International Tax Review (ITR):
What advice would you give to companies about how to
reduce the risk of becoming involved in a dispute with the
Mexican tax authorities?
Luis Carbajo-Martinez (LCM) (pictured):
Mexico is a formalistic country and its tax authorities are
very active in auditing taxpayers. There are commonly as many
as 90,000 tax audits in a fiscal year.
Audits on customs matters increased
from 2,400 in 2009 to 6,800 in 2011 and this tendency is
expected to increase in the coming years on customs and other
tax matters such as transfer pricing.
The tax authorities are becoming more
specialised in litigating cases and increasing revenue from tax
It is important to get sound tax and legal advice at the
planning stage, but also that companies continue receiving
consistent advice once the strategy is being implemented or at
the time the structure is fully operational.
In many cases, advice given at the planning or
implementation stages is not fully or adequately applied in the
long-run, and thus, because of errors in the implementation, or
even worse, because formal requirements of specific tax laws
are not fully met, a good and solid planning strategy may not
have the desired tax effects.
Companies without complete knowledge of the auditing trends
should ask their tax advisers to determine whether they have
any activity likely to become subject to the scrutiny of the
tax administrations and then consider possible options to
correct what has been done or to prepare in case the
authorities audit the company.
A tax litigator should assess the taxpayer's chances of
prevailing based on judicial precedents and determine a
potential strategy based on any formal mistakes made by the tax
authorities which could result in the entire tax assessment
being declared null and void by a court of law.
ITR: What options do Mexican taxpayers have to
resolve disputes with the authorities other than litigation?
What are the positives and negatives of these
LCM: Taxpayers have the legal right to
request a self-correction, which involves filing a
supplementary tax return to amend the original return and
paying the omitted taxes.
Then, taxpayers have to notify the tax authority about the
self-correction procedure and the authority may accept or
reject the amounts paid via this procedure.
However, a self-correction procedure will involve a fine
equivalent to 20% of the paid omitted taxes, if the
self-correction is conducted before the final audit minutes are
If the self-correction is conducted after issuance of the
final audit minutes, but before notice of the formal
assessment, the fine is equivalent to 30% of the tax
Although the self-correction procedure is convenient and
gives legal certainty, each specific case has different
particularities which have to be analysed by tax practitioners
and tax attorneys together to assess the appropriate
Once a tax assessment is notified, taxpayers may either file
an administrative appeal or challenge the assessment in
In the international arena it is also common for non-residents to file for mutual agreement
procedures (MAP) whenever the Mexican tax administration
takes a position which contradicts tax treaty law by re-characterising
The MAP suspends the terms for the taxpayer to file for a
litigation appeal. This alternative has the advantage that both
tax administrations participating in the MAP would have to work
out a solution to avoid any double taxation.
However, in most of Mexico's tax treaties reaching a final
settlement is not mandatory so there is no certainty that a
given issue will be solved through a mutual agreement by the
ITR: Are you seeing any trends in the types of
dispute cases the Mexican tax authorities are taking up, and
those where they are succeeding in the courts?
LCM: The Mexican tax administration is
auditing the main sectors of the economy: maquiladoras
(manufacturing in free trade zones), pharmaceutical companies,
electronics and telecommunication, hotels, and oil and gas
The areas being scrutinised are also very broad.
I have seen a particular trend whereby the Mexican tax
administration is scrutinising whether taxpayers comply with
the domestic deduction requirements on payments abroad.
Specifically, the authorities are ensuring that payments
abroad do not lack substance; that they are connected to the
business-producing activity; that the compensation has been
calculated at arm's-length; that the corresponding taxes are
correctly withheld and that the pertaining invoices are secured
from the service providers.
Although the tax authority attempts to reject an entire
deduction based on different allegations - including for
alleged lack of compliance with the arm's-length principle - we
have secured court resolutions confirming that the tax
authority should not reject the entire deduction and should
Another issue being scrutinised is supply-chain
restructurings in which no compensation is being calculated for
the Mexican entity losing revenue as a consequence of the
restructuring (as an exit payment).
Taxpayers must analyse the need for compensation. If no
compensation is paid, documentation relating to the
restructuring should analyse the economic and financial
rationale leading to that decision in detail as it may be
contended at audit.
Transfer pricing disputes are also increasing in the courts,
but no significant final resolutions yet exist. For transfer
pricing, taxpayers must include consistent financial
information in the economic analysis.
ITR: What do you think multinationals in Mexico can
expect from the Mexican tax authorities in the
LCM: Mexico will continue to be very active
in auditing taxpayers once the new administration takes office
on December 1 2012.
We are generally seeing audit activity increase for
companies with international or inter-company transactions.
Whether an audit is triggered by the reduction of taxable
income, increase of refund requests, negative opinions on
audited financial reports, or because of a whistleblower, once
an audit is open the tax authority will concentrate first on
formalistic inconsistencies and then it will move to matters of
The main focuses include: permanent establishment,
withholdings, pro-rata expenses, thin capitalisation,
interests, business restructurings, migration of intangibles
I have also seen a dramatic increase in the auditing
activity of the Mexican customs authorities during the last
The Mexican tax administration recently announced the
creation of a new branch that will specifically audit customs
and foreign trade issues. Thus, we should expect even more
audits in future.
A recent court precedent may change the litigation
environment. In the past, it was possible to file additional
evidence that was not submitted at the auditing stages.
However, there is a new court resolution stating that additional evidence cannot be filed to
rebut the finding of the tax authority once an audit has been
closed and a tax assessment has been issued.
In our view, this lacks legal merits and violates certain
constitutional rights. However, I advise taxpayers to involve
their litigation advisers as soon as the audit procedure
commences to avoid compromising the eventual litigation
strategy of the company.
Luis Carbajo-Martinez (email@example.com
) of Baker & McKenzie.