MEXICO Law and Practice Contributed by: Ángel Escalante, Gabriel Rojas, Daniel Colunga and Brenda Favela, Escalante & Asociados
artificial deferral or diversion of profits to low-tax juris - dictions. Finally, Article 28, section XXIII of the MITL denies the deductibility of certain payments made to related parties or under structured arrangements when the corresponding income received by the related party is subject to a preferential tax regime, including situ - ations involving hybrid structures. Principal Legal Indicators of Tax Abuse In summary, the principal legal indicators used to identify abusive tax arrangements include: • the absence of a valid business purpose under Article 5-A of the FFC; • the lack of economic substance or material capac - ity in documented transactions; • non-compliance with the arm’s length principle in related-party transactions; and • the use of structures involving low-tax jurisdictions or hybrid arrangements. 5.2 Anti-Avoidance Mechanisms The Mexican legal framework includes both general and specific anti-avoidance mechanisms aimed at addressing tax fraud, evasion and aggressive tax planning, provisions primarily established in the FFC and the MITL. General Anti-Avoidance Rule (GAAR) The GAAR, contained in Article 5-A of the FFC, allows the tax authorities, within the exercise of their audit powers, to presume that certain legal acts lack a busi - ness purpose and their tax consequences can there - fore be recharacterised according to the economic benefit reasonably expected by the taxpayer. Importantly, this provision does not invalidate the legal act itself, but rather allows the tax authorities to rede - fine its tax effects for the purpose of determining the appropriate tax treatment. Specific Anti-Avoidance Rules (SAARs) In addition to the GAAR, Mexican tax law includes specific anti-avoidance rules (SAARs) designed to address types of tax planning structures, especially in a cross-border context.
For example, in interest payments the following SAARs apply: Interest deduction limitation (earnings-stripping rule) Pursuant to Article 28, section XXXII of the MITL, the deductibility of net interest expense is limited to 30% of the taxpayer’s adjusted taxable profit (tax EBITDA). Net interest exceeding this threshold is non-deducti - ble in the relevant fiscal year, although it may generally carry forward for up to ten years, subject to certain conditions. Thin capitalisation rules Under Article 28, section XXVII of the MITL, interest paid on debt contracted with foreign related parties is non-deductible to the extent that the taxpayer’s debt- to-equity ratio exceeds 3:1. Non-deductibility of payments to low-tax jurisdictions and hybrid structures In accordance with Article 28, section XXIII of the MITL, payments made to related parties, or under structured arrangements, are non-deductible when: • such income is subject to a preferential tax regime; • the payment gives rise to a hybrid mismatch, resulting in non-taxation or double deduction; or • the income is not effectively subject to taxation abroad. The Transfer Pricing Regime The transfer pricing regime, primarily set forth in Articles 179 and 180 of the MITL, requires taxpay - ers engaged in transactions with related parties to determine their taxable income and allowable deduc - tions based on the arm’s length principle (prices or consideration that would have been agreed upon by independent parties in comparable transactions). These rules represent the primary mechanism for pre - venting artificial profit shifting in cross-border related- party transactions. Preferential Tax Regime Rules Under Article 176 of the MITL, income obtained through foreign entities or legal arrangements subject
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