A recent move by Mexico is causing consternation within the EU.
In accordance with article 29 XXIII of the tax reform proposal for 2014 sent by the Mexican government to the Congress, expenses paid by a Mexican company to a related party in Mexico or outside Mexico are non-tax deductible in case the company receiving the payment is taxed at a national level at less than 75 % of the Mexican tax rate ,this means less than 22,5%.
If the proposal becomes a law all the payments made to EU countries with national tax rates less than 22.5% would be non-tax deductible in Mexico – resulting with heavy double (or more) taxation. This would be the case regardless of the business substance in the recipient entity. This bizarrely will result in Germany being categorised as a low tax country because tax at the lander level will be ignored!
The ultimate rationale of this tax reform was to limit the profit shifting to tax havens to reflect the OECD BEPS report. However, the application of the current draft
regulation in its current form would not be limited to tax havens only, but would be extended to companies carrying manufacturing and other active business within the EU.
Now a number of people have commented on their concerns that the BEPS process will lead to a free for all where fiscs will seek to increase their share of bilateral taxing rights. Well this appears to be a perfect example of why this concern has not been overstated and why we need to focus on the future shape of international taxation while the BEPS process continues. I’m sure that Mexico will be receiving representations about this legislation from a number of countries which is completely justified. My concern though is wider than this. Here we have an OECD member (whose former minister is in charge of the OECD) seeking to extend its taxing rights over income which should be taxable in its OECD partners under established OECD principles. So what is the OECD going to do? Is it going to comment on Mexico’s actions and if not why not? Is this what we can expect going forward under the BEPS project and what other types of retaliatory or predatory taxation are we going to see between OECD members?
I agree with many of the proposals in the BEPS project and I agree that we need single taxation not double non taxation. But it is paramount that business can expect that under this process there should be no double taxation between OECD members. OECD needs to sort this out before we see this type of initiative spread wider.