In general terms, the repatriation of capital can be defined as the return of those investments made abroad by residents of the country of origin. Currently, the regulation and structuring of systems and mechanisms to avoid tax evasion in international matters, as well as to safeguard the taxable base of each country, something that has been in constant care since the members of the world organizations have entered into international treaties and agreements to regulate foreign trade and tax aspects, does not go unnoticed.
Mexico as a member of several international organizations such as the Organization of American States (OAS), the United Nations (UN), the World Trade Organization (WTO), the Organization for Economic Cooperation and Development (OECD), among others, has entered into international treaties and agreements to address relevant issues regarding foreign trade, double taxation and exchange of financial information. The purpose of these agreements is to avoid tax evasion at an international level due to strategy and tax planning developed by taxpayers to hide income and assets from the tax authorities. Therefore, communication between subjects at an international level regarding financial information is an important basis for the repatriation of capital and a topic that undoubtedly encompasses a diversity of aspects.
Now, the relevant topic of interest in the present analysis falls on the year 2017, when the Mexican government in search of an economic benefit for the country, reduced the impact that would be caused by the review of the results obtained by the signing of the international agreements and treaties referred to above implemented for this purpose the issuance of the “Decree that grants various administrative facilities in income tax matters relating to deposits or investments received in Mexico“, published on January 18, 2017.
Such decree, as its name indicates, served to bring back investments made by Mexican residents in foreign countries, being in force from January
19, 2017 until July 19, 2017. The capital repatriation program was short, but it granted the benefit that those who had made investments in foreign countries up to December 31, 2016, could enjoy a tax benefit as an incentive for those investments to be returned to Mexico, this benefit being the preferential income tax rate equivalent to 8% of the repatriated amount; which it should be specified, did not have any deduction and was beneficial if compared to the established base income tax rate corresponding to 35% individuals and 30% corporations. However, it is also important to note that such tax benefit was subject to the repatriated capital being used for various productive activities that promoted or helped the economic growth of the country.
In order for the returned capital to be considered valid, the capital had to be deposited in national credit institutions or brokerage firms and once inside, the capital had to be invested for at least two years from the date on which it was returned in one of the following activities:
- Acquisition of fixed assets that were considered deductible for Income Tax purposes.
- Acquisition of properties and constructions in Mexico and that were destined for the exercise of productive activities that the taxpayers carry out in the country, being impossible their sale in a period of two years from the purchase.
- Conducting research and technology development projects.
- Payment of liabilities contracted with independent parties prior to the entry into force of the decree, provided that such payment is made through national institutions or brokerage firms.
- Payment of liabilities with respect to taxes or benefits, as well as the payment of wages and salaries derived from a subordinate personal service in the Mexican country.
- Investment in Mexico through publicly traded credit institutions incorporated under Mexican legislation.
It is worth mentioning that there were also exceptions that limited or prevented compliance with this repatriation program, the main one being that taxpayers, prior to the date on which the repatriation of capital is to be carried out, had initiated the exercise of verification powers by the tax authorities in relation to the aforementioned income, such as field visits, desk reviews and electronic reviews, with respect to income from investments held abroad.
However, when the taxpayer had been subject to verification powers, it could correct its tax situation with the payment of income tax, applying the rules of the Decree in cases where the payment was made at any stage within the review and even after the determining resolution and as long as the term to file the means of defense to fight the resolution had not elapsed. The foregoing, since the tax benefit could not be applied when any tax defense, administrative or jurisdictional proceeding related to the tax regime for the income subject of the decree had been filed, except in those cases in which the individual withdrew the means of defense filed.
In addition to the aforementioned, there was another exception to this benefit, such as having obtained income from illegal activities, having been used for such activities or having any other assumption related to the financing of terrorism or money laundering as a crime, in which case it is evident that the facility could not be claimed.
With respect to the determination of income tax, as previously mentioned, the 8% income tax rate would be applied to the returned resources without any possible deduction and emphasizing that the payment of such tax would be determined based on the total of all returned resources, including the income obtained during the time they were in the foreign country, interest, dividends, capital gains, foreign exchange profits and other types of profits obtained.
In the event that part of the capital had already paid the corresponding tax in Mexico, no further payment of tax should have been made with respect to that part or the part that is exempt income, for which the exempt income should be credited in such circumstance, so that only the corresponding 8% rate would be paid with respect to the remaining income.
Similarly, a limitation of the benefit granted by the aforementioned decree is that it established that the capital maintained abroad, even if it had already paid the corresponding tax previously, must also have been returned together with all the income from the profits obtained, otherwise the taxpayers could not adhere to the repatriation program.
At that time, the deadline for taxpayers to pay the tax was 15 calendar days following the date on which the resources were returned to Mexico.
An important fact to consider with respect to the repatriation of capital is that, in addition to applying a lower tax rate for the return of resources, omissions in the filing of tax returns were also corrected, since those who took this tax benefit would also have to comply with the tax obligations related to income and investments held abroad, including the informative returns for holding investments in preferential tax regimes, and also that those repatriated resources would not be considered as accruable income for income tax purposes. The aforementioned, in express terms of the Decree itself.
In connection with the above, on May 15, 2017, the general rules issued by the Tax Administration Service (“SAT”) were published for the application of the “Decree that grants various administrative facilities in income tax matters relating to deposits or investments received in Mexico”, the rules were published within the First Resolution of Amendments to the Miscellaneous Tax Resolution for 2017, specifically in Chapter 11.8. Of the Decree that grants various administrative facilities on income tax matters related to deposits or investments received in Mexico, published in the DOF on January 18, 2017.
In the aforementioned general rules, the requirements to pay income tax, obligations, notices, returned income, changes in investments and a variety of other aspects that I mentioned above, were specified in detail.
Up to this point we can conclude that the issue of capital repatriation is relevant in many ways and even more so today, since the tax authorities are
beginning to exercise their powers of verification on taxpayers who availed themselves of such benefit and are reviewing the fiscal year in which they obtained all this income by way of repatriation, As it is well known, the tax authority will question such income requesting the appropriate documentation to demonstrate that in fact the taxpayers who repatriated the capital had done so in accordance with the provisions of the Decree that promoted such benefit.
The procedure with which the SAT is normally exercising verification powers in charge of taxpayers who repatriated capital under the benefit granted in 2017, is the Cabinet Review.
As in all cases, the adequate attention to the audit procedure will allow taxpayers to keep their tax compliance, and specifically, to maintain the benefits they obtained with the application of this facility. On the contrary, in the event that an audit procedure is not properly handled, the result will be the determination of a tax credit composed of the taxes that should have been paid without the application of the benefit, updates, fines and surcharges.
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