Mexico: Assessing the tax reforms of 2021

The Mexican Congress has passed a tax reform for 2021. The reform focuses mainly on changes to the tax authority´s audit capabilities, as well as its ability to instil a stronger sense of self-correction and reporting in taxpayers.

As promised by President Andrés Manuel López Obrador at the start of his term in office, no new taxes are being introduced for the first three years. As a result, there are no major changes proposed to the income tax law or the VAT law.

The amendments focus on increasing the ability of the tax authority to improve tax collection, both through the implementation of swift auditing procedures, and more expeditious and enforced collection processes.

At the same time, the tax authorities remain focused on driving taxpayers to settle, as opposed to litigate. For the past two years, the Mexican government has been publicising high-profile tax settlements by multinational corporations and large Mexican taxpayers alike. This has been achieved by the Tax Administration Service meeting directly with the taxpayers´ senior officials or even stakeholders to push them to settle, often without legal or tax counsel present, a practice that has been generally frowned upon by legal and tax practitioners alike.

The main weapon to encourage taxpayers to settle is the threat of criminal prosecution for tax fraud. To this end, in 2020, the Mexican government introduced a number of measures allowing them to apply organised crime consequences (including mandatory prison time and seizure of assets) and penalties to various instances of tax fraud.

It is also interesting to analyse a couple of the proposed amendments that were rejected by Congress, and the reasons surrounding these rejections.

The tax amendment package included a proposal to allow tax authorities to use video and photographs to record the amount of assets of a taxpayer and other factual elements relevant to an audit. This created an uproar from taxpayers and tax practitioners alike, albeit somewhat uninformed.

It was assumed that this process would allow tax authorities to record where a person lived, how many cars they owned, and details about the size and type of house they lived in, with all elements similar to simple surveillance checks. In fact, the proposed recording ability was limited to factual instances arising during an audit that would have otherwise been described by the auditor in words. So, the potential for supposed abuse of authority, was likely to be out of scope in most cases.

It did not help the authorities that a related proposal was to allow the sharing of videos and photographs with the General Attorney’s Office, should they prove to be relevant for the investigations of any crime. This element, in contrast, did pose a serious concern since the level of confidence usually granted to the authorities in charge of the investigation and prosecution of crimes in Mexico is very low.

So, a proposal that was aimed at granting the taxpayer more certainty, as to how factual matters were recorded in the audit´s minutes – such as the size of a plant or warehouse, the set-up of an office to support business capabilities, or the amount of machines that a taxpayer had available or in operation to carry out his/her trade or business – was eventually rejected because of perceived security concerns.

Another proposal that was rejected pertained to the ‘business reason’ requirement. Since 2020, Mexican taxpayers must meet two criteria to support that a particular transaction has a legitimate business reason. Taking advantage of a tax benefit is not enough.

The criteria are that commercial benefits exceed the tax benefit and that all legal and corporate steps have been taken to finalise the transaction. Failure to meet these criteria allow the tax authorities to recharacterise the transaction as they see fit under a substance-over-form approach. A special audit is required to come to such conclusion (Article 5A of the Federal Fiscal Code).

For 2021, it was proposed that this ability by the tax authority allows also for criminal prosecution, when applicable.

This proposal was eventually rejected by Congress on the grounds that the tax authorities already have the ability to prosecute a taxpayer, based on information gathered under a business reason audit. This is because, under their interpretation of Articles 63, 108 and 109 of the Federal Fiscal Code, the tax authorities are allowed to use any information gathered under legal basis to support its ruling, including the request for criminal prosecution for tax fraud, to the General Attorney´s Office.

Although there are no new taxes being introduced in the 2020 tax reform, Mexican taxpayers may expect the tax authorities to maintain or even increase the existing levels of audits and pressure to self-correct.

This administration has been clear in stating that litigation is widely frowned upon, and that they will keep on pressuring taxpayers’ senior officials and stakeholders to settle, in many cases using the threat of criminal prosecution.

Mauricio Martínez D´Meza Violante

T: +52 55 5080 7040

E: maumartinez@deloittemx.com

Ricardo Gonzales Orta

T: +52 55 5080 7023

E: rgonzalezorta@deloittemx.com