All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Mexico: Lack of business purpose as factor in determining sham transactions

Sponsored by

The new CIT project will bring changes to the existing model

A recent court ruling in Mexico has enabled the tax authorities to dive deeper into taxpayer affairs to determine whether transactions have real substance. Carlos Ramírez & Víctor Masón of Deloitte Mexico explain why taxpayers should take note of this judgment.

Mexico's Superior Chamber of the Federal Administrative Court published a decision in November 2017 in which it concluded that the tax authorities can take into account the fact that a transaction lacks a business purpose when determining whether a transaction has substance. The principles of the court's decision will apply in cases where the tax authorities discover during a tax audit that the transaction is not reflected in the taxpayer's accounting books.

The court stated that even though Mexican law does not define the term "business purpose", the concept is related to the profit earnings of an enterprise and, therefore, the absence of a business purpose for a particular transaction can be a factor that is relevant in determining whether a transaction is genuine and whether it lacks a real economic effect other than to create a tax advantage.

According to the Federal Administrative Court, the tax authorities can rely on the lack of business purpose provided other facts are present that corroborate that the transaction never took place, such as whether the transaction is unusual or exceptional, there is inconsistent data and documentation, there is an absence of infrastructure or personnel to carry out the transaction, a lack of cash flow, etc. In such cases, the burden then shifts to the taxpayer to demonstrate that the relevant transaction does have substance. Failure to do so can result in an assessment and potential criminal liability, depending on the circumstances. However, it appears that the lack of business substance on its own (i.e. without corroborating other factors), would not be sufficient to consider a transaction to be a sham transaction.

It should be noted that the tax authorities will be able to make the determination that a transaction is simulated without the involvement of a civil court. Under Mexican law, the tax authorities are required to provide a statement to the civil court in cases where they intend to make a sham transaction determination.

Taxpayers should be aware of this decision of the Federal Administrative Court and ensure that they maintain appropriate records of all documentation and other evidence that demonstrates a business purpose for their transactions.

Carlos Ramírez and Víctor Masón

Deloitte Legal


more across site & bottom lb ros

More from across our site

The Italian government published plans to levy capital gains tax on cryptocurrency transactions, while Brazil and the UK signed a new tax treaty.
Multinational companies fear the scrutiny of aggressive tax audits may be overstepping the mark on transfer pricing methodology.
Standardisation and outsourcing are two possible solutions amid increasing regulations and scrutiny on transfer pricing, say sources.
Inaugural awards announces winners
The UN’s decision to seek a leadership role in global tax policy could be a crucial turning point but won’t be the end of the OECD, say tax experts.
The UN may be set to assume a global role in tax policy that would rival the OECD, while automakers lobby the US to change its tax rules on Chinese materials.
Companies including Valentino and EveryMatrix say the early adoption of EU public CbCR rules could boost transparency of local and foreign MNEs, despite the short notice.
ITR invites tax firms, in-house teams, and tax professionals to make submissions for the 2023 ITR Tax Awards in Asia-Pacific, Europe Middle East & Africa, and the Americas.
Tax authorities and customs are failing multinationals by creating uncertainty with contradictory assessment and guidance, say in-house tax directors.
The CJEU said the General Court erred in law when it ruled that both companies benefitted from Italian state aid.