Mexico: Tax Disputes

Taxpayers are bound to register under the Federal Taxpayer Registry, for income, value added and excise tax purposes.

As of 2022, taxpayers above 18 years are obligated to obtain such registry, regardless of their economic activities or lack thereof. The tax authorities recently clarified that the registry does not entail payment of taxes nor filings, unless an economic activity is performed that is subject to tax.

An additional registration process is required for federal excise taxpayers that manufacture, bottle or import alcohol or alcoholic beverages.

Mexico has imposed a self- assessment method for filing federal taxes. Thus, the assessment filed by the taxpayer stands unless the authority amends it through a tax assessment.

The tax authorities have the power to request –within a 3-month term- the taxpayer or even third parties information or documents to corroborate what is stated in the tax return filed. This is commonly known as one of the “facultades de gestión”, which do not entail a formal audit.

Additionally, the tax authorities can exercise its auditing powers (“facultades de comprobación”), which can result in a tax assessment. Tax omissions or incorrect filing, can result in other consequences, such as fines or even a restriction of the digital certificate to issue tax invoices.

Once a taxpayer has filed a return it is considered final. Taxpayers may voluntarily amend their returns up to 3 times, as long as tax authorities have not initiated an audit.

Nonetheless, a taxpayer may do so, in specific exceptional cases. Although no time restraints to modify tax returns are foreseen by law, once an amended return is filed, the statute of limitations regarding the concept modified is extended.

In our view, the main methods to verify the compliance of tax obligations, upon exercising auditing powers, are the following:

• In-situ tax audit (“visita domiciliaria”): This review takes place in the taxpayer’s tax domicile; the tax authorities requests therein the submission of information and documents to verify the compliance of tax obligations.
• Desk review (“revisión de gabinete”): Such review is carried out by requesting taxpayers to submit information and documents at the tax authority’s offices.

The electronic review (“revisión electronica”), which is a less common procedure, consists in the examination of information electronically available to the tax authorities.

It is important to point out that during the past years, the tax authorities have been increasingly issuing taxpayers non-official “invitations”, which are powers different from carrying out a formal audit.

Although these invitations are not challengeable, the consequences of not replying or clarifying the taxpayer’s situation can result in a restriction of the digital certificate to issue invoices.

According to information published by the Tax Administration, these non-official invitations issued under a program “Vigilancia Profunda” have resulted in an increase in “efficient” collection of 62.4%. The comparison was made accounting the collection of the first 6 months of 2022 and the same period for 2021.

The tax authorities have implemented programs in the past years to “invite” non-registered taxpayers to formal registration. There is no specific procedure to enforce this process, although such informal taxpayers are subject to fines, and in some cases, even criminal sanctions.

A new Simplified Trust Regime, applicable for individuals and entities, entered into effect as of 2022. This new regime seeks formality and/or payment under a reduced effective tax rate for individuals that ranges from 1% to 2.5%, applicable under certain requirements.

The tax authority’s ability to impose sanctions or determine a tax assessment is limited to 5 years.

Under exceptional circumstances, such as when taxpayers are not registered, or when they fail to file their annual tax return, the term is limited to 10 years. In the latter, the taxpayers’ income and due tax may be determined presumptively by the authority through a special procedure.

Tax fraud is defined, by law, as the omission in paying taxes, or obtaining an undue benefit, through the use of deception or taking advantage of an error.

Additionally, the law defines what is “aggravated” tax fraud, such as omitting the payment of taxes withheld, for example. This results in higher fines, aside from criminal sanctions.

No criminal charges are brought up, if the taxpayer voluntarily pays the corresponding tax omitted, along with surcharges and the adjustment by inflation, before the authorities acknowledge the omission, or issue a requirement, or an order to verify compliance.

Although tax fraud is punishable with a custodial sentence, in our view tax authorities mainly seek the recovery of the taxes due, when applicable. This is also reflected in certain provisions that foresee the dismissal of the case, upon the Ministry of Finance’s request, when the taxes and applicable surcharges are fully paid, among other cases.

A similar provision states that no criminal complaint shall be brought up, if the taxpayer voluntarily pays the corresponding tax omitted and surcharges and the adjustment by inflation, in the case referred to above.

It is not common that the tax authorities initiate an audit after a return is filed. However, in recent years, it has become common practice for such authorities to issue non-official invitations, requiring taxpayers to exhibit documentation or explanations.

Regarding formal audits, the Administration of Federal Audit Planning and Programming is the area of the Federal Tax Administration that has the power to establish the parameters and limits for audits concerning federal taxes.

Recently, the Tax Administration published a “master plan” attempting to increase collection in the following years, particularly from large taxpayers.

The main points contained in the published plan state that the tax authorities will increase their focus on large taxpayers in general, but with a specific emphasis on certain acts such as NOLs, corporate restructures, foreign payments, among others; as well as an emphasis on certain sectors and industries such as steel, automotive, tobacco, pharmaceutical, finance and mining, among others. Moreover, the tax authority published certain parameters on the profit margins taxpayers should obtain, on certain industries. The authorities seek that taxpayers review internally their effective income tax rate, for such purposes, and, if applicable, implement a self-correction.

Finally, under the current rules it is not necessary for tax authorities to have a formal justification to commence an audit, even for taxpayers who submit an auditor’s tax report.

The tax authorities must comply with certain minimum standards contained in Federal Taxpayer Rights Law, as well as the Federal Tax Code, which, among others.

Depending on the type of audit conducted, certain specific rules are applicable. For example, when carrying out in-situ audits, tax authority’s officers must identify themselves upon initiating audits, allow taxpayers to select witnesses, and make a record of every submitted and requested during such audit.

Additionally, the authorities are bound to communicate –upon commencement of a formal audit-, the period and tax that is subject to review. Additionally, tax authorities are limited as to the duration of the audits. Generally, audits must conclude in a 1-year period, subject to exceptions, such as taxpayers who are part of the financial system or when the authorities formally request information abroad.

During the course of an audit, the tax authorities have the power to request documents necessary to review the correct compliance of tax obligations. Generally, the information and documents requested therefrom, must be strictly necessary to review the correct tax compliance.

Under a recent Federal Circuit Court precedent, the Court considered that the name and address of the tax advisors is not strictly relevant for such purposes.

Although taxpayers can file a nullity tax claim to challenge certain acts, we consider that, since the request of information is not a “definitive” act, a claim of such nature would have no grounds. The amparo claim, when challenging such acts, is of an “exceptional” nature and will only be valid in case there is a clear constitutional breach on the request.

Regardless, in case a taxpayer files a nullity claim or an administrative appeal challenging a tax assessment, such taxpayer can raise arguments challenging the prior information requests, or any procedural act, deemed illegal.

The tax authority can request information from third parties, as well as from any joint obligors related to the audited taxpayer, exclusively regarding the periods and taxes that are subject to audit.

In this case, we believe a nullity tax claim, or even an amparo claim by a third party, would generally have no grounds. To sustain this, we consider the third party would have no tax liability resulting from the information requested, nor a tax assessment determined to another person.

As of 2014, taxpayers have widely used the conclusive agreement procedure, which is type of mediation with the tax authorities, regarding federal taxes, with the intervention of the Mexican Tax Ombudsman Agency (“PRODECON”).

Tax authorities are free to accept or reject the taxpayer’s proposal but have the legal obligation to participate in such procedure.

The agreement reached is binding and unchallengeable for both parties. What is agreed upon in one fiscal year does not constitute a precedent for other years.

The taxpayer has the right to submit additional evidence in this procedure and is entitled to a 100% fine reduction, if an agreement is reached, only on the first conclusive agreement.

In case the taxpayer reaches a partial agreement, the tax authority will have the power to issue a formal tax assessment considering what was not agreed upon. Taxpayers may file a nullity claim before the Federal Court of Administrative Justice, to challenge such assessment.

Taxpayers that consider the tax authorities do not abide by the rules set for tax audits, can file a complaint with the PRODECON, for investigation and to determine if the taxpayer’s rights are breached.

A PRODECON observer may be requested to attest on how the audit is being developed. We consider that, an expedited or slow audit, provided it complies with the time limits (1 year – general rule), would not breach taxpayer’s rights.

Additionally, if a tax assessment is determined and challenged, the taxpayers can raise arguments on the non-compliance of the audit’s formalities.

Once a taxpayer has been notified of a tax assessment, they have the option to file an administrative appeal directly with the Tax Administration’s legal branch, or a nullity claim before the Federal Administrative Justice Court.

If the taxpayer elects to file an administrative appeal, and obtains an unfavorable ruling, they can challenge such rulings and the tax assessment, and raise new arguments thereto.

Additionally, in case a taxpayer elects to file an administrative appeal, they have the right to exhibit further evidence not provided during the audit; this is the last procedural stage for the taxpayer to do so.

Furthermore, taxpayers are relieved from the obligation to provide a guarantee, as opposed to nullity trials, except under the substance over form nullity trial, where this obligation is relieved until a first instance ruling is issued.

An administrative branch (non-judicial) of the Tax Administration rules upon the administrative appeal, while the Federal Court of Administrative Justice, which is an autonomous Court solves upon a nullity claim.

Although such Court is autonomous, it does not form part of the federal judicial branch.

Once the Federal Court of Administrative Justice issues its ruling, taxpayers have the right to file an amparo claim (“amparo directo”), to challenge an unfavourable decision, which is solved by a Circuit Court that is part of the referred judicial branch.

The administrative appeals and nullity trials are mainly carried out through written procedures. Thus, most rulings –aside from the new “substance over form” procedures- are issued without a previous public hearing.

All rulings issued must be published (generally on an anonymous basis) or made available upon official requests, on the grounds that such rulings are considered to be of public interest, as per a 2020 decision of the Supreme Court of Justice. Notwithstanding, in practice we consider this rule is not always followed through.

In Mexico, tax trials and administrative appeals are mainly composed by written procedures.

Taxpayers have the choice to file these proceedings under a “substance over form” methodology, provided certain requirements and a “de minimis” threshold are met.

The “substance-over-form” procedure is special in nature where orality plays a major role. After the claim and reply are filed, the parties are summoned to a hearing for defining the controversial points. Furthermore, the Court has the power to summon expert witness, for a special hearing to raise specific questions and follow up queries.

Regarding the nullity trial, a special chamber rules on this special procedure, and the taxpayer benefits from being relieved to guarantee the tax assessment, on first instance.

There is not a formal document discovery process, as in certain common law countries.

Generally, the taxpayer must submit documentary evidence along the nullity claim. Special evidence, such as the expert witness report, are submitted at a later stage of the trial.

In the administrative appeal, the taxpayer has a 15-day term to state its proposed evidence, and the same term for submitting it.

Regarding documentary evidence in possession of the authorities, the taxpayer can request the Court to order such authorities its submission, provided certain requirements are met.

Taxpayers have the right to offer witnesses in nullity trials. The Court has certain discretionary powers to take such witness into account.

Even if the taxpayer does not offer a witness testimony, the Court may order proceedings for better understanding the disputed facts, although in practice the Courts rarely use such power.

In Mexico, all administrative acts are presumed valid, subject to certain exceptions, until proven otherwise.

In other words, the burden to disprove a tax assessment –on trial or administrative appeal mainly- falls on the taxpayer, as the assessment is protected by the aforementioned presumption.

In our experience, an administrative appeal ruling can take approximately from 1 – 2 years. A nullity trial ruling can take approximately 2 -3.5 years, depending on the circumstances of the case.

This, especially considering that the taxpayer may challenge interim rulings (dismissal of evidence, for example).

Once the Federal Court of Administrative Justice has ruled upon, taxpayers may file an amparo action (“amparo directo”) to challenge an unfavourable decision and raise legality or even constitutionality arguments, of the law applied or that should have been applied.

The Supreme Court of Justice can attract the case, in certain limited cases, and/or rule upon an exceptional appeal filed in the amparo trial.

Generally, once a tax assessment is notified, the taxpayer has 30 business days to pay the determined amount or provide a guarantee (ex. surety bond).

However, the applicable exceptions are as follows:

• When a taxpayer files an administrative appeal, no guarantee is required for the duration of this procedure. Only in case a fully unfavourable ruling is issued, must the taxpayer pay the amount due or provide a guarantee, within a 10-day term.
• Under certain interpretations, when a partially favourable ruling is issued, the taxpayer may be relieved of this guarantee.
• The guarantee is not required in a “substance-over-form” trial, until the first instance ruling is issued.

Initially, all taxpayers (entities) must file the appeal through their legal representative with sufficient power to appear before Court. Generally, a general power for litigious acts or sufficient power to file lawsuits is accepted. For administrative appeals, a general management power or special one for such appeals is also acceptable.

The legal representative can appoint authorized person to appear and act on its behalf, in the proceedings.

Under the Mexican system, no award of costs is in place for administrative appeals, to be borne by the “losing” party.

We consider this a disadvantage because the taxpayer cannot recover its legal expenses (attorneys, bond, etc.) notwithstanding obtaining a favorable ruling.

The only “exception” is that taxpayers are bound to pay legal costs in favor of the authority when rulings are challenged with notoriously dilatory purposes.

Additionally, the authorities are bound to pay damages and lost profits in cases when a “serious fault” is incurred upon issuing the contested resolution and the authority does not accept the claim, upon reply during the trial. Taxpayers must expressly request this and is not commonly seen in practice.

Finally, the Tax Administration Service’s law also contemplates the possibility that taxpayers are indemnified for damages and lost profits caused by liable public servants.

As stated, taxpayers may request to participate in an alternative dispute resolution form referred to as “conclusive agreement procedures” which are carried out with the intervention of the PRODECON.

Certain cases are barred from conclusive agreement procedures; the currently barred cases are:

• When an audit was initiated to verify a tax refund request.
• When the dispute concerns an information request to a third party arising from an audit.
• Audit acts that derive from a court or administrative appeal ruling.
• When the taxpayer has been “flagged” by the tax authority for issuing tax invoices without the necessary assets, personnel or infrastructure.

After the Federal Court of Administrative Justice issues its first instance decision, the taxpayers have a right of onward appeal via a constitutional claim (“amparo directo”).

Under the amparo procedure, taxpayers may raise legality arguments to challenge the considerations of the contested ruling, as well as constitutionality arguments of the provisions of the disputed matter.

Finally, in case the amparo claim is resolved unfavourably, taxpayers may file a last appeal before the Supreme Court of Justice; however, such appeals are only limited to constitutional matters and should be of an exceptional interest, from a constitutional or human rights perspective.

Unpaid taxes are subject to adjustment for inflation based on Mexico’s national price indexes and subject to monthly surcharges (in 2022, the monthly rate is 1.47%), for a maximum of five years, as a general rule.

Additionally, tax authorities may impose fines that range from 55% to 75% of the (historical amount) unpaid tax.

Under certain circumstances, the fines can be increased due to aggravating conducts, such as failing to pay withheld taxes, thus increasing the fines for an additional 50% to 75% of the historic amount of tax due.

In case the same act is subject to multiple fines, the taxpayer is only obligated to pay the one with the highest value.

Fines can be mitigated in several forms. First, in case the unpaid tax is settled spontaneously, before an authority’s requirement is issued, the applicable fine is waived.

Additionally, in case taxpayers formalize a conclusive agreement procedure, a 100% fine reduction is applicable, as a one-time benefit. Subsequently, a reduction of a lesser percentage is applicable, in terms of the Federal Taxpayer’s Rights Law, depending on the promptness on which the taxpayer settles its debt.

Furthermore, the following are additional statutory forms to reduce fines and/or surcharge rates:

• Taxpayers can benefit from a 100% fine reduction upon omissions identified during tax audits, provided the unpaid tax does not include withheld or “transferred” taxes, such as VAT, under Article 70-A of the Federal Tax Code.

Under the same legal basis, taxpayers are entitled to a reduction of the surcharges rate in case they meet the applicable requirements, such as not incurring in aggravating circumstance, to benefit from such reduction and reduced rate.

The General Tax and Administrative Guidelines state that, to the extent the authority does not formally state an aggravated act has been committed, the taxpayer can still benefit from this option.

• Taxpayers can also benefit from a fine condonation, upon breaching tax or customs laws, provided the fines are definitive and not finally challenged.

The applicable reduction varies from 10% to 100%, depending mainly on the originating infraction, including its date, and type of tax.

What is ruled upon on the fine reduction or condonation request, is not challengeable by ordinary means of defense. This gives leeway to exceptionally challenge an unfavourable decision through an amparo claim.

Recently, a “master plan” was published that states that the tax authorities will increase their focus on large taxpayers in general, with an emphasis on certain acts such as NOLs, corporate restructures, foreign payments, among others; as well as an emphasis on certain sectors and industries such as steel, automotive, tobacco, pharmaceutical, finance and mining, mainly large taxpayers.

From our experience, we have identified that the tax authorities are becoming especially interested in auditing large taxpayers.

Additionally, we consider that the authorities are having an increasingly active intervention using non- audit mechanisms, such as the “cartas invitación”, which as explained have resulted in greater revenue for 2022, and will likely be replicated in the following years.

Tax refunds are an extremely burdensome process for most taxpayers, especially since the elimination of the “universal offset” of tax balances as of 2019. As of this year, taxpayers have more limited options on offsetting or compensating balances and leaves them with the refund process that are lengthy and generally require a considerable amount of documents and information, before approval.

This generally derives in complaints with PRODECON or administrative appeals.

Furthermore, we consider the tax authorities have a very formalistic approach on tackling or challenging deductions, especially when no evidence is provided to prove the service was rendered, according to its view.

Finally, although the “substance over form” trial or appeal is useful, we consider that such a procedure should have a broader scope, to avoid excessive or disproportionate effects to the taxpayers´ non-compliance of formal requirements. Eliminating the de minimis requirement and/or broadening the admissibility requirements would be helpful.

We consider that, in the following months, given the international oil context and generalized inflation, that revenue will play a key role for the tax authorities.

To this effect, we consider that transfer pricing has been an actively challenged area by the authorities and anticipate it will still be subject to challenge for corporate taxpayers.

We consider that NOLs, tax refunds and the application of border tax incentives shall be special interest in the upcoming months for the authorities, as well as payments made abroad.

Additionally, the authorities have been taking special attention to VAT on digital service, and we believe this will be subject to challenge for the following years. On August 2021, a non-resident formalized the first conclusive agreement before PRODECON concerning VAT in digital services, which resulted in a tax collection of MX $183,000,000.