Under Mexican jurisdiction, tax disputes between taxpayers and the tax authorities are very common. In those disputes, taxpayers first try to solve disputes through meetings held with the tax authorities; however, it is common that the parties do not agree, so taxpayers usually need to start procedures to challenge an assessment or a tax refund denial.2
The Mexican tax authorities usually start audit procedures, with all types of taxpayers, when they detect such taxpayers have failed to pay all the taxes they should have, and they end with a tax assessment. Regarding tax refunds, it is important to point out that in recent years, the tax authorities have denied such refunds in a very visible manner, mainly regarding value added tax refunds.
When the tax authorities determine a tax assessment or deny a tax refund, it is very common for taxpayers to end up with a litigation, for which it may take around three years to obtain a final decision. The fees and costs of such litigations may vary taking into consideration the amounts of the assessments or tax refunds, if the respective lawyer works by him or herself or in a firm, and the prestige of such firm.
II COMMENCING DISPUTES
Once a tax assessment is determined or a tax refund is denied, taxpayers have the opportunity to challenge the ruling that contains the tax assessment or the tax refund denial. There are two legal remedies available for purposes of challenging rulings, which are set out below.
i Administrative appeal
At first instance, taxpayers have the option of filing an administrative appeal within a 30 business-day term as of the date the ruling is notified.
It is important to point out that the First Division of the Supreme Court of Justice issued a criterion in which it stated that taxpayers were required to offer the necessary evidence during an audit procedure; otherwise, they would be barred from offering new evidence if they challenge the tax assessment before the Federal Administrative Court through an annulment complaint.
In terms of such criterion, if a taxpayer wishes to offer additional evidence to the tax authorities than that provided during the audit procedure, the taxpayer must first file an administrative appeal to be allowed to offer such evidence before the tax authorities.
In accordance with this criterion, in the event that taxpayers intend to offer evidence additional to that submitted during the audit procedure, they must first file an administrative appeal to be in a position to do so.
In the event of an unfavourable resolution, taxpayers are entitled to file an annulment complaint against the Federal Administrative Court within a 30-business-day term as of the date the resolution of the administrative appeal is notified.
ii Annulment complaint
The other way to challenge an unfavourable resolution is by filing an annulment complaint before the Federal Administrative Court within a 30-business-day term as of the date the ruling is notified to the taxpayer.
Against a favourable or unfavourable resolution, the tax authorities or the taxpayers may respectively file an appeal or an amparo complaint before a collegiate tribunal within a 15-business-day term as of the date the decision is notified.
iii Amparo complaint or tax authorities appeal
The amparo complaint is filed by taxpayers before a collegiate tribunal to challenge decisions issued by the Federal Administrative Court within a 15-business-day term as of the date the decision is notified.
The tax authorities can also file an appeal challenging the decision issued by the Federal Administrative Court within a 15-business-day term as of the date the decision is notified, and it is also solved by a collegiate tribunal.
In cases where taxpayers file an amparo complaint and the tax authorities also file the respective appeal, the same collegiate tribunal will solve them in the same session.
iv Extraordinary appeal
It is important to point out that the parties may file an extraordinary appeal within a 10-business-day term challenging the decisions issued by a collegiate tribunal while solving an amparo complaint only to argue that an article violates the Constitution or human rights.
Such extraordinary appeal is solved by the Supreme Court of Justice, which decides if the matter is transcendent and important before admitting the extraordinary appeal.
In accordance with the Federal Tax Code, if an administrative appeal is filed before the tax authorities, taxpayers will not have to offer any security to guarantee the tax assessment until the tax authorities rule on the administrative appeal.
However, in the event that an annulment complaint is filed challenging a tax assessment or once the administrative appeal is solved unfavourably to the taxpayers’ interests, it would be necessary to offer a guarantee for purposes of securing the tax assessment.
Taxpayers must secure it as follows:
- cash deposit;
- security interest or mortgage;
- security bond granted by an authorised institution;
- joint and several liability assumed by a third party;
- administrative-law attachment; and
- securities or loan portfolios.
Finally, it is important to mention that there is no significant difference in the dispute if the tax assessments or tax refunds correspond to personal, corporate or partnership taxes.
III THE COURTS AND TRIBUNALS
i Administrative appeals
As previously mentioned, the tax authorities are in charge of solving administrative appeals that taxpayers may file against an assessment or a tax refund denial.
In fact, there is a special legal section that is part of the Mexican tax authorities that is in charge of solving administrative appeals. The persons in charge of solving such appeals are tax authorities’ officers depending on the tax residence of the taxpayer.
Such appeals take approximately six months to be solved (it may take more or less time depending on how difficult it is to study the appeal); however, under the Federal Tax Code, if the tax authorities do not issue a decision within a three-month term, taxpayers may choose to take such omission as an unfavourable negative decision and proceed to challenge it, or wait until a formal decision is issued.
In practice, it is unlikely that taxpayers will obtain favourable decisions at this stage, unless they prove that during the audit procedure the tax authorities did not analyse all the evidence that was submitted, or even when taxpayers submit evidence during the appeal additional to that submitted during the audit procedure. This is the case because, as previously mentioned, the Supreme Court of Justice issued a criterion in which it established that evidence that was not provided during the audit procedure can only be provided while filing the administrative appeal.
ii Annulment complaints
Annulment complaints are solved by the Federal Administrative Court, which is integrated by three collegiate judges. It may take around a year for the Federal Administrative Court to issue its first instance decision. However, the parties are entitled to challenge such decision through an amparo complaint (taxpayers) or an appeal (tax authorities), which will be resolved by a collegiate tribunal.
It is common to offer as evidence a tax opinion issued by a certified public accountant in the annulment complaints filed to challenge a tax assessment or a tax refund denial. However, this depends on the specific case, and what the taxpayer needs to prove to demonstrate the illegality of the assessment or the origin of the tax refund.
When such expert opinion is offered as evidence, the parties (taxpayer and tax authorities) should appoint an accountant expert who will be in charge of such opinion. In the event such opinions differ, the Federal Administrative Court must appoint a third-party expert whose opinion will prevail.
iii Amparo complaint or tax authorities appeal
Amparo complaints or a tax authorities’ appeal is resolved by a collegiate tribunal, which is composed of three judges.
It usually takes around seven months for collegiate tribunals to issue their decisions, which can only be challenged through an extraordinary appeal.
iv Extraordinary appeal
As previously mentioned, the parties may file an extraordinary appeal challenging the decisions issued by a collegiate tribunal only to argue that an article violates the Constitution or human rights.
Such extraordinary appeal is solved by the Supreme Court of Justice, which is composed of 11 judges divided into two sections. Such judges issue their decisions by sections (first and second sections) or in a full seating.
Regarding tax assessments and tax refunds, only a few matters end up in an extraordinary appeal before the Supreme Court of Justice, since they are mainly solved with the amparo complaint or the authorities’ appeal before a collegiate tribunal.
IV PENALTIES AND REMEDIES
Under Mexican legislation, tax disputes usually conclude with a final decision that determines the legality or illegality of a tax assessment or a tax refund.
If the decision is favourable to a taxpayer, the tax authorities will annul the assessment. In cases where the taxpayer had already paid the assessment, the tax authorities will refund the taxes with adjustments for inflation, surcharges and fines. If the matter is a tax refund, the tax authorities will refund the taxes with adjustments for inflation and surcharges.
In the event that the decision is unfavourable to the taxpayer regarding tax assessments, the taxpayer will have to pay such assessment to the tax authorities with adjustments for inflation, surcharges and fines. If the matter is a tax refund, the denial of such refund will be confirmed.
Criminal penalties will only be imposed on taxpayers that commit any of the crimes typified in the Federal Tax Code, such as tax fraud or contraband.
V TAX CLAIMS
i Recovering overpaid tax
Taxpayers may recover overpaid taxes as long as they prove that such taxes should have never been paid to the tax authorities.
To recover such amounts, taxpayers must file before the tax authorities a tax refund application in which they must specify why the specific amounts correspond to overpaid tax.
In cases where the tax authorities deny such tax refund, taxpayers may challenge such decision through the procedures explained above.
ii Challenging administrative decisions
Administrative decisions or assessments may always be challenged by means of any of the procedures set forth herein.
It is important to note that under Mexican law, taxpayers are allowed to assert formal and substantive arguments. However, under a recent criterion issued by the Supreme Court of Justice, formal arguments can only declare the nullity of a ruling to provide that such formal violation is amended.
The parties entitled to file tax claims are those who are obliged to pay the applicable tax, or those who have already paid the tax and file a tax refund application.
Regarding VAT, for purposes of filing a tax claim, the parties must demonstrate whether they lodged the VAT refund or passed on the VAT to another party in accordance with the VAT mechanism set forth in Mexican law, and that they are entitled to claim the refund thereof.
It is not common for taxpayers to recover the costs incurred to challenge a tax assessment or a tax refund; however, under the Tax Administration Services Law, the tax authorities are responsible for paying damages caused by their officers derived from the performance of their duties.
In fact, under the Tax Administration Services Law, the tax authorities must indemnify taxpayers when their ruling is declared null and void as a result of not being duly grounded in law and fact or the competence of the tax authorities; is contrary to a criterion issued by the Supreme Court of Justice in terms of legality; or is declared null for abuse of power.
However, in practice, obtaining a decision where the courts order the tax authorities to pay such costs is unlikely.
The tax authorities are never entitled to charge their costs regarding tax claims. Under the Federal Tax Code, they are entitled to recover the costs incurred in other kinds of procedures, such as the seizure process, but we do not analyse this in this chapter.
VII ALTERNATIVE DISPUTE RESOLUTION
i Taxpayers’ Ombudsman
The Mexican Taxpayers’ Ombudsman, better known as Prodecon, is an independent public organisation established through a Decree of Law published on 4 September 2006.
On 1 September 2011, Prodecon opened as a decentralised public agency on tax matters that follows up those grievance or complaint procedures against acts of the federal tax authorities that violate the rights of taxpayers.
Among other faculties, Prodecon plays a major role in conclusive agreements (mediation procedure), which are the first alternative means of tax dispute resolution in the Mexican tax system.
To initiate a conclusive agreement, a taxpayer needs to have a ruling issued by the tax authorities with a classification of acts or omissions within an audit procedure. However, under the Federal Tax Code, one of the requirements that should be met to initiate the conclusive agreement is that a tax deficiency has not been assessed. The conclusive agreement allows a negotiation between taxpayers and the tax authorities in which Prodecon acts as a mediator, and it may grant mutual benefits for the parties.
The issuance of a conclusive agreement is binding on the parties and cannot be challenged. However, if taxpayers do not agree with the tax authorities’ proposal, they may decline it.
In recent years, Prodecon has played an important role in tax disputes, and has clearly provided a new option for taxpayers to avoid litigation against tax assessments and tax refunds.
ii Mutual agreement procedures
The mutual agreement procedure is another alternative dispute resolution applicable in Mexico, which is established in the treaties for the avoidance of double taxation entered into by the Mexican government with other governments.
Such mutual agreement procedure can be initiated simultaneously with the previously described administrative appeal, and it suspends the resolution of the administrative appeal or the annulment complaint.
To initiate such procedure, taxpayers must first file a writ before the Mexican tax authorities. Once the writ is filed, if the writ is duly grounded, the competent tax authority must try to find a solution unilaterally.
If the competent authority considers said writ grounded but is not in a position to adopt a favourable decision, it must try to solve the matter through a mutual agreement with the competent authority of the other country.
By means of the mutual agreement procedure, the Mexican tax authorities will establish the terms and conditions of the agreement.
If the other country’s government agrees to a correlative adjustment, the most common outcome will result in the elimination of the double taxation through the ‘corresponding adjustment’.
Once the agreement between the authorities is concluded, the taxpayer will be notified of the decision with the corresponding explanation. After the taxpayer accepts the decision, the tax authorities will exchange written confirmation of the agreement, which will also be notified to the taxpayer.
Subsequently, both tax authorities will execute the result, effectively repairing the non-conforming assessment.
If the decision is favourable to the taxpayer, it will express its conformity and commit to abandon any claim or appeal that it may have filed in Mexico, or it will refrain from filing any other claims or appeals.
Once the taxpayer has expressed its conformity, the competent authorities shall proceed to enforce said decision within their jurisdictions, or carry out the necessary proceedings for it.
With respect to the mutual agreement procedure, there is a Manual for the Application of the Administrative Process of the Organisation for Economic Co-operation and Development that establishes that usually the authorities grant a two-year period to issue a decision, and if the competent authorities do not come to an agreement they may continue their discussions or consider the possibility of granting a reasonable extension to reach such agreement.
Under the Federal Tax Code, tax provisions that set forth burdens as well as exceptions thereto for private parties, in addition to those that define violations and set forth penalties, are of strict application. Provisions that define taxpayers, activities subject to tax, the amount to which the tax rate applies, rates or the tax rate schedule thereof, are considered to impose burdens on private parties.
Other tax provisions will be interpreted by applying any method for legal interpretation. In the absence of an express tax provision, the provisions of federal law will be applied, provided that the application thereof is not contrary to the essence of tax legislation.
In terms of the aforementioned, there are no general anti-avoidance rules for tax purposes; however, the Mexican legislation establishes special anti-avoidance rules, such as the case of the Mexican Income Tax Law, which establishes an exemption for transactions entered into between related parties.
In fact, the Income Tax Law establishes that, for the purposes of calculating Mexican-source income, the tax authorities may, in exercising the powers of verification afforded by law, determine that a transaction is a sham exclusively for tax purposes. Such determination shall be duly based on law and facts within the review procedure, and the existence of the sham shall be stated in the ruling assessing the taxpayer’s fiscal situation, provided that the transactions had been conducted between related parties as set out in the Law.
For fiscal year 2013, a modification was proposed for the Federal Tax Code to establish that if the tax authorities detect practices or operations from taxpayers that formally do not imply a taxable activity and lack business rationality, they could assess the corresponding tax. However, such amendment was not approved and did not come into effect.
The Income Tax Law also establishes as a non-deductible item the interest on a taxpayer’s debts that exceeds the equivalent of three times its shareholders’ equity, and that comes from debts entered into with foreign-resident related parties.
In addition, the Income Tax Law establishes as non-deductible items payments of interests, royalties or technical assistance made to a foreign entity that controls or is controlled by the taxpayer when the foreign entity that receives payment is considered transparent; the payment is considered non-existent for tax purposes of the country or territory where the foreign entity is found; and the foreign entity does not consider such payment as income subject to tax under the applicable tax provisions.
The Income Tax Law also establishes the possibility for the following to be treated as dividends for the purposes of such Law: interest derived from credits extended to legal entities or to permanent establishments in Mexico of foreign residents by Mexican residents or foreign residents that are related to the party paying the credit. Such is the case for interest derived from back-to-back loans, even if extended through a financial institution residing in Mexico or abroad.
Regarding the OECD base erosion and profit shifting (BEPS) proposal, as an OECD member, Mexico is seeking to implement measures through its tax authorities to comply with the commitments made within such organisation. Among others, the Mexican tax authorities are starting to audit taxpayers who have conducted business restructurings with related parties, where the authorities consider that the purpose sought was to erode the tax base in Mexico.As of 2014, the Federal Tax Code incorporated a new obligation for taxpayers to provide the information established in the official form 76 ‘Information of relevant operations (Article 31-A of the Federal Tax Code)’. The most relevant transactions to be provided through such official form are: financial derivative instruments transactions, transfer pricing transactions, shares transactions and corporative restructures.
Also, in 2016, an amendment was made to Mexican legislation to include a new transfer pricing provision for Mexican taxpayers, which in general obliges them to file before the tax authorities additional information regarding related-party transactions through informative tax returns. The above-mentioned obligation is based on the BEPS Action Plan issued by the OECD, specifically Action 13, regarding transfer pricing documentation (master file, local file and country-by-country report).
From our point of view, taxpayers who use this kind of structure to carry out their business in Mexico (related parties), should review their current standing in respect of tax and transfer pricing obligations, in order to anticipate a possible tax audit by the Mexican tax authorities and, if necessary, be in a position to provide the corresponding supporting documentation.
IX DOUBLE TAXATION TREATIES
Mexico has entered into treaties for the avoidance of double taxation with many countries. However, there are no specific domestic rules applicable to the interpretation and application thereof.
Derived from the above, to interpret and apply such treaties Mexico should observe the Vienna Convention on the Law of Treaties, the Model Convention of the Organisation for Economic Co-operation and Development and its commentaries, as well the respective protocols.
X AREAS OF FOCUS
i Relevant operations report
For fiscal year 2014, a modification was added to the Federal Tax Code that obliges taxpayers to provide to the tax authorities a report of the relevant transactions they have carried out.
In terms of such modification, for the tax authorities to exercise their functions effectively and efficiently, it is essential that they have the relevant information in a timely manner, and, owing to the proposal to eliminate the obligation to submit audited tax reports, it is necessary for the authorities to replace that information through requests made to taxpayers.
Owing to the above, Article 31-A was added to the Federal Tax Code providing that taxpayers must submit to the tax authorities information related to the relevant operations indicated in the official form approved by such authorities within a 30-day term counted from the date the operations were entered into. It also provides that, whenever taxpayers submit information in an incomplete or erroneous manner, they will have a 30-day term counted from the notice of the tax authorities to correct the information wrongly submitted, and if that information is not corrected, the obligation shall be considered as unfulfilled.
The tax authorities have established a catalogue of 36 operations contained in different fields that are considered relevant, including:
- financial operations;
- transfer pricing operations;
- reorganisation and restructuring operations, and
- other relevant operations.
We consider that taxpayers should take into account the obligation of reporting such relevant operations to the tax authorities and be aware of such obligation’s importance.
ii Amendment regarding human rights
In 2011, an amendment was made to the Federal Constitution that basically obliges all Mexican authorities, including the judicial branch, to always respect the human rights of private parties, including taxpayers. Derived from such amendment, all judicial authorities, including the Federal Administrative Court, the collegiate tribunals and the Mexican Supreme Court of Justice, should issue their decisions taking into consideration taxpayers’ human rights, especially those provided by international treaties or agreements entered into by Mexico.
Although the amendment was a big step to respect human rights at all levels, the Supreme Court of Justice has already issued a criterion in which it establishes that, if an article of the Constitution goes against a human right provided for in a treaty entered into by Mexico, such provision must prevail, which, from our standpoint, is a regression in the evolution of human rights.
iii VAT refunds
As previously mentioned in Section 1, in recent years the tax authorities have denied tax refunds in a very visible manner, mainly refunds related to VAT. In fact, the tax authorities sometimes fail to respond to such refunds, or when they do so, they merely limit their response to a request for additional documents to proceed to such refunds.
In addition, in recent years the tax authorities have requested from taxpayers documents that are not related to or irrelevant for the respective tax refund in order to deny such refund.
iv Substantial claim and substantial administrative appeal
In 2017, an amendment was realised, and a new claim as well as a new administrative appeal to challenge tax assessments (not tax refund denials) were incorporated into the Mexican legislation.
In such processes, the parties are only able to make arguments in connection with the substance of the tax assessment, and no formal or procedural arguments are allowed. Their filings are optional for the parties.
One of the benefits of the ‘substantial claim’ is that the taxpayers are not obliged to offer a guarantee for the purposes of securing the challenged tax assessment, and its study and resolution is undertaken by specialist judges with extensive knowledge in tax matters.
Another benefit of the ‘substantial claim’, as well as of the ‘substantial administrative appeal’, is that in such processes the oral principles should be privileged (implementation of hearings, verbal communication between the judge and the parties) and celerity (reduction of deadlines by eliminating formalities).
The parties are only allowed to file the ‘substantial claim’ or the ‘substantial administrative appeal’ when the amount of the tax assessment exceeds approximately 5 million Mexican pesos.
In our experience, in the hearings that have been held in the new ‘substantial administrative appeals’, not only have the responsible officials participated, but they have also included their teams (the tax authority that issues the assessment, as well as the tax authority that will issue its decision in the appeal), which seems right and positive in order that the appeal be resolved considering all the elements exposed by the parties.
XI OUTLOOK AND CONCLUSIONS
Even though Prodecon has played an important role in the past in allowing taxpayers to negotiate with the tax authorities and to solve disputes between such parties, we consider that much work remains to be done to challenge the tax authorities’ position in many matters. With respect to this, we believe that Prodecon will continue to play an important role; however, it appears that Prodecon’s workload capacity has been exceeded, so we consider that something should be done in this regard. We also consider that it would be advisable to afford Prodecon greater power so that its recommendations become mandatory for tax authorities.
In recent years, we have also seen that the Supreme Court of Justice has issued decisions regarding tax matters in a manner that does not benefit taxpayers. Clear examples of the above-mentioned are the recent decisions issued by the Supreme Court of Justice regarding the appeals filed by taxpayers challenging the amendments made to the tax legislation in fiscal year 2014, in which almost all the decisions were issued in an unfavourable manner to the taxpayers, notwithstanding the clear violations to their human rights.
In view of this, given that the Supreme Court of Justice is the highest court in Mexico, we strongly believe that the designation of new judges must be made by preferring officers with a judicial career over officers with a background related to the tax authorities or tax administration. This is to avoid such judges issuing decisions with interests other than the administration of justice.
With respect to the above, in our opinion a requirement that should be met to become a judge of the Supreme Court of Justice is that candidates have never worked (or at least not for a long period of time) in the public administration, particularly in the Tax Administration Service.