Mexico: Mexican taxation and human rights

The first relevant event was a modification to Article 1 of the Mexican Constitution. The modification established the obligation on the Mexican authorities to interpret human rights provisions contained not only in the constitution but in the international treaties Mexico enters into, to afford the broadest protection. This is understood as the pro persona principle.

The second relevant event took place in October 2011, when a resolution issued by the Mexican Supreme Court was published in the National Gazette, establishing guidelines to comply with a decision rendered by the Inter-American Court of Human Rights against the Mexican government in the Radilla Pacheco case.

In this decision, the Mexican Supreme Court analysed extremely important aspects of Mexican law. The most relevant for this article was the one indicating that all Mexican authorities are required to protect not only the human rights contained in the Federal Constitution, but also those contained in the international instruments entered into by the Mexican State, adopting the most favourable interpretation of the human right in question.

Therefore, it was stated that when various legally valid interpretations exist, first the judges must give preference to the one which affords the greatest protection under the human rights recognised in the constitution and international treaties. Only when all of the possible interpretations of the relevant legal provision transgress human rights, the judge may cease to apply the legal provision.

This is particularly relevant considering that judicial review under Mexico's legal system was limited to certain federal courts (federal district courts, circuit courts and the Supreme Court). Therefore, only these courts could declare a legal provision as unconstitutional because it was contrary to the Federal Constitution or to an international treaty entered into in accordance with the constitution.

Arising from the decision rendered by the Inter-American Court of Human Rights in the Radilla Pacheco case and in accordance with constitutional amendment, the Mexican Supreme Court, through various criteria, established a procedure that Mexican authorities and Mexican judges must follow to exercise control over the application of the legal provisions, in accordance with the supremacy of constitutional and conventional (international treaty) provisions on human rights.

Therefore, the Supreme Court determined that all the bodies of the Mexican government must interpret the body of law in the most beneficial manner for the person (pro persona principle) based on the human rights applicable to the case and judges may desist from applying the domestic legal provision due to its being contrary to the human rights recognised in the constitution or international treaties.

That is to say, when a Mexican judge considers that a legal provision is not in accordance with the human rights established in the Federal Constitution or in international treaties, it is empowered to cease applying the provision.

It is worth mentioning that only judges can cease to apply a legal provision. Mexican authorities do not have this attribution but they do have the obligation of interpreting the body of law in the most beneficial manner for the person.

In general terms, human rights that apply in tax matters consist of:

• Taxes must be paid proportionately. In other words, that each taxpayer pays the owed amount in accordance with its actual economic capability;

• Tax law must be equitable, by not affording the same treatment to taxpayers under different circumstances or vice versa;

• Tax legislation must be adequately codified, without giving room to arbitrary acts by the tax authority;

• Tax law must not be retroactive to the detriment of taxpayers; and

• Inspection proceedings carried out by the authorities must follow due process and afford the taxpayer an adequate defence before the assessment of a tax deficiency.

Though the Mexican Constitution has acknowledged these rights in a clearer manner since 1857 and the Supreme Court of Justice recognised in 1962 the possibility of challenging tax laws that transgress these principles, the most radical change is that the tax authorities have the constitutional obligation to interpret and apply the law to preserve the human rights of the persons in mind, which will give rise to the indirect control of the constitutionality of the provisions by such authority. Furthermore, judges must also exercise constitutional control over the law, with the possibility of not applying the relevant provisions.

Given that the concept of human rights is firstly linked to individuals, whether the human rights provisions also afforded protection to legal persons was not entirely clear, though we consider that in Mexico legal persons have been afforded the same protection as individuals when applicable.

This is so because legal or juridical persons are created by individuals to pursue determined purposes and thus constitute an instrument to serve the interests of the persons that created them.

Therefore, legal persons are the consequence of the prior exercise of other rights, such as the freedom of association and contractual freedom, which, to be fully exercised require that the organisation created is guaranteed the fundamental rights needed to pursue the proposed ends. In addition, any burden imposed on legal persons may directly transgress against the human rights of the individuals comprising it.

Moreover, the Mexican Supreme Court's position in this regard appears to be in the direction that human or fundamental rights are applicable to legal persons if they are in accordance with the legal person's end.

Certain provisions of Mexican legislation have recognised the fact that human rights may even be applicable to legal persons, as have various criteria issued by international bodies such as the Inter-American Court of Human Rights.

Based on this, it can be considered that legal provisions must be applicable to all persons, whether they are individuals or legal persons, in a way that is in accordance with the human rights established in the constitution and the international treaties that Mexico has entered into and in a manner that affords them the broadest protection.

This new manner of interpretation and application (or ceasing to apply by judges) of the law transcends all areas of domestic legislation, including tax legislation. Even so, given the particular and explicit rule for interpreting tax provisions, recent precedents have taken on a significant importance.

In accordance with the Federal Tax Code, the legal provisions establishing the essential elements to determine tax liability must be strictly applied, without it being necessary to analyse whether their application could be detrimental to the taxpayer and even less so when this application is in accordance with the constitution or international treaties.

Therefore, before the events in question, it was clear that in the Mexican tax environment, the legal provisions relating to determining tax liability or those that establish sanctions or exceptions had to be strictly applied.

This led to giving preference in most tax cases to applying or even interpreting the tax provisions primarily to the letter of the law (though recently some Mexican judges have embraced a substance over form approach), without addressing the consequences this application would have on the taxpayer's human rights.

Thus, due to the modification to the constitution and the decision of the Mexican Supreme Court analysed above, we consider that the manner in which tax provisions are interpreted and applied may be significantly modified.

Based on these events, any authority, whether administrative or judicial, is now required to interpret the legal tax provisions, no longer in a strict manner, as had been done, but in a manner that is the most favourable to the taxpayer and respects the human rights established in the constitution and international treaties.

That is to say, the interpretation of tax provisions should now change from being a strict interpretation (literal or grammatical) to being a pro persona interpretation, which means, one that is the most favourable or least harmful to taxpayers.

As a result, important changes may be expected in tax matters in the way that the tax authorities and judicial bodies apply the substantive and procedural aspects of the legal provisions.

Shortly after the modification to the constitution, precedents were issued by the Mexican Supreme Court, circuit courts and even the Tax Court, where these new rules have been adopted for interpreting and applying tax laws in a way that is the most favourable to taxpayers, addressing the human rights connected to the particular case.

In these decisions, the courts are just beginning to apply these new tools, but we can expect the courts to increase their use and application as they become more familiar with them.

Even so, there is not thought to be any case where the tax authorities have applied the pro persona principle and interpreted a provision in accordance with a human right.

Unfortunately, it is not considered likely to happen in the near future. The freedom of action of Mexican authorities is limited considering that they are under the constant scrutiny of their respective accountability office and any change from the usual way of carrying on governmental business will be particularly examined.

Before the events mentioned here, only specific constitutionally-protected rights were applicable to taxation. The constitutional amendment broadened the scope of rights that may be applicable to taxation by requiring all authorities to interpret legal provisions in accordance with the applicable human rights.

Therefore, the Mexican courts had studied human rights as applied to taxes only in a limited scope before these events, it would be premature to define the position or general trend such courts will adopt in interpreting and applying tax provisions under this new set of rules.

The guidelines established by the Mexican Supreme Court by various criteria and the Radilla Pacheco case, which constitutes a milestone in interpreting human right provisions, have changed the tax environment considerably. Even so, tax practitioners question whether this new human rights trend will have an effect on the interpretation of legal provisions that refer to the elements that determine tax liability or only the procedural provisions, or both.

Nora Morales
		Chevez, Ruiz, Zamarripa y Cía Vasco de Quiroga 2121 4o Piso Peña Blanca Santa Fe Tel: +52 55 5261 5607 Email: nmorales@chevez.com.mx Website: www.chevez.com Nora Morales is a partner of Chevez, Ruiz, Zamarripa y Cía specialising in tax litigation, with an emphasis on transfer pricing, tax treaty benefits and financial entities. She holds a JD from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM), and has a master's degree in tax law from the Unversidad Autónoma de Nuevo León. She is vice-president of the National Technical Tax Committee of the Mexican Institute of Financial Executives (IMEF), and an active member of the International Fiscal Association and of the Tax Law Committee of the Mexican Bar Association (BMA). She is a professor of tax law at the Centro de Investigación y Docencia Económica (CIDE), and also in the master's degree program of tax law in the Universidad Anáhuac. She has written numerous articles on taxation topics.

Ramon Orendain
		Chevez, Ruiz, Zamarripa y Cía Batallón de San Patricio No. 109, Piso 8 COL. Valle Oriente 66269, San Pedro Garza Garcia, Nuevo Leon Tel: +52 81 1340 9202 Email: rorendain@chevez.com.mx Website: www.chevez.com Ramon Orendain is a partner at Chevez, Ruiz, Zamarripa y Cía based in the Monterrey office and specialises in tax litigation. He holds a JD from Escuela Libre de Derecho in Mexico City and an LLM in US taxation from Northwestern University School of Law. He is a member of the International Bar Association (IBA) and of the Mexican Bar Association (BMA) where he is a member of the board of directors of the Nuevo Leon Chapter. He is a professor at the Facultad de Derecho in Monterrey, Nuevo Leon, where he teaches federal income tax and tax procedure.