Legal considerations

On 17 March 2020 the Federal Judicial Branch and the Superior Court of Justice of Mexico City, decreed the suspension of activities from 18 March to 20 April, 2020 in order to avoid contagion by COVID-19, period in which:

• There are no procedural terms
• Only cases that required immediate attention in criminal and family matters will be addressed. The same has happened with the Conciliation and Arbitration Boards and the attention in offices and administrative acts of the Local tax authorities regarding their actions and the IMSS (SS) delegations (with the exception of certain procedures)
• Also, the Federal Court of Administrative Justice ordered the suspension of activities from 18 March until 17 April. During the suspension of the aforementioned activities, the jurisdictional activity will be suspended and there will be no procedural deadline.

All these declarations and those that correspond to other federal and local administrative agencies, are in any way affected by the agreement of the Health Council that is discussed in the next section of the bulletin, leaving in practical terms the judicial and administrative deadlines suspended until the April 30, 2020.

For their part, neither the Tax Administration Service (SAT) nor the Taxpayer Defense Attorney's Office has announced the suspension of terms or the granting of extensions.

However it is noteworthy that according to the Federal Tax Code (CFF), the time limits to the exercise verification procedures can be suspended when the authority is prevented from continuing to exercise its powers, due to force majeure, until the cause disappears, which must be published in the Official Gazette of the Federation and on the SAT website.

Likewise, according to the CFF, no enforcement measures will be applied when taxpayers, jointly liable parties or third parties related to them, express in writing to the authority, that they are prevented from fully or partially attending to the request made due to force majeure or case fortuitous, and prove it by exhibiting the corresponding evidence.

This situation, according to the Code itself, may be applicable to the configuration of infractions that lead to fines and penalties that the federal tax authorities intend to establish.

Agreement of the General Health Council declaring the epidemic of illness caused by the virus COVID-19 as a " health emergency " due to force majeure

On March 30, 2020 it was published in the evening edition of the Official Journal of the Federation the agreement where is declared a health emergency because of force majeure the epidemic generated by the COVID-19. Within it, the Ministry of Health has determined various actions that affect the normal development of labour relations in the private sector, including:

• The immediate suspension from March 30 to April 30, 2020 of activities not essential.
• Companies that carry out essential activities that are directly necessary to meet the health contingency may continue to operate, such as:

1. activities of the medical branch
2. supply, services and medical supplies
3. pharmaceutical sector,
4. disposal of waste, cleaning and sanitation of medical facilities.

• Some additions sectors may also operate such as:

1. financial,
2. distribution and sale of energy,
3. gas and gas stations,
4. food and non-alcoholic beverages industry,
5. food markets,
6. supermarkets,
7. self-service stores,
8. groceries and sale of prepared foods,
9. transportation of passengers and cargo,
10. agricultural and livestock production,
11. agrobusiness,
12. chemistry,
13. cleaning products,
14. hardware stores,
15. messaging,
16. private security,
17. nurseries and asylums,
18. telecommunications,
19. media,
20. funeral services,
21. storage and cold chain of essential supplies,
22. logistics (airports, ports and railways), and
23. activities whose suspension may have irreversible effects for its continuation and activities related to the operation of government social programs.

• In the continuity of carrying out essential activities, it is necessary to observe the control and healthy distance measures that had already been indicated since the previous phase of monitoring the epidemic.

The health emergency urges all the population that does not participate in essential work activities to stay at home and not go to their workplaces, without this implying that companies can compute unjustified absences and must pay full wages for workers.

• Workers over 60 years of age or with a diagnosis of hypertension, diabetes, cardiac or lung disease, immunosuppression, pregnant or lactating who work in essential activities, must remain at home, with full wages.

The health emergency is not tantamount to a declaration of health risk to order a general suspension of work, in terms of Articles 42BIS and 427 paragraph VII of the Law Federal of Labour, that would allow employers temporarily suspend collectively and relations with their workers or the pay the minimum wage (Mex$123.33) for each day spent the contingency.

In conclusion, the reference agreement does not contain a declaration of health contingency that implies the general suspension of work. Basically, it establishes that since many of the labour relations can continue in the tele-work modality (“home-office”), employers must pay the salary and benefits in an integral way, which puts at risk the viability of various companies, especially micro and small (SMEs).

The sanctions for non-compliance with the measures of the agreement are foreseen in the General Health Law, especially in articles 417 to 421-BIS, and establish fines that can range from Mex$170 thousand to even more than Mex$3 million in recidivism.

We consider that with these bases, the elements are gathered so that businessmen dedicated to sectors expressly affected with closure and suspension of their activities by agreements or sanitary security measures , as a special measure, present the notice of collective suspension of relations labour by fortuitous event or greater force, provided for in article 427 of the Federal Labour Law.

This would allow employers to suspend the payment of wages, and once the Conciliation and Arbitration Board resume their activities, the suspension notice would be presented so that prior to the procedure indicated in the labour law, it be approved, with the understanding that if authorized, the payment of compensation to the workers will be fixed, which cannot exceed the amount of one month's salary. The elements of the agreement must be evaluated together with their labour lawyers.

Tax consequences that could arise due to the health contingency

Those individuals who suffer an affectation and impairment in their assets, due to the COVID-19 health contingency and the measures taken to mitigate it, must analyse the corresponding authorized deductions, in order to comply with the requirements applicable to each one and be in possibility of duly reflecting their economic reality for tax purposes.

Losses and damages, if any, should shall be reflected through the application of deductions in the annual tax return (ISR), corresponding to the fiscal year 2020. Even if it is deemed that the coefficient of utility that is applied for the determination of advance payments is higher than the profit coefficient of the year, from the second semester of the year, authorization may be requested to decrease provisional payments, and such request must be submitted one month before the date in which the entire provisional payment that is requested to be reduced must be made, the foregoing, for example, due to a loss for exchange rate fluctuation derived from the current high volatility in the exchange market, mainly against the US dollar, or for any of the operations mentioned in the next section.

Deductions

Loss and damage

Some deductions due to the current situation may refer to losses due to fortuitous event or force majeure. In particular, the case of investments, specific rules must be observed in each case, in the case of investment losses, expenses, etc.

Inventories

There may also be a situation that due to the affectation of the supply chain, inventories lose their value (e.g., in the case of perishable products). In such situation, the corresponding deduction could be made, to the extent that the corresponding requirements are met, such as offering them as a donation - in the case of basic goods for human subsistence - or their destruction is carried out; Likewise, the corresponding accounting record must be made and the corresponding notices must be submitted in due time and form .

In the case of the sale of goods that are made at cost or less than the cost, it will be relevant to document that the goods suffered a demerit or there were circumstances that determined the need to carry out the sale under such conditions.

Bad loans

It could be analysed whether, due to the economic impact and lack of liquidity of the affected debtors, a notorious impossibility of collection is generated and, therefore, the deduction of the loss for bad loans could be considered.

Conventional sanctions, compensation or penalties

Continuing with the aforementioned, it will be important to analyse those cases that the current situation experienced by the contingency generated by COVID-19 forces a party to pay a conventional sanction, compensation or penalty, this with the aim of analysing the nature of said payment from a legal perspective, and if applicable, the possible deductibility thereof, in accordance with the provisions of Income Tax Law.

Currency effects

It is important to note that the COVID-19 health contingency and the measures taken to mitigate it, among other factors, have generated a depreciation effect of the Mexican peso against foreign currencies (such as the US dollar). In this sense, it should be analysed whether said exchange fluctuations generate a loss or gain, as the case may be, for income tax purposes and particularly the impact it may have on advance income tax payments.

Granting of incentives and benefits

It will be relevant to follow up on the actions that, if applicable, both the federal and local governments decide to take in terms of incentives and benefits, to analyse whether they are applicable to the taxpayer and whether the necessary requirements for obtaining them are met.