az Alert | Tax Reform: New appraisal rule in Article 64 of the Tax Code

Likewise, the Service may proceed to the assessment of the tax base in the cases of subsection 2 of article 21 and article 22.

When the price or value assigned to the object of the alienation of a movable, tangible or intangible item, or to the service rendered, serves as a basis or is one of the elements for determining a tax, the Service, without the need for prior citation, may assess such price or value in cases in which it is notoriously lower than the current market prices or those normally charged in conventions of a similar nature, considering the circumstances in which the operation is carried out.

The provisions of this article shall not apply in cases of division or merger by creation or incorporation of companies, provided that the new or subsisting company keeps the tax value of the assets and liabilities of the divided or contributing company.

Nor shall the provisions of this article apply in the case of the contribution, total or partial, of assets of any kind, tangible or intangible, resulting from other reorganization processes of business groups, which are due to a legitimate business reason, in which the contributing company subsists, whether it is an individual company, a corporation, or taxpayer of No. 1 of Article 58 of the Income Tax Law, which involve a capital increase in a pre-existing company or the incorporation of a new company and which do not give rise to actual cash flows for the contributor, provided that the contributions are made and recorded at the book or tax value at which the assets were recorded in the contributor. Such values must be assigned in the respective shareholders’ meeting, or public deed of incorporation or modification of the company in the case of partnerships.

Likewise, in all those cases in which it is appropriate to apply taxes whose determination is based on the price or value of real estate, the Internal Revenue Service may assess such price or value, if the one fixed in the respective act or contract is notoriously lower than the commercial value of the real estate of similar characteristics and location, in the respective locality, and immediately remit the corresponding tax without any other previous procedure. The appraisal and assessment may be challenged simultaneously through the procedure referred to in Title II of Book Three.

For the purposes of this article, normal market values shall be understood to be those that would have been agreed upon by unrelated parties, under arm’s length conditions, considering the relevant circumstances in which the act, convention or operation is carried out, such as the characteristics of the industry, sector or segment or of the goods or services transacted, or the functions assumed by the parties, among others, and may be determined even when there are no comparables, through commonly accepted valuation methodologies.

For the purposes of the appraisals referred to in this article, the Service shall summon the taxpayer in accordance with article 63 of the Tax Code, so that it may provide all the background information necessary to verify whether the act, convention or operation has been carried out at normal market values. For these purposes the taxpayer may use the following valuation methods.

a) Discounted Cash Flow Method. It consists of determining the capacity of the property, asset or company to generate future income, so that its economic value can be measured by the present value of the flows expected to be received during the life of the property, asset or company discounted at a rate associated with the risk of that property, asset or company.

b) Method of Relatives or Multiples. Consists of estimating the target value of a property, asset or company using certain ratios of similar characteristics.

c) Adjusted Book Value. Consists of determining the normal market values using the taxpayer’s financial information as a basis, adjusting assets and liabilities under market considerations.

d) Other valuation methods. When, in view of the characteristics and circumstances of the case, it is not possible to apply any of the methods mentioned above, the taxpayer may credit the normal market values using other methods, justifying that the special characteristics and circumstances of the transactions do not allow the application of the preceding methods.

The taxpayer must use the most appropriate method considering the characteristics and circumstances of the particular case. For these purposes, the advantages and disadvantages of each method, the applicability of the methods in relation to the type of act, convention or operation, and the availability of relevant information, among others, must be taken into consideration.

Taxpayers may accompany studies to prove the normal market values through a valuation report that shows the determination of the prices or values of the act, convention or operation under analysis. The presentation of these reports does not release the taxpayer from its obligation to keep at the disposal of the Service all the background information by virtue of which such methods have been applied or such studies have been prepared.

If the taxpayer, in response to the summons issued, fails to prove that the act, convention or operation has been carried out at normal market values or does not appear or does not respond to such summons, the Service will determine such values or prices based on the evidence provided by the taxpayer and any other background information available to it, applying for such purposes the methods already mentioned. The Service may request information from foreign authorities with respect to the acts, conventions or operations that are the object of the audit.

Once the normal market values or prices have been determined by the Service, the tax liquidation will be made or the resolution will be issued with the determination of the respective adjustments, and the determination of the corresponding interest and fines.

In all those cases in which it is appropriate to apply taxes whose determination is based on the price or value of real estate, the Internal Revenue Service may assess such price or value when it differs notoriously from the market values, and immediately remit the corresponding tax without any other previous procedure. The assessment and remittance may be challenged simultaneously through the procedure referred to in paragraph 1 of Title II of Book Three of this Code. The difference between the price or value assigned or agreed by the taxpayer and that determined by the Service by means of a resolution, liquidation or that proposed by the taxpayer in response to the summons, accepted by the Service, and that proposed by means of rectifying returns, shall be subject to the single tax of the first or third paragraph of article 21 of the Income Tax Act, as applicable, in the corresponding financial year.

This single tax shall not be levied on the differences determined by the taxpayer himself in rectifying returns filed prior to a request from the Service on the matter, provided that they imply an increase in his taxable base, and shall be taxed with the general taxes corresponding to the act, convention or operation that is the object of the rectification.

The provisions of this Article shall not apply in respect of any type of business reorganizations, such as mergers, divisions or contributions of assets of any kind, disposed of or assigned within the national territory, insofar as such reorganizations are carried out for a legitimate business reason. In the case of mergers, divisions or the partial or total contribution of assets, the tax cost of the assets must be maintained in the absorbing or merger company, in the company that comes into being as a result of the division or in the company that receives the contribution of one or more assets.

Taxpayers may submit queries on the application of this Article in the event of a corporate transaction or reorganization. Such consultation shall be dealt with in accordance with the procedure laid down in Article 26a.