The ABC of BEPS project to avoid double taxation

The plan seeks to limit the fiscal erosion through interest deduction explains Alma Gutierrez; also seeks to prevent abuses in treaties and strengthening of controlled foreign companies rules.

MEXICO CITY (CNNExpansión) – The Organisation for Economic Co-operation and Development (OECD) is a forum where the governments of different countries, including Mexico, exchange experiences, contributions and views on issues such as economic development, financial stability, trade, investment, technology, taxation and transfer pricing, as well as development cooperation, among others.

The particular case of tax initiatives implemented by the OECD has opened the way to tax treaties worldwide.

Given this context, last October 5th OECD issued the final project documents Plan of Action against the Base Erosion and Transfer of Benefits ( Base Erosion and Profit Shifting ), better known as BEPS for its acronym in English, launched in July 2013, and it establishes the following objectives, among others:

1. Addressing fiscal challenges of the digital economy

2. Neutralize inconsistencies in hybrid agreements

3. Strengthen rules of the controlled foreign companies ( Controlled Foreign Corporation )

4. Limit erosion through deduction of interest and other financial payments

5. Attacking harmful tax practices

6. Prevent treaty abuse

7. Artificial prevent evasion of the characterization of permanent establishment

8. Ensure that transfer prices are in line with the creation of value: Intangible Assets, Risk and capital and other high-risk transactions.

9. Establish methodologies to collect and analyze information relevant to BEPS

10. Require disclosure of aggressive tax planning arrangements

11. Re-evaluate the transfer pricing documentation ( CbC report )

12. Improve effectiveness of dispute resolution mechanisms

13. Develop a multilateral instrument for actions anti-BEPS

In general, the aim of the Action Plan BEPS is that tax profits are taxed where they carry out activities that generate such profits and where value is created.

These measures are to be implemented through changes to avoid double taxation, in perspective with the Guidelines of Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Guidelines) and domestic laws, among others.

Mexico and perspective to combat tax evasion

The September 8, 2015 the federal government presented to the Congress the economic package for 2016, which among other things proposes a new Article (76-A) of the Law on Income Tax, which establishes the obligation taxpayers indicated in Article 32-H sections I, II, III and IV of the Fiscal Code of the Federation (those with responsibility for presenting information statement fiscal situation), that conduct transactions with related parties submit three related information returns Action 13 of the Action Plan BEPS: master file ( master file ), local file ( Local file ) and country by country reporting ( country by country report , CBC).

The master file should detail relevant information about the business of multinational enterprises (MNEs) policies and transfer pricing agreements with the tax authorities. For its part, the local file requests information on local business, including payments to related parties, ie what is known as transfer pricing study.

With regard to the declaration country by country, the economic package 2016 states that this report be presented when taxpayers are located in one of the following cases:

1. Multinational corporations controlling, understood as those who meet the requirements of the provision in question, and

2. Resident legal entities in national territory or resident abroad with a permanent establishment in the country, which have been designated by the controlling entity of the multinational business group residing abroad as responsible for providing the information country by country declaration

It should be noted that the adoption of Article 76-A as part of the 2016 tax reform Mexico ranks as one of the first countries to include in their domestic legislation the new standardized documentation indicated in Action 13 of the Action Plan BEPS approach.

It is also important to mention that this is not the first initiative of its kind implemented in our country, also highlights the format 76 published in 2014 and which is mandatory for 2015, which provides that taxpayers report their quarterly basis in certain significant transactions issues such as the transfer pricing adjustments.

How to prepare before the new fiscal environment

Regardless of incorporating this approach to documentation through the three information returns, taxpayers should be prepared to operate in this new environment, the disclosure requirements for documentation to determine whether the taxable income being taxed where they are held profits and value is created, they will be a constant in everyone.

In this new scenario, we identified three key steps for companies to comply with the provisions of the tax authorities : preparation, implementation and sustainable report.

1. Preparation: It is necessary to identify, all information statements established, are applicable to each taxpayer and begin to consolidate information considered as part of the master file , the file locally and CbC report . At this stage it is also key to assess the real needs in both systems and mapping of data to be in a position to issue the necessary information to fill information returns.

2. Implementation: it gives way to the design of technological solutions to concentrate the information and data collected at this stage, preparing analyzes and reports are issued.

3. Sustainable Reporting: This stage, which is considered necessary, based on validating the consistency between different formats, information returns and reports to be presented.

In the case of Mexico these measures will be a reality for the year 2016 (information to be revealed in 2017).

With respect to the Mexican subsidiaries, they must communicate their corporate foreigners the master file will require subsidiaries to submit information to the Mexican authorities.

These measures are part of a global non-exclusive subject of Mexico; the fact that our country is proactively implementing these new requirements will allow the Mexican tax authorities to develop a risk assessment to prevent erosion of the tax base through the transfer of profits, resulting in a further strengthening of tax system of the country.