MEXICO: An Introduction

Overview - Tax Arena 

President Andrés Manuel López Obrador (AMLO) was elected in the midst of particularly challenging circumstances in the country, specifically from a political, economic and social perspective. Mexico has historically experienced significant levels of inequality, which have been exacerbated by several factors over the past few decades, such as unsuccessful strategies to address regimes implemented by past administrations. This has eventually resulted in heightened social unrest.

In order to address this, a popular view among specialists for a considerable time now, including international organisations such as the International Monetary Fund, has emphasised the necessity of enacting a thorough tax overhaul to incentivise economic growth through investment enhancement, extend the number of active taxpayers through combating the informal economy and promote wealth distribution in an effort to reduce economic inequality.

However, in 2018, during the first months after the election, the Executive branch released a statement conveying that no tax reforms would be promoted to increase taxes for the first three years of AMLO’s administration. As of that year, despite the fact that the actual administration eventually did enact certain measures to close loopholes to address tax avoidance and evasion, as well as to strengthen revenue collection by strenuously adding and developing tools stemming mainly from the BEPS Project, no new taxes have been levied.

Currently, more than four years into AMLO’s six-year term, the status quo remains the same. Despite a small increase in the tax-to-GDP ratio for revenue statistics during the past couple of years, Mexico is still ranked 38th out of 38 OECD countries. Furthermore, recent international factors such as civil unrest over tax increases in Latin America, the COVID-19 pandemic, military conflicts, rising inflation and an upcoming presidential election in Mexico, have rendered any kind of tax reform as unfeasible for the time being. The Ministry of Finance has recently stated that the government does not envisage any tax increases in the near future, precisely because of the present situation.

Notwithstanding the fact that a tax reform does not seem to be anywhere on the horizon, the business context in Mexico has not been exempt from the circumstances mentioned above. On top of persistent supply chain issues, Mexico’s Central Bank (Banco de México) expects the inflation rate to average a 7.9% rate during the first quarter of 2023. Additionally, the current administration has continued with its efforts to expand the tax base, make taxation more efficient by enhancing the tax authorities’ powers and increase tax revenues to fund the government’s ambitious welfare programmes. Aggressive tax audits are on the rise out of urgency for revenue collection, and a distinct focus taken by the authorities regarding compliance of excessive formal requirements during filing procedures has inflicted administrative pressure on businesses and investment structures.

Taking the above into consideration, the purpose of this article is to provide general guidelines to navigate around certain problematic aspects which have arisen from the present environment, especially for multinational enterprises, as well as to point out alternative legal remedies/courses of action available to achieve manageable situations, with very good possibilities of obtaining favourable results.

Mutual Agreement Procedure (MAP) 

This specific alternative dispute resolution mechanism has proven its efficiency for solving international tax law disputes with the Mexican tax authorities to avoid double taxation in complex cases. Cross-border transactions are a common ground in Mexican disputes and our tax authorities are familiar with their application. MAPs enable tax administrations to reach consensus on matters that require expert analysis on international law and, at the same time, allow tax administrations to save face domestically when reaching solutions on a particular matter, without waiving tax sovereignty to another state or third party.

It is important to bear in mind that not only the number of cases in which this mechanism is used in Mexico has been constantly increasing because of its flexibility and the opportunity that it brings to get an in-depth analysis and know-how to the table, but also that experience around this mechanism has been growing, such as cases in which three-way MAPs have been efficiently implemented.

Despite the clear advantages of MAPs, there are certain disadvantages that should be evaluated when pursuing this course of action. One of the main issues is that states are obligated solely to endeavour to resolve the MAP and thus there is no obligation to reach an agreement upon conclusion. Unfortunately, mandatory arbitration is currently not available, as it is an optional procedure, and Mexico has shown its unwillingness to enforce it. Likewise, even though the commitment of countries under the BEPS initiatives is that a MAP should be concluded within two years, delays should be expected since – as per OECD’s statistics – around 32 months is taken to finalise a MAP transfer pricing-related case, and 21 months with other cases.

Mexican tax ombudsperson 

Created in 2011, the Procuraduría de la Defensa del Contribuyente (PRODECON) is a semi-autonomous public decentralised body that is specialised in tax matters and provides several services to taxpayers, including the possibility of mediating controversies between the tax authorities and taxpayers, as an alternative dispute resolution mechanism.

The PRODECON has incentivised – and achieved – a better relationship between taxpayers and tax authorities in the solution of complex cases. For these purposes, the “conclusive agreement” procedure, in which working tables are set into place to reach a transparent, consensual solution for both parties involved, must be filed during the tax audit process and before the final tax deficiency is determined. However, although still effective in certain cases, the PRODECON’s budget has recently been reduced and a head of the organisation has not been appointed for the last couple of years.

Administrative appeal 

An additional strategic option that taxpayers have to address aggressive tax audits initiated by the tax authorities is the administrative appeal, which constitutes an alternative means to litigation before courts (a previous stage).

The benefits involved are that there is no need to guarantee the tax assessment (ie, with a bond among other permitted means) and that it offers an additional opportunity to produce evidence that was not offered during the tax audit. This is a strategic move, since the extra evidence may be used at the litigation stage, for example when filing an annulment suit to challenge the tax assessment in case the administrative appeal resolution is not favourable to the taxpayer.

In these cases, the administrative appeal must be filed before a “reviewing” tax authority that is part of the SAT (Mexican tax authorities) itself; therefore, the possibility of obtaining a successful outcome is limited.

Penalty Relief 

Taxpayers may also qualify for penalty relief when already subject to a tax audit, to the extent that certain requirements are met. Reduction may range from 20% to 100% of an estimated penalty, and a reduction in the application of interest surcharges (0.98% instead of the monthly 1.47% rate). Furthermore, in the context of a MAP, a reduction of 100% interest surcharges may be applicable.

Advance Pricing Agreements (APAs) and Bilateral Advanced Pricing Agreements (BAPAs)

Multinational enterprises should consider the importance that APAs and BAPAs have taken in Mexico to obtain legal certainty for taxpayers with regard to the interpretation and application by the tax authorities with respect to complex and/or subjective matters such as transfer pricing. The benefits arising from these agreements are considerable, and they may be combined with a MAP, with the possibility of having rollovers and rollbacks in different situations.

Final Comments 

Notwithstanding the current business context in Mexico, a variety of legal remedies are still available to multinational enterprises to safeguard their interests and provide strategic alternatives when dealing with adverse circumstances in the tax arena.

A crucial piece of the puzzle for taxpayers to bear in mind is the need to develop a robust and comprehensive course of action that will suit their specific situation and build an effective strategy around it to increase the possibilities of successfully navigating through these challenging times.