A more in-depth have a look at Mexico's 2021 tax reforms

The changes focus on improving the tax authority's ability to improve tax collection

The Mexican Congress has passed a tax reform for 2021. The reform mainly focuses on changing the tax authority's auditing capabilities, as well as its ability to give taxpayers a greater sense of self-correcting and reporting.

As promised by President Andrés Manuel López Obrador at the beginning of his term in office, no new taxes will be introduced for the first three years. As a result, no material changes to the Income Tax Act or the Value Added Tax Act are proposed.

The federal tax code

The changes focus on improving the tax authority's ability to improve tax collection, both through the introduction of faster audit procedures and through faster and more enforced collection procedures.

At the same time, tax authorities continue to focus on getting taxpayers to settle instead of litigating. For the past two years, the Mexican government has published high-profile tax returns from multinational corporations and large Mexican taxpayers. This was accomplished by meeting the Tax Administration Service directly with senior officials or even taxpayers' stakeholders to urge them to regulate a practice that has been disapproved of by legal and tax professionals alike, often without legal or tax advisers.

The main weapon used to encourage taxpayers to settle is the threat of criminal prosecution for tax fraud. To this end, in 2020 the Mexican government put in place a series of measures that will allow them to apply the consequences of organized crime (including the mandatory prison term and asset seizure) and penalties for various cases of tax fraud.

Changes that did not pass

It is also interesting to analyze some of the amendments that Congress rejected and the reasons for those rejections.

Use of video technology for audits

The tax amendment package included a proposal to allow tax authorities to use videos and photos to track a taxpayer's wealth and other matters relevant for an audit. This caused an uproar among taxpayers and tax practitioners alike, albeit somewhat uninformed.

It was believed that this procedure would allow tax authorities to record where a person lived, how many cars they owned, and details of the size and type of house they lived in, all of which resembled simple surveillance controls. Indeed, the proposed record-keeping capability was limited to facts that occurred during an audit and that the auditor would otherwise have described in words. The potential for an alleged abuse of authority should therefore in most cases not be taken into account.

It did not help the authorities that such a proposal would allow videos and photos to be shared with the Attorney General if they were found to be relevant to criminal investigations. In contrast, this element has given rise to serious concern as the level of confidence normally enjoyed in the authorities responsible for investigating and prosecuting crime in Mexico is very low.

A proposal aimed at giving taxpayers more certainty about how matters were recorded in the audit's logs – such as the size of a factory or warehouse, the establishment of an office to support business skills, or the number of machines operating a Taxpayer had available or was in operation to run his trade or business – was eventually turned down due to safety concerns.

Business Law Enforcement

Another proposal that was rejected was related to the "business reason" requirement. As of 2020, Mexican taxpayers must meet two criteria to prove that a particular transaction has a legitimate business reason. Taking advantage of a tax advantage is not enough.

The criteria are that commercial benefits outweigh tax benefits and that all legal and corporate steps have been taken to complete the transaction. Failure to meet these criteria allows tax authorities to re-characterize the transaction at their own discretion using a substance-over-forms approach. A special examination is required to arrive at such a result (Article 5A of the Federal Tax Code).

For the year 2021 it has been suggested that this ability also enables the tax authority to prosecute.

That proposal was eventually rejected by Congress on the grounds that tax authorities already have the ability to prosecute a taxpayer based on information gathered during a business audit. This is because, according to their interpretation of Articles 63, 108, and 109 of the federal tax law, the tax authorities are allowed to use any information collected legally to assist their decision, including the prosecution for tax fraud filed by the Attorney General.

Conclusions

Although no new taxes will be introduced in the 2020 tax reform, Mexican taxpayers can expect the tax authorities to maintain or even increase the existing level of auditing and pressure to self-correct.

This government has made it clear that litigation is largely frowned upon and that it will continue to put pressure on senior officials and taxpayers' advocacy groups, in many cases under threat of prosecution.

Mauricio Martínez D´Meza Violante

T: +52 55 5080 7040

Ricardo Gonzales Orta

T: +52 55 50 80 70 23

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