TAX and AMPARO. Amparo Lawsuit against the Limiting in the Deduction of Interest derived from Indebtedness March 29, 2021
On January 1st, 2020, the article 28, section XXXII of the Income Tax Law (ITL) entered into force, which establishes that the net interest for the tax year that exceeds the amount resulting from multiplying the adjusted tax profit by 30% will not be deductible, complying for this purpose the rules, mechanics and exceptions set forth in said provision for proper implementation. Consequently, those taxpayers whose net interest derived from contracted debts are located in the aforementioned provision, must reflect the limitation of said deduction for the first time in the annual income tax return that they must submit no later than this Wednesday, March 31st, 2021.
Such limitation will be applicable to taxpayers whose interest accrued during the tax year derived from their debts exceed MXN $20’000,000.00. Said amount will be jointly applicable to all legal entities that pay taxes in accordance with Title II of the ITL, as well as to permanent establishments of residents abroad that belong to the same Group or that are related parties.
Said provision establishes the mechanics through which both the net interest and the adjusted tax profit (i.e. EBITDA) will be determined, so once the amounts of said concepts have been calculated, will have to determinate the new interests limit that may be deduct. In the event that the amount of non-deductible interest is “zero” or negative, the deduction of all the interest accrued by the taxpayer will be allowed in accordance with such provision.
It should be noted that the amount of net interest of the tax year that is not deductible in accordance with the aforementioned provision may be deducted during the following 10 tax years until it is exhausted, and for this purpose, a record of the net interest pending for deduct must be kept and the same tax losses rules set forth in article 57 of the ITL must be observed; that is, a deferred deduction of said net interest may be made.
Finally, said limitation will only be applicable when the amount of non-deductible interest calculated in accordance with such provision is higher than the amount determined in accordance with section XXVII of article 28 of the ITL; that is, to the so-called “thin capitalization”, in which case, the latter section will not be applicable.
Although the aforementioned provision pretends to find a supposed concordance with Action 4 of the Framework against the Base Erosion and Profit Shifting or BEPS that seeks to combat the practices detected in certain Multinational Groups where they have eroded the income taxable basis through the implementation of financing structures that generate deductions of interests, we estimate, among others, that the considerations expressed by the Federal Executive Brach in the Explanatory Statements that originated the provision in question suffer from several constitutional deficiencies.
We consider that article 28, section XXXII of the ITL violates different human rights and fundamental principles, so an amparo lawsuit may be filed against it on the occasion of its first concrete application action, that is, within a 15 business-day-term following the submission of the annual income tax return for fiscal year 2020.
If you have any questions regarding the foregoing, please do not hesitate to contact us.
Mexico City, March 29, 2021