be that the expense paid may be considered as non deductible and that the VAT may not be refundable.


Notice for Manufacturers & Exporters (DIEMSE) Hector Vega Tax Partner

6


DIEMSE (Informative declaration/return)

Obligated Taxpayers

Maquiladoras applying Safe Harbor method or APA

Shelter Maquiladoras

If DIEMSE is filed on time there is no need to file:

Safe Harbor written notice before SAT

Written notice of addition deduction for Maquiladoras (deduction of the employees exempt income)

In this declaration the Maquiladora will support that 30% of its M&E is owned by the foreign Company.

Deadline

FY 2014.- April 15, 2016

FY 2015.- September, 2016


Contacts

Simón Somohano Transfer Pricing Partner [email protected] +52 (664) 622 7872 Héctor Vega Tax & Legal Partner [email protected] +52 (664) 6227821 Jorge Ferreira Int´l Trade & Customs Consultor [email protected] +52 (664) 622 7894 www.deloitte.com/mx

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/mx/aboutus for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

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As used in this document, "Deloitte" means Galaz, Yamazaki, Ruiz Urquiza, S.C., which has the exclusive legal right to engage in, and limit its business to, providing auditing, tax consultancy, financial advisory, and other professional services in Mexico, under the name "Deloitte".

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person or entity who relies on this publication.

© 2016 Galaz, Yamazaki, Ruiz Urquiza, S.C.

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