The 2020 tax reform introduces subsection XXXII to article 28 of the Mexican Income Tax Law (MITL), with the purpose of limiting the deductibility of net interest paid by companies in a given fiscal year, to the amount that results from multiplying the net adjusted profit by 30%. In simple words, the interest deduction is capped to 30% of the tax EBITDA.
The Executive Branch’s proposal is based on Action 4 of the BEPS (Base Erosion and Profit Shifting) initiative, developed by the Organization for Economic Cooperation and Development and the G20; however, we believe that it is necessary to ponder whether this measure is recommendable for countries such as Mexico and, if this is the case, whether its implementation, as proposed, is appropriate or even within the limits of the Mexican Constitutional framework.
This document analyses the amendment published on December 9th, in the 2020 tax reform, initially presented by the Executive Branch, as well as the modifications made by the Lower House’s Finance Committee in its report (Report) approved on October 16th, 2019.
- The proposal and its impact in Mexico
As established under Action 4 of the BEPS Final Report, the purpose of implementing a similar measure as the one proposed by the Executive Branch seeks to limit three main practices :
- That multinational groups assign larger amounts of third party debt to jurisdictions where corporate income tax rates are higher; this is, where they have access to a greater interest deduction;
- That multinational groups use intercompany debt to obtain higher interest deductions, when compared to those interest paid to third parties;
- That multinational groups use intercompany or third party debt to fund exempt income.
The Statement of Intent (Exposición de Motivos) made by the Executive Branch as well as the Report, describe these objectives and the recommendations developed in the context of the BEPS initiative; however, it lacks evidence to support that Mexico is currently facing the issues that this limitation intends to counter in the first place and that would somehow justify the introduction of this measure.
Considering that this is a measure that would certainly represent a relevant impact for Mexico’s economy, since it would increase financing costs throughout multiple sectors of the economy, demonstrating its effectiveness (i.e., whether its implementation would actually counter abusive practices) is of outmost importance.
