As of January 1, 2022, the obligation established in the Federal Tax Code (CFF) came into effect, requiring taxpayers to obtain and maintain, as part of their accounting records, complete and updated information on controlling beneficiaries.
Although this concept had already been incorporated into Mexican regulations through the Federal Law for the Prevention and Identification of Transactions with Illicitly Sourced Funds (LPIORPI or Anti-Money Laundering Law) since 2012, the obligations are distinct. Similarly, it is a different obligation from the notice referred to in Rule 2.4.15 of the Miscellaneous Tax Resolution (RMF) for 2022, related to Article 27, Sections A, II, and B, VI of the CFF. This represents an additional administrative burden for obligated entities.
Compliance and Internal Controls
To comply with this new obligation, companies must implement properly documented internal control procedures that allow them to identify, verify, and validate each Controlling Beneficiary (CB) appropriately. The information and documentation to be included for each CB is specified in Rules 2.8.1.22 and 2.8.1.23 of the RMF, and may be requested by the Mexican Tax Administration Service (SAT) at any time, granting only fifteen business days to comply (with a possible ten-day extension, if duly justified).
Obligated Entities
According to Article 32-B Ter of the CFF, the following entities are obligated to comply with these requirements:
- Legal entities, fiduciaries, settlors, or beneficiaries in the case of trusts.
- Contracting parties or members in the case of any other legal structure.
- Notaries, brokers, and any other persons involved in the formation or execution of contracts or legal acts leading to the constitution of such entities or the establishment of trusts or any other legal structures.
- Financial entities and members of the financial system for purposes of the Income Tax Law (LISR).
Definition of Controlling Beneficiary
According to Article 32-B Quáter of the CFF, a Controlling Beneficiary (CB) is understood as the individual or group of individuals who:
- Obtain a benefit derived from their participation in a legal entity, trust, or any other legal structure.
- Exercise control over the legal entity, trust, or any other legal structure.
However, identifying CBs can be complex when there is a chain of ownership, meaning indirect ownership through other legal entities, or a chain of control, where control is exercised indirectly via other legal entities, trusts, or other structures. This situation is common in multinational corporations, where there are various levels of ownership, sometimes outside the country. Notably, the miscellaneous tax rules do not clarify how many levels must be considered.
Related Parties and Transfer Pricing Implications
In the process of identifying Controlling Beneficiaries, particularly in cases of ownership and control chains, related parties may emerge that were not initially recognized.
Since the CB obligation aims to identify individuals, it is essential to consider that the last paragraph of Article 90 of the LISR states that two or more entities are related parties when:
- One directly or indirectly participates in the administration, control, or capital of the other.
- A person or group of persons directly or indirectly participates in the administration, control, or capital of both entities.
- There is a linkage between them under customs legislation.
Customs Law and Related Parties
In this regard, Article 68 of the Customs Law (LA) significantly expands the definition of related parties, considering a linkage to exist when:
- One party holds executive or managerial positions in the other’s company.
- They are legally recognized business associates.
- They have an employer-employee relationship.
- One party has direct or indirect ownership of 5% or more of shares, equity, or voting rights in both entities.
- One entity directly or indirectly controls the other.
- Both entities are directly or indirectly controlled by a third party.
- Both entities jointly control a third party.
- They are part of the same family (as defined in Article 125 of the Regulations of the Customs Law).
Transfer Pricing Considerations
If the controlling beneficiary has carried out transactions with the entity they control or related parties, such transactions must be:
- Reported,
- Evaluated, and
- Confirmed to comply with the arm’s length principle.
Failure to provide adequate documentation for transfer pricing compliance may lead to the disallowance of intercompany expense deductions. From the perspective of tax authorities and courts, such expenses may not meet the requirements of Article 27 of the LISR, particularly in:
- Section V: Deduction requirements for transactions with foreign related parties.
- Section XVIII: Timeframes for meeting the deduction requirements set by law.
Additionally, if taxable income is reassessed, it may be considered a deemed dividend (LISR 140-VI). Under Article 5 of the Value Added Tax Law (LIVA), the VAT associated with rejected intercompany deductions may also become non-creditable for income tax purposes.
Non-Compliance Risks and Sanctions
Beyond these transfer pricing implications, Articles 84-M and 84-N of the CFF establish substantial penalties for failing to comply with CB obligations, ranging from $500,000 to $2,000,000 per CB.
Additional consequences of non-compliance include:
- Negative tax compliance opinion (Rule 2.1.37 RMF 2022).
- SAT may conduct audits on third parties related to the obligated entity to verify compliance with CB regulations (Article 42, Sections XII and XIII, CFF).
- Interpretation or application of CB-related tax provisions cannot be subject to consultations under Article 34 of the CFF (Rules 2.1.41 and 2.1.47 RMF 2022).
Final Considerations
Given the significant implications and potential sanctions, it is crucial to immediately implement the necessary measures to ensure compliance with this regulatory framework and minimize risks related to transfer pricing, tax deductions, and potential fines.
