MEXICO: An Introduction to Tax: Non-contentious

Artificial Intelligence and Law 

Artificial intelligence (AI) is a subject of constant conversation and discussion nowadays. AI is part of the innovative tools that have been created in the past decades to gather a large amount of information on an endless number of topics, resulting in information processors used for different purposes and in various fields, one of which is the law.

It is now common to hear people talk about Chat GPT, a natural language processing tool driven by AI technology that allows you to have human-like conversations and much more with the chatbot. Young people seem to be closer to this type of technology, with their usage going from testing the accuracy of the tool and learning about certain topics, to drafting university and school papers, and elaborating documents required in the professional field.

Technology providers in Mexico are working hard to exploit these new kinds of software and are devoted to the collection of information to be able to offer legal materials and data to law firms and other law professionals. Users are requested to contribute their own legal information to feed the tool in such a way that, by means of data systematisation algorithms, it manages to gather a greater amount of information that allows it to develop an endless number of topics, such as contracts, legal opinions and solutions connected to legal matters.

AI seems to be a great tool to help lawyers with common tasks such as producing initial drafts and citing statutes and relevant case law, as well as creating arguments and anticipating those of opposing counsel, which raises questions such as: To what extent can "artificial" intelligence supplant legal professionals and their legal judgement and create solutions to the immense diversity of cases and situations that arise? Who is considered the author of the materials offered by AI? What role do the laws on intellectual property play in this field? What would the courts decide in each jurisdiction?

For now, AI is an instrument that streamlines processes and may contribute to helping legal specialists tackle their assignments in a more efficient way, becoming a complementary tool that can certainly be of great value. However, the complexity of the cases that are presented in the different areas of law, in both the private and public sectors, and in the vast majority of occasions the kind of rights that are at stake require the analysis and interpretation of a human being, which indicates that for the time being it does not seem probable that lawyers will rely confidently on AI, much less that it will replace their tasks in the short term.

Nearshoring 

Nearshoring is the strategy whereby a company transfers part of its production to third parties who, despite being located abroad, establish in nearby destinations with a similar time zone. This practice arises as a response to offshoring, which, in order to reduce costs, seeks suppliers in other destinations to make production processes more efficient.

Mexico's strategic position, the COVID-19 pandemic and other geopolitical and economic problems have made Mexico an attractive country for foreign investment.

During 2023, investments in Mexico have increased. Several companies have announced their interest in establishing operations in Mexico due to the relocation of supply chain, which is the major reason for nearshoring. Mexico has various legal structures that an investor may adopt to carry out a business, such as the incorporation of a Mexican subsidiary (taxed at the 30% rate), establishing a branch, or having operations through a trust.

Mexico also has programmes that promote the import, manufacture and export of goods, such as the IMMEX Program, which allows the temporary import of goods without payment of the general import tax and other taxes (eg, value-added tax), and PROSEC, which allows producers of certain goods to import at a preferential rate.

Mexico has several good locations for setting up manufacturing facilities (eg, Tijuana, Chihuahua and Guadalajara). Under local law, the states are able to grant tax incentives by reducing or exempting payment of the 2% local wages tax for a certain number of years, or through the interconnection of water and sewage services or training.

Some Clarity on VAT Mechanics 

In March 2023, Mexico’s Supreme Court set jurisprudence in a matter of great transcendence for the mechanics of Mexican VAT, by resolving a contradiction of criteria held by different courts of the Judicial Power of the Federation.

In essence, the Supreme Court determined in its ruling that VAT is a contribution with a cash flow basis. Therefore, in order for a taxpayer to be able to claim input VAT (creditable VAT), a payment in cash (credit card, debit card, wire transfer, check, etc, as provided by the corresponding tax rules) must have been made to cover such input VAT. Notably, civil law elements that extinguish contracted obligations, such as civil compensation, do not give the taxpayer a right to claim input VAT that has been “paid” in any of these forms.

Hence, Mexican VAT taxpayers who sell goods, provide independent services, grant the temporary use of goods, and import goods or services into Mexico must bear in mind that, pursuant to Article 5 of the Value Added Tax Law, in order to have the right to claim input VAT on expenditure, in addition to fulfilling the requirements listed in this legal provision, in accordance with Section III such input VAT must have been paid in any of the forms prescribed by tax legislation in the corresponding month, making VAT’s cash flow basis prevail.

As a result, those taxpayers who have expenditure “paid” by means of civil compensation have two alternatives in relation to VAT: (i) to compensate the value of the civil debt and pay the VAT component separately by any of the forms prescribed by law, in accordance with the Supreme Court’s ruling and the Value Added Tax Law; or (ii) to compensate any civil obligation including the corresponding VAT and not to give any tax treatment, for VAT purposes, to the VAT component of the relevant expense (ie, not to claim input VAT on such expenditure).

Lastly, all tribunals and federal courts are compelled to follow Mexico’s Supreme Court jurisprudence in their rulings.

Alienation of Shares by Non-Tax Residents: How to Access the Preferential Tax Treatment

For the alienation of shares issued by a Mexican resident company or by a non-Mexican tax resident that is considered to have its source of wealth in Mexico, being the corresponding income taxable under the Mexican Income Tax Law, the corresponding tax shall be determined by applying the 25% rate to the total consideration agreed. However, if certain requirements are complied with, non-tax residents may apply the 35% rate on the gain obtained on the transaction.

One of the most complex requirements is the appointment of a legal representative in Mexico by the non-resident selling party, who shall take joint and several liability with the taxpayer regarding the income tax payable and generally the compliance of tax obligations. In this regard an additional requirement was introduced in the tax regulations: the appointed representative shall have enough assets to cover the income tax due in case the taxpayer fails to comply with its tax obligations. If a legal entity is appointed as legal representative, the following shall be observed: (a) the amount of taxes due by the non-resident seller shall not exceed 10% of the paid-in capital of the legal representative, and (b) the legal entity appointed as representative shall not have incurred a tax loss in the last two fiscal years.

In this regard and in order to make it easier for the appointed representative to guarantee tax compliance, the tax authority recently established the option to offer as guarantee of the tax payment a letter of credit issued by a banking institution that covers at least the tax payable by the non-resident, which may replace the requirement of the appointed representative having a paid-in capital of at least 10% of the tax due.

The above requirements become problematic in practice when guaranteeing large amounts, and the situation becomes even more complex for transactions that are tax exempt under a double tax convention, or in cases where no gain derives from the sale transaction. This is because the amount of tax due (i) is the basis for determining the paid-in capital that an entity to be appointed as legal representative needs to have, and (ii) is the amount for which the letter of credit shall be issued, and which will serve as guarantee of compliance of the tax obligations of the selling party. To date, the Mexican tax authorities have not issued a criterion on this matter or an alternative mechanism through which the appointed representative may guarantee compliance with tax obligations, nor have they stated if the mentioned requirements are mandatory.