In late June, the Mexican tax authorities granted companies an extension of 15 days to file their 2013 annual tax report (dictamen fiscal). The original due date was June 30 2014.
For many years, Mexican taxpayers focused their efforts on getting their house clean until the moment of the tax report filing, since it was a common practice to file the annual tax return with the most accurate figures and close the process three months before complying and, if necessary, paying the tax differences, jointly with the tax report through an amendment return.
This tax report is basically a number of exhibits containing a taxpayer’s financial information of the taxpayers, the most important transactions from a tax standpoint and several notes about the most important items for the knowledge of the tax authorities. This was all with the intention to keep the tax authorities informed and, potentially, to detect potential audit situations.
Tax authority opposition
Some years ago, the Mexican tax authorities started a campaign against the usefulness of the dictamen, arguing that the information granted by the taxpayers was not being provided properly and that the external auditors were not disclosing the facts as required by the tax authorities.
The authorities have taken this position because of a misunderstanding about the goals of the dictamen. It is true that the report was created as valuable control tool for the tax authorities. However, the line between a situation that is reportable for the auditors and an interpretation of the law is too thin.
In general terms, external auditors should be reporting:
- listed operations (criterios no vinculativos);
- unpaid taxes; and
- positions of the taxpayers on which a tax law has been violated.
An external auditor should not be responsible for disclosing those events in which taxpayers make an interpretation of the law or even when taxpayers perform strategy structures to take advantage from a tax perspective, if one of the previously-mentioned three situations are not given, even in the cases of important tax savings.
The tax report, on the one hand, for sure provides unvaluable information for the tax authorities to open audits and detect structures, strategy and criteria not shared by them. For instance, in the event of structures focused on creating deductions, the information about such expenses should be contained in the tax report.
On the other hand, the strategy of the authorities has been focused on narrowing the rights and chances for taxpayers to defend themselves against the potential exercise of their powers by the authorities.
It is important to remember that so far, tax authorities cannot exercise their powers against taxpayers that file a tax report until such powers are first used to review the working papers of the external auditor. This gives time to taxpayers to prepare for direct audits, if you consider that the periods stated in the law to deliver information during tax audits are very short (normally 10 to 20 working days) and, basically, tax authorities can require whatever they want.
There is also jurisprudence of the Mexican Supreme Court that establishes that it is not possible to provide information during a lawsuit which was not actually provided during an audit.
This tax report is mandatory for taxpayers with revenue of more than around $2.5 million, assets of more than around $5 million or more than 300 employees.
From 2014 (due in 2015), the dictamen fiscal will be no longer obligatory for taxpayers, but it will be an option for taxpayers with revenue of more than around $8 million.
It is easy to imagine that, given the unpopularity of the dictamen fiscal because of the large administrative burden it causes for taxpayers, most taxpayers who have the choice to file dictamen or not will no longer do it. This will certainly reduce work burdens, but it will have consequences for taxpayers’ rights.
On the other hand, tax authorities are looking to the advantages of the new 2014 obligation for taxpayers to upload their book records to the tax authorities’ own electronic platform, based on the recurrent audit model in other countries such as Brazil.
As mentioned in some of our previous articles, this new obligation has been highly controversial and there is a lot still to be written about the detailed compliance rules, which, at the time of writing, have still not been issued by the tax authorities; the potential constitutional appeal that a lot of taxpayers are in process of filing and the terms of the tax authorities – taxpayers relationship that is very difficult at the moment.
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