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Electronic tax reviews to begin this year in Mexico – how will compliance be affected?

Tax reform discussions have been consistent

Mexico’s 2014 tax reform has brought some small but significant changes to the country’s tax legislation.

One of the most important changes for taxpayers was the introduction of an obligation to upload accounting records electronically through the tax authorities’ websites. This reform was part of a strategy intended to create a technological environment for tax compliance jointly with digital invoicing and electronic returns filing.

In addition, tax authorities enabled a new kind of faculty: the electronic tax audit.

This new audit is deemed to be a ‘fast track’ mode of a tax assessment in which, based on the electronic information gathered through the aforementioned tools, such as digital invoicing and electronic returns, along with some analytics, tax authorities can determine tax credits against taxpayers.

Under this system, tax authorities can send an assessment to a taxpayer through an official electronic mailbox, notifying a tax credit and leaving a few days for taxpayers to prove whether the assessment is right or not.

Since tax authorities have already received a lot of information from taxpayers, 2016 will be the ‘kick off year for deploying these electronic audits, which will be aligned with recommendations made by the OECD on BEPS Action Plan.

Accordingly to recent press statements by Aristoteles Núñez, head of the Mexican Tax Administration Service (Servicio de Administración Tributaria; SAT), tax authorities will commence around 4,000 electronic reviews during the second half of 2016.

In this regard, audits will be based on the information submitted by the taxpayers, especially information which relates to income accounts and digital invoices.

Around 45,000 traditional audits are made in Mexico by the SAT each year, and this number is expected to gradually decrease in order to accommodate the transition to an increase of electronic reviews which are, as commented before, more expedient for tax authorities and increase exposure for taxpayers since the starting point will be a tax credit instead of a traditional requirement of information and, in general, the process will be dramatically shortened (a ’traditional’ tax audit from the tax authorities lasts a year and a half).

Under this scheme, it is predictable that the tax authorities’ goal in the medium to long term is to get enough information to be able to calculate the taxes that the taxpayers shall pay, and to notify the payable taxes as well as favorable balances to simplify taxation procedures. This has been strongly criticised by  taxpayers and business leaders in Mexico.

Mexico is one of the first countries to adopt drastic changes in line with measures recommended under the OECD’s BEPS Project, looking for fair taxes to be paid by local and multinational entities and the challenge for tax authorities in the future will be to get to this point without transgressing basic taxpayer rights. Even though this process will not be fast and easy, it constitutes an irreversible trend for the Mexican tax environment. Traditionally, tax compliance has been seen as an ancillary activity within the financial function of the corporations, but this is certain to change as tax becomes more of a centralised function impacting all parts of the business, and as technological advances facilitate the transition to e-auditing.

Notwithstanding the above, companies that do not invest in components to assure the right tax compliance controls will not be able to guarantee that they are able to i) comply properly and ii) be prepared for the challenges of this new electronic tax world.

Tools, controls and external support are a few of the components available for companies to evolve and face the challenges of the near future. From a compliance perspective, making sure such tools are utilized is a decision that cannot be postponed any longer.

This article was prepared by Gustavo Gómez (gustavo.gomez@mx.ey.com), and co-authored by Renato Reyes  (aldair.reyes@mx.ey.com) of EY Mexico, principal Mexican correspondents of the Compliance Management channel on www.internationaltaxreview.com

EY’s other tax compliance partners in Mexico City are:

Hector Armando Gama Baca (hector.gama@mx.ey.com)

Fernando Tiburcio Lara (fernando.tiburcio@mx.ey.cmx.ey.com

Juan Manuel Puebla Domínguez (juan-manuel.puebla@mx.ey.com)

Raúl Tagle Cázares (raul.tagle@mx.ey.com)

Ricardo Delgado Acuña (ricardo.delgado@mx.ey.com)

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