The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS Convention) will take effect on July 1, 2023, for Mexico, after being formally ratified in March 2023. The agreement now covers 1,850 bilateral tax treaties—demonstrating a strong global commitment to preventing the abuse of tax treaties for base erosion and profit shifting. According to the Organization for Economic Cooperation and Development (OECD), the goals of the agreement are as follows:
- Address the growing problem of corporate tax avoidance
- Improve the coherence of international tax rules
- Ensure transparency in the tax environment
- Address the tax challenges arising from a digital economy
What Behaviors Are Covered by the BEPS Convention?
Base erosion and profit shifting cost countries up to $240 billion USD in lost revenue annually. This is equivalent to 4-10% of the global corporate income tax revenue. Some examples of behaviors covered by the BEPS Convention include:
- Using tax planning to reduce the size of a company's taxable profits in a country with high taxes
- Making payments to group companies to move profits from high-tax regions to ones with lower taxes
- Managing a group's trademarks and licenses through entities located in areas that apply lower taxes to intellectual property, then charging group companies royalty fees to use the brand
- Setting up debt-funded subsidiaries and using the interest to reduce the group's overall tax bill
- Setting up paper companies to take advantage of preferential tax regimes without locating any physical aspects of the business within the country
- Using hybrid mismatch arrangements to have instruments treated in the paying country as tax-deductible debt while they are a tax-exempt dividend in the receiving country
How Will Mexico's Approval of the BEPS Convention Affect CRS Reporting Requirements?
The Common Reporting Standard (CRS), approved by the OECD Council on July 15, 2014, requires financial institutions to identify customers who appear to be tax residents outside of the country/jurisdiction where they hold their accounts. They must then report certain personal information to the appropriate local tax authority and share that information with the tax authority where the customer is a tax resident. CRS is the global counterpart to the Foreign Account Tax Compliance Act (FATCA) regulations used by the United States.
As BEPS Convention rules take effect, CRS reporting requirements will increase to discourage tax avoidance by multinational enterprises. This may present concerns for you in terms of your company's overall tax liability as well as the privacy and safety of your personal information. Download Is it a Matter of FATCA or CRS? What Every Investor With Foreign Accounts Needs to Know to learn more about FATCA and CRS rules, then contact our experienced international business planning attorneys to help you determine the best way to move forward.
Do You Need to Meet With an International Business Planning Attorney Who Has BEPS Expertise?
The typical business planning attorney is ill-equipped to handle the specialized needs of investors with multinational interests. However, attorneys Antonio Gastélum and María Elia Gastélum are experienced, dual-licensed, and bilingual international business planning attorneys with the expertise to take care of all of your legal needs. To learn more about how MEG International Counsel's services can benefit your business, contact us online or call us today at (800) 694-6604.