On October 12 2022, the Mexican Senate finally ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting adopted by the OECD in 2016 and signed by Mexico in 2017, under the framework of the work performed on BEPS.
The Multilateral Instrument (MLI) was published in the Mexican Official Gazette on November 22 2022, but it has not yet been deposited before the OECD, in order for it to enter into force, which is expected to happen in 2023 (with regard to certain provisions, entry into force is expected to be in 2023, and in 2024 in other cases).
Pursuant to Action 14 of the BEPS package, Article 16 of the MLI implements a minimum standard regarding improvements to the resolution mechanisms for treaty disputes and the mutual agreement procedure (MAP).
A MAP is a dispute resolution mechanism between two or more signatory countries in which the competent authorities from the parties interact to resolve international tax disputes, mainly to avoid double taxation arising from the actions of one or more of the contracting states that results in taxation not in accordance with the application of a double taxation treaty (DTT).
One of the main additions to the MAP provisions allows a resident of one or both DTT parties – when considering that the actions of one or both contracting states result, or may result, in taxation not in accordance with the provisions of the DTT – to present their case to the competent authority of either state. The case must be filed within three years from the first notification of the action resulting in taxation that is not in accordance with the provisions of the DTT.
Another of the main MAP provisions provides that the tax authority shall strive, if the objection appears to be justified and if the authority is unable to reach a satisfactory solution, to settle the case by mutual agreement with the competent authority of the other state.
One of the most significant changes in the MAP provisions provides that the competent authorities of the contracting states shall endeavour to settle by mutual agreement any difficulties or doubts arising as to the interpretation or application of the DTT. The states may also hold joint consultations for the purpose of the elimination of double taxation in cases not provided for in the DTT.
Article 16 of the MLI allows jurisdictions to modify covered tax agreements (CTAs) to introduce provisions that are based on the OECD Model Tax Convention. However, a series of notifications is required to ensure clarity as to how the CTA will be modified by Article 16 of the MLI. The relevant notification clauses in the article provide that a party shall notify the depositary of the list of its CTAs that do not contain the provisions described in the compatibility clauses and that the MLI would only apply where all contracting jurisdictions have made a notification with respect to a CTA.
Also, according to the Explanatory Statement to the MLI, provisions that are not consistent in content with the MAP provisions implemented should be modified by the MLI. Pursuant to Article 16 of the MLI, application should be as broad as possible, especially in cases where a CTA would not otherwise satisfy the minimum standards stated in Action 14 of the BEPS package.
In connection with Article 16, Mexico reserved the right for the article not to apply to its CTAs on the basis that, for the purposes of all its CTAs, it intends to meet the minimum standard for improving dispute resolution according to the BEPS package, by accepting, in its DTTs, the following provisions:
Contracting jurisdictions shall not make any adjustments to profits that are attributable to a permanent establishment of an enterprise of one of the contracting jurisdictions after a period that is mutually agreed between both parties (except in the case of fraud, gross negligence, or wilful default); and
Contracting jurisdictions shall not include in the profits of a company, and consequently tax, profits that have not so accrued, after a period that is mutually agreed (this provision shall not apply in the case of fraud, gross negligence, or wilful default).
In addition, Mexico did not accept the arbitration provisions of the MLI. This may represent a limitation on the taxation of certain transactions attributable to permanent establishments. Mexico has specified those DTTs that do or do not contain a provision described in Article 16 of the MLI with respect to MAP provisions. Moreover, Mexico has already implemented the MAP in its domestic laws (for example, Rule 2.1.30 of the Omnibus Tax Resolution for 2022, “Mutual Agreement Procedure included in a Double Tax Treaty”).
Mexico’s implementation of the MAP will be strengthened when the MLI enters into effect, on the first day of the month following the expiry of a three-month period beginning on the date of its deposit with the OECD. This implies that the improved MLI regulations will apply to any MAP filed after the MLI enters into effect, regardless of whether the facts were before its entry into force.
A new defence against tax authority aggression
For the past four years in Mexico, the tax authorities have harshened and broadened their audits, particularly regarding large taxpayers and cross-border transactions. In addition, the Mexican authorities’ criteria are not always aligned with international standards and bona fide interpretations (for example, Escalante & Asociados has seen an incremental exposure in commercial arbitration against the Mexican government).
On this basis, the MLI provisions regarding the MAP are expected to have a deep and extended impact in Mexico, where they may become the best tool for large taxpayers to defend their interests in cross-border matters against the aggressive Mexican tax authorities.
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