Mexico has deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).
Relevant Features of the MLI
On March 15, 2023, Mexico deposited with the OECD its instrument of ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which was previously ratified by the Mexican Senate on October 12, 2022 and published in the Official Federal Gazette on November 22.
In essence, the MLI will affect the following strategies:
- Treaty Shopping. The MLI will prevent taxpayer benefits from a treaty, which normally is not available, by interposing intermediary companies;
- Artificial shifting of profits. The MLI tackles strategies to pay less tax, using jurisdictions where there is no economic value.
- Avoidance of Permanent Establishment. The MLI curbs creation of artificial arrangements, to prevent taxation in jurisdictions where taxpayers perform substantial activities;
- Aggressive tax planning. The MLI will reduce the use of tax havens to reduce tax by hiding income; and
- Hybrid payment arrangements. The MLI will deter use of such techniques to exploit differences in tax laws to pay less tax in the countries of the payor and the payee.
In light of this development, we recommend companies making payments to foreign payees analyze the possible consequences of the MLI to identify in due time any actions or adjustments that they may be required, as well as the associated costs of such changes in the international landscape.
On July 1, 2023, the MLI will come into force in Mexico
On January 1, 2024, any MLI provisions that refer to taxes withheld at source on amounts paid to non-residents shall take effect
On January 1, 2025, all other provisions related to taxes on a yearly basis shall take effect
The effective date of the provisions of the MLI shall also depend on the date on which the MLI enters into force in the other jurisdictions with which Mexico has tax treaties. To this end, we are suggesting to perform a case-by-case analysis depending on the jurisdictions involved.
The principal consequence of the MLI will be the automatic modification of Mexico’s current tax treaties for incorporating the BEPS measures contained in the text of the MLI, provided the following conditions are met:
- That both Mexico and the other contracting country have signed the MLI and have deposited their respective instruments of ratification with the OECD;
- That the provisions of the MLI have already entered into force for Mexico and for the other contracting country;
- That both Mexico and the other treaty country have designated the treaty as a Covered Tax Agreement subject to modification by the MLI; and
- That the contracting countries have made no reservations pursuant to any of the provisions of the MLI.
Since Mexico made reservations, among others, pursuant to the arbitration section of the MLI, the arbitration rules set forth in the MLI shall not be applicable for resolving disputes involving Mexico.
Lastly, Mexico has designated all of its current tax treaties (61 treaties in all) as covered tax agreements subject to modification by the MLI. However, it is worth considering the situation of Mexico’s main trading partners in relation to the MLI:
- United States: Since the US did not sign the MLI, the MLI will have no effect on the Mexico-US tax treaty.
- Germany: The MLI will have no effect on the Mexico-Germany tax treaty.
- Brazil: Since Brazil did not sign the MLI, the MLI will have no effect on the Mexico-Brazil tax treaty.
- Tax Treaties with Canada, Spain, Netherlands and Japan, among others, will be amended by virtue of the MLI.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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