Tax Measures in response to COVID-19

Measures taken by governments to flatten the curve on COVID-19 pandemic may trigger different scenarios of economic recession across all affected countries. For instance, Moody's announced a 3.7% contraction in Mexico's GDP and predicted that Mexico's response would not suffice.

In Mexico, the federal government has not yet taken a stand on tax measures or responses to support for taxpayers on the COVID-19 pandemic. However, it is worth noting that, historically, the federal government has provided various incentives to taxpayers in vulnerable situations like the one we are currently facing, such as natural disasters and the AH1N1 swine flu pandemic in 2009. The government must urgently address this issue to reassure economic stakeholders.

In view of our current economic situation, the Organization for Economic Cooperation and Development (OECD) has issued a list of suggestions (not recommendations) for the governments of its member countries regarding measures that could be taken. Said suggestions are meant to assist administrations globally in their consideration of appropriate measures in their own national contexts to help taxpayers during this period. Some of the measures targeting economic and fiscal policy issues could be summarized as follows:

• Deferring employer or self-employed social security contributions and payroll taxes.
• Providing tax benefits for health and emergency workers.
• Deferral of VAT (Value Added Tax), foreign trade taxes, or excise taxes for imported products (e.g., food, medicine, capital goods, etc.)
• Accelerating VAT refund processes.
• Flexibility on the provisions related to the amortization of net operating losses (NOLs).
• Adjusting the establishment of provisional payments or advance tax payments based on a projected and expected liability according to the economic circumstances of each country.
• Extending tax payment or filing periods.
• Removing or evaluating a scheme that suppresses fines and surcharges for late tax payments, among others.

On the other hand, the G-20 countries have also proposed and established measures, some of which are in line with those suggested by the OECD.

The following sections summarize some of the measures taken by four G-20 member countries, highlighting the cases of the United States, Canada and Brazil. It is important to note that these countries have proposals that have not yet been approved, which is why this report comprises only information available as of the date in which it was written.

The United States

According to the press release issued by PricewaterhouseCoopers (“PwC”), on March 26, 2020, the United States Senate approved an economic stabilization package, the ‘Coronavirus Aid, Relief, and Economic Security Act’ (the CARES Act) which contains various provisions and tax benefits. Among other considerations, the package includes the following (non-exhaustive list):

• Introducing measures that provide employees of small and medium-sized enterprises (SMEs) with benefits, including refundable payroll tax credits for employees who are diagnosed with coronavirus or who are in the process of being diagnosed, as well as for employees who have to take care of their children due to the closure of day-care centers.
• This package also establishes measures designed to provide benefits related to the NOLs, including a five-year NOL carryback for NOLs generated in fiscal years beginning in 2018, 2019 and 2020, subject to certain restrictions. In addition, the package also contemplates an increase in the 30% adjusted taxable income limitation to 50% for tax years beginning in 2019 and 2020.

Lastly, based on information published by PwC, it is worth adding that prior administrative relief had already been approved, allowing tax filing deadlines to be postponed from April 15th to July 15th 2020 without charging late payment penalties.

Canada

According to the information provided on the PwC website, Canada has submitted, among others, the following measures:

• These measures cover both federal and state income tax, as well as indirect taxes, and it should be noted that, at the time of writing this report, these had still not been approved. Among other things, these include extensions to individual, trust and business tax payment deadlines (which do not include extensions to tax return filing due dates). There are also measures aimed at temporarily deferring tax audit processes for certain taxpayers.
• On the other hand, the government proposed to provide a temporary wage subsidy for eligible small employers for a period of three months, which would be subject to certain limits per employee and employer. There are also benefits for employees who have to work reduced hours or have lost their jobs because their employers are forced to close their businesses, as well as for those who can't work because they are sick with COVID-19.

Brazil

According to the information published by PwC, Brazil's measures covered mainly administrative issues, such as the following:

• There are no proposed measures related to corporate income tax yet, but there are other initiatives that allow early payment of public pensions and the suspension of severance payments contribution.
• Additionally, in view of the on-site restriction of the service units in the respective offices, the Ministry of Economy has authorized a 90-day suspension of various deadlines related to administrative proceedings involving the Brazilian authorities, which, among other things, will allow taxpayers to submit their claims on administrative proceedings in tax assessments. On the other hand, it is also contemplated to delay until May 2020 the issuance of notices to expel taxpayers of installments programs of debts, as well as other notices related to unpaid tax debts.

Mexico

As of March 26, 2020, the Mexican federal government had not yet issued any statement on tax measures or responses to support for taxpayers on the COVID-19 pandemic. As mentioned above, it is worth noting that, historically, the federal government has provided various incentives to taxpayers in vulnerable situations like the one we are currently facing, such as natural disasters and the AH1N1 swine flu pandemic in 2009.

Nonetheless, the federal government should be assessing the need to issue some economic or tax relief measures to address this situation. In the corporate sector, there are some boards, associations and groups that have expressed their views on the measures they believe should be taken to address the current situation.

Here are some of the tax measures that these boards or associations have proposed:

• The Consejo Coordinador Empresarial, has proposed measures to safeguard employment and reduce the impact on the economy, which include accelerating VAT refund processes, allowing the accelerated depreciation of investments during 2020 with no territorial restrictions and accelerating pending payments to PEMEX suppliers, among others.

• The Confederación Patronal de la República Mexicana proposes six main tax measures: accelerating the VAT refund processes, temporarily suspending monthly estimated income tax advanced payments, temporarily suspending tax audits, promoting tax incentives for employment and investment, temporarily suspending the excise taxes on gasoline and diesel, and improving access to funding through Nacional Financiera and the Banco Nacional de Comercio Exterior.

In addition, various government agencies, such as the Instituto del Fondo Nacional de Vivienda para los Trabajadores and Secretaría de Economía, have issued measures concerning phase 2 of the pandemic, which are mainly oriented towards administrative issues and some economic ones, accordingly.

We must bear in mind that the issuance of new measures is a quickly evolving process, even on a daily basis. Therefore, it is also important to pay attention to any notices from the federal government and its agencies, mainly in tax related matters, where history has shown that the authorities have issued administrative benefits around certain deadlines, for example, for filing annual tax statements.

With this in mind and based on the scenarios of other countries, recommendations from the OECD and requests from organizations in Mexico regarding the economic effects that are having an impact on countries from all around the world, we believe that the federal government should take the pertinent tax measures and policies and focus them on reducing the adverse effects on the economy, pursuing tax measures that will help ease potential employment issues, boost investment and consumption, improve businesses’ cash flow, provide administrative benefits from a tax compliance standpoint and encourage productivity and Mexican exports. These measures must also make it possible to increase confidence, not only among consumers but also among both domestic and foreign investment.

The following are some of the tax measures that could be discussed in Mexico:

• Extension, payment in instalments or deferment of the tax payment deadlines for a certain period.
• Improve or expedite tax refund processes to boost taxpayers' cash flow
• Establish a 100% deduction on certain capital expenditures (CAPEX) investments for at least a couple of years.
• Applying tax measures to encourage job retention in a scenario of recession and economic slowdown.
• An extension to the filing deadline of monthly and annual tax returns and payments.
• Increase the period of NOLs carryforward for 2020 and 2021 by up to 10 years longer than the established period, taking into account the adverse economic effects of the depreciation of the Mexican peso against the U.S. dollar.
• Suspending the limitation on interest deductions under the new 30% limit on adjusted taxable income (tax EBITDA) or allowing a higher deduction for those taxpayers who either rely on additional sources of financing to curb adverse economic effects.
• Monthly advanced payments reduction for the entire year and not only for the second semester.
• Improved requirements for deducting uncollectible accounts and obsolete inventory.
• Allowing a larger limit on deductions for donations related to health contingencies.
• Initiatives to assist the reorganization of companies belonging to a single group.
• Increase personal deductions and allowances for individuals on their annual tax return.
• To temporarily modify the monthly and annual tariffs for individuals, where the tax burden is adjusted in order to face a possible lack of cash flow among taxpayers.

Both the United States and Canadian governments have responded quickly. In Mexico's specific case, it will be of great importance to be able to introduce and carry out tax measures based on the current economic scenario and expected recession in Mexico.

While the measures proposed by the business sector and the OECD pose benefits that would be ideal for taxpayers in view of the potential economic problems and challenges ahead, especially for SMEs, the feasibility of such measures would have to consider the financial needs of the Mexican Government, among other external aspects, such as the drop in oil prices and the depreciation of the Mexican peso against the U.S. dollar.

Hence, it is extremely important to pay attention to any notices given by the government in the coming days, which should be carried out as soon as possible, in order to send a strong message about the tax measures to support the Mexican economy, which is greatly needed.

References

• Confederación Patronal de la República Mexicana. (16 de marzo de 2020). Recuperado el 25 de marzo de 2020, de Coparmex propone medidas concretas para hacer frente a los efectos Económicos del COVID-19: https://coparmex.org.mx/coparmex-propone-medidas-concretas-para-hacer-frente-a-los-efectos-economicos-del-covid-19/

• Consejo Coordinador Empresarial. (19 de marzo de 2020). Medidas Urgentes para Preservar el Empleo y Mitigar las Afectaciones a la Economía. Recuperado el 25 de marzo de 2020, de Medidas Urgentes para Preservar el Empleo y Mitigar las Afectaciones a la Economía: https://www.cce.org.mx/medidas-urgentes-para-preservar-el-empleo-y-mitigar-afectaciones-a-la-economia/

• Haines, A. (19 de marzo de 2020). ITR’s COVID-19 hub: Managing the tax impact of the coronavirus. (I. T. Review, Editor) Recuperado el 25 de marzo de 2020, de International Tax Review: ITR’s COVID-19 hub: Managing the tax impact of the coronavirus

• Organization for the Economic Cooperation and Development. (20 de marzo de 2020). Emergency tax policy responses to the Covid-19 Pandemic. Recuperado el 25 de marzo de 2020, de https://oecd.dam-broadcast.com/pm_7379_119_119695-dj2g5d5oun.pdf

• PricewaterhouseCoopers, LLP. (26 de marzo de 2020). PwC Global. Recuperado el 26 de marzo de 2020, de Navigate the tax measures in response to COVID-19: https://www.pwc.com/gx/en/services/tax/navigate-the-tax-measures-in-response-to-Covid-19.html?c1=austria

• PricewaterhouseCoopers, LLP. (26 de marzo de 2020). Senate passes Phase Three COVID-19 economic stabilization legislation. (L. PricewaterhouseCoopers, Ed.) Recuperado el 26 de marzo de 2020, de Tax Insights from Washington National Tax Services: https://www.pwc.com/us/en/tax-services/publications/insights/assets/pwc-senate-pass-phase-three-covid-19-legislation.pdf

• PricewaterhouseCoopers, LLP. (23 de marzo de 2020). Tax Measures in Response to COVID-19. Recuperado el 25 de marzo de 2020, de https://www.pwc.com/gx/en/assets/tax/covid-19-master-document-tax-measures.pdf