It has become common practice for Mexican tax authorities to
reject the deductibility of taxpayers' transactions based on an
alleged lack of business reason of such operations. The SAT
(the Mexican tax administration service) has found in this
supposed business purpose an excuse to easily deny tax refunds
and other valid operations of taxpayers without properly
explaining what constitutes a valid "business reason", or how
to prove that a given transaction actually had a business
purpose.
It should be noticed that the Mexican law contains no
provision defining the concept of a business reason, nor in
which situations tax authorities are allowed to apply it,
deriving in arbitrary rulings, tax refund denials or
unjustified tax assessments by the SAT.
This is relevant especially in international transactions,
where the rejection of a deduction consisting of a payment made
abroad by a Mexican company to either a related or a
non-related party will cause a double taxation scenario,
regardless if the payment is made to a company residing in a
tax treaty partner jurisdiction.
What is understood as a "business reason"?
As mentioned above, since the term "business reason" has no
legal basis. Its interpretation depends on the tax authorities
criteria in a case-by-case scenario. This discussion already
reached the Supreme Court of Justice, which vaguely accepted
the use of this principle by tax authorities for the specific
cases discussed before the court.
Nevertheless, in Mexico, we still do not have any existing
legal provision that describes or provides a proper meaning of
what is to be understood as a "business reason" or the
different features that the taxpayer should rely on in order to
evidence the compliance with such a principle. At present, we
only have non-binding criteria from the Mexican tax ombudsman
and the abovementioned decisions from the federal courts that
state that whenever the tax authorities use the aforementioned
concept, taxpayers will have to prove before such federal
courts that their transactions had a business motive.
Therefore, Mexican taxpayers still do not have any legal
certainty regarding the tax authorities' powers to use and
apply this "business reason" concept, which clearly represents
an additional and unnecessary burden for Mexican taxpayers.
This situation continuously forces them to prove that they are
indeed doing lawful activities that comply with the Mexican
laws, even when the authorities do not have any legal basis to
question their operations.
In order to provide legal and tax treaty certainty, such a
concept should be included and described in legislation
because, the mere use of it has a clear negative impact on such
resolutions.
Further tax reforms will tell us if this arbitrariness ends
or remains.
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Hernaldo Vega |
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Arianna Aguirre |
Hernaldo Vega (hevega@deloittemx.com)
and Arianna Aguirre (araguirre@deloittemx.com)
Deloitte
Website: www.deloitte.com/mx