Focus on: Tax in Mexico

Chevez Ruiz Zamarripa

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MOMENT OF GOVERNMENT TAX SUPERVISION IN MEXICO, CHALLENGES AND STRATEGIES

INTRODUCTION

As a result of the change of administration, several factors have led the Mexican tax authorities to exercise a pressure never seen before on captive taxpayers and, thus, attempt to collect the largest possible amount of tax funds. In many of these cases, such collection could imply violations of the fundamental rights of taxpayers which, until a few years ago, were mostly respected.

The aforementioned circumstance has generated an environment of uncertainty and disincentives towards private investment in Mexico because the result of some audits have left taxpayers in a state of legal uncertainty and insecurity, even, on some occasions, in a state of defenselessness. This situation is even worse in the case of acts that go beyond audit procedures such as invitation letters and oral comments tending to achieve a persuasive collection.

Fortunately, there are certain mechanisms, both preventive and defensive (measures and legal remedies) that should be considered for purposes of better handling audit procedures, which may help taxpayers deal with the current environment differently.

In fact, we consider that taxpayers that are taxed in Mexico should be prepared and change the form in which they have worked in the past form a tax standpoint in order to create a preventive culture and act at any time in the most expedient manner possible to protect their interests.

In this article, we will address the previous ideas in general, proposing a series of measures that may be an indication for those persons that pay taxes in Mexico so that their fundamental rights from a tax standpoint may be respected such as, an adequate assessment of the documentary evidence they contribute to the development of the audits to which they are subject to and, if necessary, the filing of the applicable legal remedies with the jurisdictional bodies.

CURRENT ENVIRONMENT

On December 1, 2018, a new political party took office in Mexico facing, as it is common, several challenges, within which we may highlight that related to a low collection on the part of the Public Treasury, together with a philosophy of austerity and budget cuts to state entities. A new ideology was about to start an awaited change in the direction of Mexico, with the ambition of carrying out new projects that would require significant funds with charge to public expenditures.

As of this moment, great pressure could be felt towards the business environment, which was classified, on a generalized manner, as “corrupt” and “evil”.

In 2020, the difficult economic situation that could already be felt in the country was exacerbated as a result of the Pandemic caused by the SARS-CoV-2 (Coronavirus).

With the need to obtain greater funds for public expenditures and the lack of income generation on the part of several economic sectors, the tax authorities began exercising pressure on taxpayers in order to respond to such need, thus giving rise, as a result thereof, to an aggressive policy on collection matters, which resulted in the flight of capital and the shortage of investment in the country.

In fact, with a disproportionate aim of collection and the budget cut that was carried out for purposes of achieving such objective, the tax authorities began with legal interpretations merely with collection intentions, moving away from technical interpretations and the strict and legal application of the law. It should be borne in mind that despite that in the past this type of interpretations existed, they were not as extreme and, even, without a context of economic logic and the lack of adherence to the fundamental principles set forth in the Mexican Constitution.

In response to the position of the authorities and the threat of numerous tax deficiency assessments, taxpayers have been obliged to approach the latter in order to reach agreements and negotiations which, regardless of the unlawfulness of the positions in the related tax supervision procedures, in many cases, taxpayers have accepted them in order to avoid greater detriment.

¿What to do?

Overwhelmed by the difficult economic situation faced by the country and concerned about the current aggressive collection policy, many taxpayers have questioned what to do against such actions which, as previously commented, on many occasions, have resulted arbitrary.

As a mere indication of our advice to taxpayers so that they face the audit procedures in a better way and position, the following should be taken into account:

ANALYSIS OF ADOPTED CRITERIA

It would be advisable to review the criteria adopted during the last 5 years for purposes of assessing tax liabilities to taxpayers in Mexico. Specifically, in the case of individuals and legal entities, should the latter have made payments to related parties due to items such as royalties, technical assistance, and interest. Further, in the event that transactions with related parties abroad may have been carried out, taxpayers should have sound transfer pricing studies and comply with the applicable formalities such as proof of tax residence of the recipient of the payment, as well as the identification of the beneficial owner thereof.

TIMELY FOLLOW-UP OF AUDITS

Commonly, when audits are carried out, there is no proper understanding between taxpayers and government officials; for this reason, it is advisable to have a timely follow-up of the requirements that are made, as well as the form of response thereto, taking into consideration at all times the stages that follow the audit.

In this respect, please bear in mind that in accordance with the Federal Tax Code, as a general rule, inspection visits and desk audits, which constitute the most common audit procedures, cannot last more than 12 months; subsequent to this period, the tax authorities have a 6-month-term to assess the applicable tax liability (there are exceptions for certain taxpayers such as the financial sector, as well as those taxpayers that carry out transactions with related parties abroad, among others).

During the general 12-month-term, the tax authorities issue a series of requirements for taxpayers in order to know their tax situation and, if applicable, proceed to inform them the respective observations. In this case, it is very important that the documentation and information that taxpayers file with the tax authorities be clear, accurate and respond to the specific request; also, taxpayers should have the documentary evidence related thereto, both in respect of the subject matter and the materiality of the transactions.

In other words, in addition of evidencing which is the tax situation of taxpayers, documentary evidence related thereto should be submitted to the tax authorities, which should include, at the discretion of the tax authorities and our Tribunals, that evidence which is deemed ideal documentation to prove due compliance with the tax provisions. The foregoing circumstance, due to the fact that we have noticed that sometimes the information that is submitted is not necessarily ideal to comply with the related requirements.

In view of the foregoing, we suggest that from the start and throughout the conclusion of the audit, taxpayers try to properly respond to the requirements, even try to respond based on any experience related to other audits made to taxpayers; further, it is also important to have in mind at all times which of the information and documentation submitted may be useful in subsequent instances or in the defense of the matter, which we will comment below.

DEFENSE FILES

Reference is made to defense files as that set of documents and information analyzed and collected by the taxpayer for purposes of proving the proper compliance with its tax obligations.

In this respect, a defense file has two stages.

The first one consists of the integration of all the documentation and information which, even prior to the exercise of the powers of verification, in our opinion, taxpayers should obtain and integrate to prove due compliance with their tax obligations; the second is integrated with that information which, during the course of the audit, taxpayers obtain and integrate to comply with the requirements of the tax authorities.

The file integrated in both stages is essential in order to i) prove due compliance with the tax obligations to the tax authorities and, ii) if necessary, file the applicable legal remedies with the corresponding courts.

Please bear in mind that prior to the exercise of the powers of verification, taxpayers should already have a defense file so that they may duly and timely respond to the audit since the beginning and through the conclusion of the process. As a result thereof, they will be able to have the specific elements to respond to, and disprove any eventual observation made by the tax authorities.

To the extent that taxpayers have a precautionary defense file integrated prior to the commencement of the powers of verification, and a subsequent defense file integrated based on the specific requirements that may arise during the course of the audit, they would have all the elements to disprove any observation made by tax authorities related to compliance with their tax obligations.

Another issue that should be taken into account is that prior to the assessment of the tax liability, within the inspection visit and the desk audit, which constitute the most frequent powers of verification utilized by the tax authorities, a preliminary tax audit report is issued, for purposes of informing the taxpayer of the observations detected by the tax authorities during the audit and, in respect of which, taxpayers may choose between disproving them or correcting their tax situation in accordance with the terms established by the tax authorities.

In the event of opting to correct their tax situation, taxpayers should take into account that the law provides certain benefits (reduction of surcharges and fines) which, if applicable, would make the correction for which the taxpayer opted less burdensome.

On the contrary, in the event of opting to disprove the observations, it is indispensable to prepare the response duly grounded in law and fact and sustain it with the defense file previously referred to, for purposes of supporting any assertion that may be made in order to prove the due compliance with the tax obligations of taxpayers.

Special emphasis is made on the issue of evidence; in this respect, it should be borne in mind that in accordance with a criterion which constitutes a court precedent1, and therefore is mandatory for all courts, taxpayers are not entitled to produce in trial any evidence that was not previously produced in the administrative procedure of origin (audit) or in the respective administrative appeal.

In other words, all that evidence that the taxpayer might have not submitted to the tax authorities during the audit or in the processing of the administrative appeal, cannot be contributed to the annulment complaint that may be filed against an eventual tax liability with the Administrative Court.

It should be noted that the last opportunity for a taxpayer to produce evidence additional to that produced during the audit procedure, would be when filing an administrative appeal with the tax authorities, which is optional for the taxpayer. We will discuss this legal remedy further in the corresponding section.

It is worth mentioning that, in the event that the taxpayer opt to disprove the observations informed by the tax authorities, there is an alternative mean of tax dispute resolution named conclusive agreement, which should be filed the Mexican Taxpayers’ Ombudsman, within a specific term and prior to the issuance of the resolution assessing the tax liability. The following section will address an in-depth analysis of the alternative mean of tax dispute resolution previously referred to.

PRODECON AND NEGOTIATION WITH THE AUTHORITIES

The Mexican Taxpayers’ Ombudsman (hereinafter PRODECON for its acronym in Spanish) is a specialized decentralized public body on tax matters which renders several types of services to the taxpayer. PRODECON is the Ombudsman on taxation to taxpayers in Mexico.

For purposes of this article, 2 of such services will stand out, to wit, complaints, and conclusive agreements.

Complaints consist of a procedure whose purpose is to denounce, so that PRODECON may be aware of and investigate those acts of the authority which are carried out in violation of the rights of taxpayers so that the authorities in question desist from these violations and redress them in the enjoyment of their fundamental rights. In such procedures, PRODECON may issue public recommendations and propose, if applicable, the corrective measures for the tax authorities that may be involved.

Conclusive agreements are an alternative mean of tax dispute resolution whose purpose is that PRODECON, as a public body with technical, functional, and managerial autonomy promote, reveal, and facilitate the advanced and consensual solution of disputes and disagreement that, during the exercise of an audit procedure, may arise between taxpayers and the tax authorities.

The application for a conclusive agreement may be filed at any time as of the commencement of the exercise of the powers of verification, to the extent that the tax authorities had already qualified the facts or omissions, and throughout a twenty-day-term counted as of that in which the final report of the audit is drawn up (tax inspection visit), notifying the ruling of observations (desk audit review) or the provisional resolution (electronic review).

With the amendments to the provisions that govern this procedure, as of 2022, the processing of conclusive agreements should not exceed a twelve-month-term counted as of the filing of the respective application; therefore, it is important that taxpayers file their application as comprehensive as possible and in compliance with all the requirements of the law for purposes of expediting the procedure and avoiding other requirements.

In view of the foregoing, please bear in mind that despite that PRODECON has been strongly criticized by the current administration, it is still an institution that facilitates dialogue between the authorities and the taxpayer more neutrally, which makes transparent the actions of the parties that resort to final agreements. In fact, in practice, it has become common that prior to the assessment of a tax liability, taxpayers attempt this type of procedure which turns out to be a sort of mediation between the taxpayer and the tax authorities.

Hence the importance to take the necessary precautions to have, at all times, documentary evidence to prove due compliance with the tax provisions on the part of the taxpayer, and to conduct the proper defense of the legal and economic reasoning that led to the adoption of a specific position within the taxpayer’s taxation scope so that, since the beginning, if possible, the best agreement may be reached with the tax authorities; further, in the event of failure to do so as a result of which the tax liability is assessed, the taxpayer may have more elements to prepare a proper defense.

For this reason, despite that in recent years there is the feeling that PRODECON has lost the strength that it initially had to counteract the arbitrary actions of the tax authorities, the complaint and the conclusive agreement are still efficient mechanisms that may help to achieve results commensurate with the interests of taxpayers.

LEGAL REMEDIES

In the event of a possible tax deficiency assessment issued by the authorities (tax liabilities), there are two means of defense that taxpayers may exhaust in the event of not sharing the latter´s criterion.

Administrative appeal

The first one of these legal remedies is an administrative remedy called administrative appeal (either in the traditional way or on the exclusive resolution of the merits of the case). The filing thereof is optional, therefore, if the taxpayer has no intention of exhausting it, it may directly file an annulment complaint before the Administrative Court.

In practice, it is complicated to obtain a favorable result within such administrative appeal; however, it is usually filed in order to contribute more evidence to the tax authorities because it is the last moment to do so, which would allow a proper defense in subsequent contentious instances.

In fact, as previously commented, based on the court precedent issued by the Second Division of the Supreme Court of Justice, that evidence that was not submitted during an audit procedure, can still be submitted in the administrative appeal, but not in a subsequent instance.

Another aspect that should be considered is that related to the processing of an administrative appeal, in which case, it is not necessary to produce any security interest to guarantee the tax liability; this situation is relevant derived from the amount of the differences that the authorities are currently assessing on taxpayers as a result of their audit procedures.

In the event of obtaining a partial favorable resolution or a resolution unfavorable to the interests of the taxpayer within an administrative appeal, they may challenge such resolution together with the tax liability originally assessed through the filing of an annulment complaint, which will be analyzed in the following section.

Annulment complaint

The annulment complaint is a legal remedy that taxpayers may file against a tax deficiency assessment or against the resolution which may fall on the administrative appeal they might have previously filed against the aforementioned assessment. This legal remedy is resolved by the Administrative Court.

Against an unfavorable decision within an annulment complaint, it proceeds to file an amparo complaint, which will be definitively resolved by a Collegiate Circuit Court. In turn, against a favorable decision, the tax authorities may file an appeal, which will also be resolved by a Collegiate Circuit Court.

Some years ago, the law incorporated a new modality for the filing of annulment complaints, which was named complaint for the exclusive resolution of the merits of the case. The intention of this complaint is to study exclusively the merits of the case, without analyzing any formal aspects.

Thus, in practice, taxpayers have sometimes opted to file this legal remedy, waiving any other formal argument they may assert against the resolution issued by the tax authorities with the intention that merely the merits of the case be analyzed for purposes of determining in this manner whether its tax obligations were duly met. One advantage of this procedure is that during the stage of the complaint for the exclusive resolution of the merits of the case, it is also not necessary to produce any security interest to guarantee the tax liability, clarifying that in the stage of amparo or appeal, in fact this would be necessary.

International treaties and protection of investments

Regardless of the legal remedies previously referred to, it should be noted that in any strategy that may be implemented in the case of an audit procedure, the taxpayer should analyze the possibility of exhausting, in due time, the MAPS (mutual agreement procedures) set forth in the treaties for the avoidance of double taxation entered into by Mexico.

Additionally, it should also be taken into account that several international treaties contain clauses for the protection of investments through which, in the event of arbitrary acts on the part of the tax authorities, taxpayers have attempted that the matter be resolved with international panels.

Under these terms, despite the domestic legal remedies, it would be advisable to also consider a more comprehensive analysis of the specific situation of the taxpayer in the event of tax audits in order to have all the possible solution alternatives.

Significant considerations

It is important to know all the stages of the audit procedures, the alternative means for the solution of controversies, as well as the contentious procedures or even the legal remedies that, at an international level, may be implemented in order to evaluate the case on an integral basis and develop an integral strategy of defense that adjusts to the requirements of each taxpayer, since there are several factors that may turn each of them more or less attractive, such as, costs, guarantees and time for resolution, some of which have already been explained herein.

In view of the foregoing, the possibilities of achieving a favorable result may be significantly increased, because, despite that arbitrary acts may be carried out by the tax authorities, a well-structured case, duly grounded in law and fact, should contribute to obtaining a intended result to the benefit of the taxpayer.

Further, a graphic which contains information of the authorities was recently published in a journalistic note. This graphic shows that during 2021 resolutions for private parties through the contentious-legal instances were mostly favorable, indicating that in such year they amounted to 54.4% of the complaints. Based on our experience, this percentage is even greater than that mentioned in the related journalistic note.2

IN SUMMARY

The environment currently faced by Mexico, at a political level, and resulting from the Pandemic, has caused that the tax authorities exercise too much pressure on taxpayers on collection matters, even in some cases, frequently violating their fundamental rights.

There are a series of remedies that taxpayers may implement for purposes of preventing and defending themselves from the positions of the tax authorities.

The timely follow-up of audits and the integration of a proper defense file that contains a series of documents that taxpayers may collect daily in the ordinary course of their activities and prior to the exercise of the powers of verification, as well as the documents that during an audit the taxpayer considers appropriate to collect in accordance with the observations of the authorities, have become fundamental.

Nowadays, PRODECON (Mexican Taxpayers’ Ombudsman) has played a significant role due to the fact that the filing of complaints and conclusive agreements has resulted in strong support for taxpayers.

In the event that no consensus is reached with the tax authorities during the audits or in the implementation of the alternative means for the solution of controversies and, as a result thereof a tax liability is assessed, taxpayers may file the applicable legal remedies against such assessments which, depending on the specific characteristics of the case, may have good possibilities of success.

 

Footnotes

[1] “CONTENTIOUS ADMINISTRATIVE SUIT. THE PRINCIPLE OF OPEN MATTER IN DISPUTE (LITIS) THAT GOVERNS IT, DOES NOT IMPLY FOR THE PLAINTIFF A NEW OPPORTUNITY TO OFFER THE EVIDENCE THAT, IN ACCORDANCE WITH THE LAW, IT SHOULD HAVE PRODUCED IN THE PROCEDURE OF ORIGIN OR IN THE ADMISSIBLE ADMINISTRATIVE APPEAL, BEING IN A LEGAL POSITION TO DO SO [MODIFICATION OF COURT PRECEDENT 2a./J. 69/2001 (*)].”

[2] Pierde SAT 54% de juicios contra contribuyentes (reforma.com)

 


Authors:

Pablo Corvera

Claudio Cardenas

Isabel Nuñez