Base Erosion and Profit Shifting (BEPS)

What is BEPS?

Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually.

The discussion on international tax planning strategies ceased to be merely fiscal, escalating to levels of both domestic and foreign policy when the leaders of the G20 member countries met in Mexico on June 18th and 19th, 2012, agreeing on the declaration end, explicitly the part referring to “the need to prevent base erosion and profit shifting”.

Stemming from this declaration and during subsequent G20 meetings, as well as through statements by leaders of different individual countries, the OECD was invited to work on a coordinated battle plan. Thus, the OECD published its first report, “Addressing Base Erosion and Profit Shifting” (“BEPS February 2013 Report”).

The final result of this ambitious plan culminated in October 2015, with fifteen actions focused on three fundamental pillars: coherence, transparency and substance, as shown below.

1.Adrees the tax challenges of the digital economy.

2.Neutralise the effects of hybridmis matcharrangements.

3.Strengthen controlled foreign company (CFC) rules.

4.Limit base erosion viainterest deductions and other financial payments.

5.Counter harmful tax practices more effectively, taking in to account transparency and substance.

6.Prevent trady abuse.

7.Prevent the artificial avoidance of the permanent establishment status.

8-10. Assure that transfer pricing outcomes are in line with value creation.

11.Establish methodologies to collect and analyse data on BEPS and the actions to address it.

12.Require taxpayers to disclose their aggressive tax planning arrangements.

13.Re-examine transfer pricing documentation.

14.Make dispute resolution mechanism more effective.

15.Develop a multilateral instrument to modify bilateral tax treaties.

Mexico, like other countries, has addressed these actions and has undertaken reforms in its tax system in order to implement them and increase tax collection. This descriptive analysis shows the main actions carried out.

Taxes on Technological Platforms: ISR and VAT taxation was implemented on individuals who obtain income from technological platforms, understanding these as any computer application or similar from which they obtain income for the provision of services, sale of goods or leasing.

Delegated capitalization: It tends to limit the excessive interest deduction produced by the imbalance in the relationship between a minimum capital and an excessive debt, which occurs in Mexican subsidiary companies of multinational groups, due to the fact that the Income Tax (ISR) for the payment of interest may be less than that originated by the payment of dividends.

Transfer Pricing: The obligation to present informative declarations was established, such as the Master Informative Declaration of related parties of the multinational business group (Master Declaration), Local Informative Declaration of related parties (Local Declaration) and Country-by-country Declaration of the multinational business group. (Declaration country by country).

Reportable Schemes: Tax advisors must submit an informative statement that contains a list with the names, denominations or business names and RFC of the taxpayers to whom they provided tax advice regarding any plan, proposal or recommendation given to a taxpayer. with the purpose of carrying out a series of acts aimed at generating tax savings, such as reducing the payment of taxes and eliminating or deferring them.

Mexico, being a (net) capital importing country, is vulnerable to the implementation of BEPS practices through which the tax base of companies residing in Mexico is eroded and the transfer of profits outside of Mexico by foreign companies. In this context, it is expected that Mexico will continue to improve its tax reform measures in accordance with the OECD recommendations.

We inform you that this information provides general information based on the current laws and regulations, and in case of an individual report, be sure to receive advice from an expert before handling it.

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