International Tax Planning and Transfer Pricing Planning with Mexico from a Spanish perspective

 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The high tax country Mexico in the OECD context
    • 2.3 Transfer pricing rules of Mexico
      • 2.3.1 Scope of legislation
      • 2.3.2 Arm's length principle
      • 2.3.3 Reporting requirements
      • 2.3.4 Country-by-Country reporting
      • 2.3.5 Documentation requirements
      • 2.3.6 Cost sharing
      • 2.3.7 Business restructuring
      • 2.3.8 Interaction between customs valuation and transfer pricing
      • 2.3.9 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Mexico and Spain
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Mexico-Spain in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Mexico in brief
      • 2.4.5 Spain in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Mexico to the Spain
      • 2.4.8 Case study 2: Interests from Mexico to Spain
      • 2.4.9 Case study 3: Royalties from Mexico to Spain
      • 2.4.10 Case study 4: Management and technical service fees from Mexico to Spain
      • 2.4.11 Case study 5: Capital gains with Mexico as asset country to Spain as seller country
      • 2.4.12 Case study 6: Dividends from Spain to Mexico
      • 2.4.13 Case study 7: Interests from Spain to Mexico
      • 2.4.14 Case study 8: Royalties from Spain to Mexico
      • 2.4.15 Case study 9: Management and technical service fees from Spain to Mexico
      • 2.4.16 Case study 10: Capital gains with Spain as asset country and Mexico as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Mexico has in 2017 a gross domestic product (GDP) of US$ 2,140,940 million, the 2nd highest in Latin America. In Mexico, the corporate income tax is levied at the rate of 30.00%. Thus, Mexico is a high tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Mexico has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, economic activity has been resilient to sharply lower oil prices, weak world trade growth and monetary policy tightening in the United States. Domestic demand remains the main driver of economic activity, supported by recent structural reforms that have cut prices to consumers, notably on electricity and telecoms services. Growth will be held back in 2017 and 2018, mostly through investment and consumer confidence, following uncertainties about future US policy, although the economy could benefit from stronger import demand from the United States. Macroeconomic policy is being tightened. This chapter provides a survey on the actual tax law frame conditions in Mexico and provides practical support in international tax planning and transfer pricing planning between Mexico and Spain based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Mexico applies the arm’s length principle and the OECD Guidelines, the following pricing methods are applied: (1) CUP method; (2) RPM; (3) CPM; (4) TPSM, (Método de Partición de Utilidades (transactional profit split method)); (5) RPSM; (6) TNMM. There are reporting requirements and documentation requirements. There is no specific legislation concerning cost contribution agreements. However, such agreements need to be evaluated in light of the existing provisions and specific fact patterns of the taxpayers. Transfer pricing rules generally apply to business restructurings that are done on a taxable basis. The application of transfer pricing provisions for customs purposes requires not only the existence of a relationship, but also that said relationship has an effect on the value of the transaction. The main aim of the relevant transfer pricing provisions is for sales transactions between related companies to be carried out at market prices. The Código Fiscal de la Federación (Federal Fiscal Code), CFF, in article 34-A provides the regime for advance pricing agreements, APAs. From this provision we can say that an APA is not an agreement by itself – it is more a unilateral APA ruling, based on information that the taxpayer submits. Therefore, an administrative procedure is to be followed.

Introduction

International tax planning and transfer pricing planning between Mexico that has the 15th largest nominal GDP and the 11th largest by purchasing power parity, and a GDP annual average growth for the period of 1995–2002 that was 5.1%, and Spain, with a capitalist mixed economy, that is the 16th largest worldwide and the 5th largest in the European Union, as well as the Eurozone's 4th largest, based on cross-border case studies is of central importance.

According to the International Monetary Fund, [1] Mexico has in 2017 a gross domestic product (GDP) of US$ 2,140,940 million, the 2nd highest in Latin America. In Mexico, the corporate income tax is levied at the rate of 30.00%. Thus, Mexico is a high tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Mexico has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [2] economic activity has been resilient to sharply lower oil prices, weak world trade growth and monetary policy tightening in the United States. Domestic demand remains the main driver of economic activity, supported by recent structural reforms that have cut prices to consumers, notably on electricity and telecoms services. Growth will be held back in 2017 and 2018, mostly through investment and consumer confidence, following uncertainties about future US policy, although the economy could benefit from stronger import demand from the United States. Macroeconomic policy is being tightened. Banco de Mexico raised policy rates to counter inflationary pressures and keep inflation expectations anchored near the inflation target and more recently in response to heightened uncertainty in the wake of the outcome of the US presidential election. In order to meet the consolidation path and ensure debt sustainability, the 2017 budget includes expenditure cuts, with the objective of returning to a primary surplus. The government laid down a consolidation path two years ago to reduce the budget deficit (measured by the public sector borrowing requirement) by 2 percentage points of GDP over 4 years. However, there is scope for reallocating expenditures and further limiting tax expenditures to raise spending on programs conducive to inclusive growth for Mexican families – such as child care, health, poverty reduction, and infrastructure.

According to Orbitax, [3] (Daily Tax News Digest of 23 January 2017),

on 18 January 2017, a decree providing a tax amnesty program for the repatriation of foreign investments was published in Mexico's Official Gazette. The decree provides that individuals and

companies resident in Mexico, as well as permanent establishments in Mexico, may repatriate undisclosed foreign investment income subject to an 8% tax rate. The reduced rate may apply for foreign investment income up to 31 December 2016, subject to the condition that the income is reinvested in Mexico in 2017 and remains invested for a minimum of two years. The types of qualifying reinvestments in Mexico include:

  • The acquisition of fixed assets that are deductible for tax purposes and used for the taxpayers activities;
  • The acquisition of land and buildings that are used for the taxpayers activities;
  • Research and technology development investments directly and exclusively for the implementation of the taxpayer's own projects;
  • The payment of liabilities with independent parties entered into prior to the entry into force of the tax amnesty decree, provided that the payment is made through credit institutions or brokerage firms incorporated under Mexican law; and
  • Investments in Mexico through credit institutions or brokerage firms that are incorporated under Mexican law, including investments in financial instruments and shares issued by Mexican companies.

When foreign investment income is repatriated for the purpose of the tax amnesty program, the tax due is to be paid within 15 days of the repatriation.

Click the following link for the tax amnesty decree (Spanish language), [4] which entered into force the day it was published and applies for a period of six months.

The pivotal question is therefore, how groups of affiliated companies with group companies in Mexico and in tSpain can – before the background of anti-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the high tax country Mexico is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Mexico (see section 3), and constructive hereon 10 case studies in international tax planning between Mexico and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Mexico and Spain.

This chapter had been written based on the following sources:

  • Orbitax[5], Orbitax Country Analysis Mexico and Spain, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool
  • the Mexican Income Tax Law (Impuesto Sobre la Renta; LISR), [6]
  • the Mexican tax reform 2017, [7]
  • Mexican Transfer Pricing 2017, [8]
  • the Spanish Corporate Income Tax Law (CITL), [9]
  • the Spanish tax reform 2017, [10] and
  • the Double Taxation Convention between Mexico and Spain signed 24 July 1992 and effective from 1 January 1995. [11]
The high tax country Mexico in the OECD context

International tax planning and transfer pricing planning between Mexico and Spain based on cross-border case studies is of central importance. In Mexico, the...

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