Mexico: Assessing the tax reforms of 2021
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Mexico: Assessing the tax reforms of 2021

Sponsored by

Sponsored_Firms_deloitte.png
The amendments focus on increasing the ability of the tax authority to improve tax collection

Mauricio Martínez D´Meza Violante and Ricardo Gonzales Orta of Deloitte Mexico analyse the key highlights of the Mexican tax reform and assess the shortcomings of the amendments which did not pass.

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 Federal Fiscal Code

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.

Amendments that did not pass

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

Use of video technology in audits

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.

Criminal prosecution related to business reasons

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.

Conclusions

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

more across site & bottom lb ros

More from across our site

As German clients attempt to comply with complex cross-border rules, local advisers argue that aggressive tax authorities are making life even harder
Based on surveys covering more than 25,000 in-house lawyers, the series provides insights into what law firms must score highly on when pitching to in-house counsel
The UK tax authority reportedly lost a case due to missing a deadline; in other news, Canada has approved pillar two legislation
There will always be multinationals trying to minimise tax by pushing the boundaries of their cross-border arrangements, Rob Heferen claimed
HMRC’s attempts to crack down on fraudulent tax relief claims are well-meaning, but the agency risks penalising genuinely innovative businesses, writes Katy Long of ForrestBrown
Argentina, Brazil, Mexico and South Africa are among the countries the OECD believes could benefit from the simplified TP rules
It comes despite an offshore enabler penalty existing in the UK throughout the entire period
It is extraordinary that tax advisers in the UK can offer their services without having to join a professional body. This looks like it is coming to an end, Ralph Cunningham writes
Meet the esteemed judges who are assessing the first-ever Social Impact Awards
The ‘big four’ firm has also vowed to spend more on nurturing junior talent; in other news, Blick Rothenberg has hired a pair of tax partners
Gift this article