Freedom of information

  • Author : Elías Adam Bitar
  • Date : August/September
ABOUT THE AUTHOR: Elías Adam Bitar is a Partner at Tron Abogados, Mexico

As you may know, the US and the international community have been enacting new tax policies with global effects.

Mexico has not escaped the scope of these policies, particularly those of the US Foreign Account Tax Compliance Act (FATCA), the US Guidance on Reporting Interest Paid to Nonresident Aliens and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

FATCA

As a consequence of FATCA, every payment made after January 2013 from a source located in the US to a foreign financial institution that does not have a signed agreement with the Internal Revenue Service (IRS) will be subject to a 30 per cent withholding tax.

To comply with FATCA and avoid this withholding tax, foreign financial institutions must inform the IRS of the existence and details of investments made offshore by US residents. Reports can be made either directly or through the institution’s domestic tax authority, as long as that authority has reached an intergovernmental agreement with the IRS.

Mexico has been actively negotiating an intergovernmental agreement, which is expected to contain a clause of reciprocity for the automatic exchange of information between the US and Mexico.

Guidance on Reporting Interest Paid to Nonresident Aliens

In addition to FATCA, the US Department of the Treasury has issued Guidance on Reporting Interest Paid to Nonresident Aliens. This guidance regulates how certain US institutions will have to report to the US government about the interest paid to non-resident individuals for investments kept by them in the US.

Such information will usually only be available to foreign governments upon request; however, should the aforementioned intergovernmental agreement with the US be reached, Mexico would have access to that information automatically.

It is important that Mexican residents earning interest from accounts in the US consider these policies and keep in mind that some of these dispositions are expected to enter into force on 1 January 2013. Moreover, when Mexican residents file their tax returns they should bear in mind that, should the Mexican and US governments enter into an agreement, the IRS and the Mexican Tributary Administration Service (SAT) will have at their disposal information about the amount of interest earned by individuals and paid by US financial institutions.

Convention on Mutual Administrative Assistance in Tax Matters

Mexico has also entered into the Convention on Mutual Administrative Assistance in Tax Matters, which, among other things, will allow Mexico to exchange tax information with other signing countries, practise simultaneous tax audits and collect tax liabilities determined abroad.

Under this convention countries will no longer need to justify an information request, and will be allowed to exchange information automatically. In addition, bank secrecy will no longer be an impediment to exchange of tax information.

The convention will only be applied in Mexico for the following taxes: ISR (income tax), IETU (flat-rate tax), IVA (value added tax) and IEPS (special tax on production and services).

Planning ahead

These policies, together with the increasing number of tax-information exchange agreements concluded by Mexico with different countries (including several offshore legislations), have been interpreted as the Mexican federal authorities becoming stricter about tax. As a result, the risk of the Mexican authorities practising tax audits of Mexican residents (whether individuals or entities) with investments placed abroad (especially in the US) has increased significantly.

Considering this, as well as the continuous changes in the Mexican tax legislation regarding investments placed abroad by Mexican residents and the upcoming change of government (which might introduce a tax law reform), it is recommended that Mexicans with offshore resources revise the design and structure of their investments abroad, to make sure of their compliance status and to take advantage of any changes or programmes the new administration may pass or enact.


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