Mexico: The Tax Disputes And Litigation Review

I INTRODUCTION

Under Mexican jurisdiction, it is very common to have tax disputes between taxpayers and the tax authorities. In those disputes, the taxpayers first try to solve the dispute with 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.1

The Mexican tax authorities usually start audit procedures with all types of taxpayers, when they detect such taxpayers failed to pay all the taxes they should have and they end up 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, 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, which 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 itself 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, the 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 the aforementioned rulings, which are set out below.

i Administrative appeal

In 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 Tax Court through an annulment complaint.

In terms of such criterion, if a taxpayer wishes to offer additional evidence to the tax authorities than the one that was provided during the audit procedure, the taxpayer must first file an administrative appeal in order to be able 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 in order 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 Tax Court within a 45-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 Tax Court within a 45-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 Tax 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 Tax 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 case 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 aforementioned extraordinary appeal.

v Guarantee

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 aforementioned 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:

  1. cash deposit;
  2. security interest or mortgage;
  3. security bond granted by an authorised institution;
  4. joint and several liability assumed by a third party;
  5. administrative-law attachment; and
  6. 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 we have 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 the aforementioned 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 a longer or shorter 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 so because, as previously mentioned, the Supreme Court of Justice issued a criterion in which it established that the 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 a Federal Tax Court, which is integrated by three collegiate judges. It may take around a year for the Federal Tax 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, it 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 case such opinions differ, the Federal Tax Court must appoint a third-party expert whose opinion will prevail.

iii 'Amparo complaint' or tax authorities appeal

The 'amparo complaint' or the tax authorities' appeal is resolved by a Collegiate Tribunal, which is integrated by three judges.

It usually takes around seven months for the Collegiate Tribunals to issue their decisions, which can only be challenged through an extraordinary appeal.

iv Extraordinary appeal

As we previously commented, 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 integrated by 11 judges divided in two sections. Such judges issue their decisions by sections (first and second sections) or in 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 the Collegiate Tribunal.

IV PENALTIES AND REMEDIES

Usually, under Mexican legislation, tax disputes 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 the taxpayer, the tax authorities will annul the assessment. In case the taxpayer had already paid the assessment, the tax authorities will refund the taxes with adjustment for inflation, surcharges and fines. If the matter is a tax refund, the tax authorities will refund the taxes with adjustment for inflation and surcharges.

In case the decision is unfavourable to the taxpayer, regarding tax assessments, the taxpayer will have to pay such assessment to the tax authorities including adjustment for inflation, surcharges and fines. If the matter is a tax refund, the taxpayer legality of the denial will be confirmed.

Criminal penalties will only be imposed on such 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.

In order 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 case the tax authorities deny such tax refund, taxpayers may challenge such decision through the procedures that we have already explained.

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 point out that under Mexican law, taxpayers are allowed to assert formal and substantive arguments. However, under 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.

iii Claimants

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 the value added tax, for purposes of filing a tax claim, the parties must demonstrate whether they lodged the value added tax refund or passed on the value added tax to another party in accordance with the value added tax mechanic set forth in Mexican law and if they are entitled to claim the refund thereof.

VI COSTS

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 the damages caused by their officers derived from the performance of their duties.

In fact, under 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, it is unlikely to obtain a decision where the courts order the tax authorities to pay such costs.

The tax authorities are never entitled to charge their costs regarding tax claims.

However, under the Federal Tax Code, tax authorities are entitled to recover the costs incurred in other kind of procedures, such as the seizure process, which we will not analyse in this chapter.

VII ALTERNATIVE DISPUTE RESOLUTION

i Taxpayers' Ombudsman

The Mexican Taxpayers' Ombudsman, better known as PRODECON, is an independent public organisation that arises by a Decree of Law published on 4 September 2006.

On 1 September 2011 the Taxpayers' Ombudsman (PRODECON) opened its doors to the public as a decentralised public agency on tax matters that follows up those procedures of grievance or complaint against acts of the federal tax authorities that violate the rights of taxpayers.

Among other faculties, PRODECON plays a major role on the conclusive agreements (arbitrage procedure), which are the first alternative means of tax dispute resolution procedure in the Mexican tax system.

In order to initiate a conclusive agreement, the taxpayer needs to have a ruling issued by the tax authorities with a classification of acts or omissions within an audit procedure. However, it is important to mention that under the Mexican Federal Tax Code, one of the requirements that should be met in order 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 the PRODECON acts as a mediator and it may grant mutual benefits for the parties.

It is important to bear in mind that the issuance of a conclusive agreement is binding on the parties and cannot be challenged, however, if the 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 administrative appeal that has already been described in this chapter 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, the competent tax authority must solve if the filling of said writ is duly grounded, and if so, try to find the solution unilaterally.

If the competent authority considers said writ is grounded but the authority 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 previously referred to, 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 said authorities is concluded, the taxpayer will be notified of the decision, with the corresponding explanation. After the taxpayer accepts the decision, said 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 Organization for Economic Cooperation 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 in order to reach such agreement.

VIII ANTI-AVOIDANCE

Under the Mexican 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 the taxpayers, the activity 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 Mexican 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 in 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 in such Law.

It is also important to point out that for fiscal year 2013 a modification was proposed for the Mexican Federal Tax Code in order 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 never came into effect.

Also, the Mexican Income Tax Law 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 Mexican Income Tax Law establishes as a non-deductible item, payments of interests, royalties or technical assistance made to a foreign entity that controls or is controlled by the taxpayer, when:

  1. The foreign entity that receives payment is considered transparent.
  2. The payment is considered non-existent for tax purposes of the country or territory where the foreign entity is found.
  3. The foreign entity does not consider such payment as income subject to tax under applicable tax provisions.

Also the Mexican Income Tax Law establishes the possibility to be treated as dividends for purposes of such Law, interests 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 of interests derived from back-to-back loans, even if extended through a financial institution residing in Mexico or abroad.

IX DOUBLE TAXATION TREATIES

Mexico has entered into several treaties for the avoidance of double taxation with many countries worldwide. However, there are no specific domestic rules applicable to the interpretation and application thereof.

Derived from the above, in order to interpret and apply such treaties, Mexico should observe the Vienna Convention in the Law of Treaties, the Model Convention of the Organisation for Economic Co-operation and Development with 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 Mexican Federal Tax Code that obliges taxpayers to provide to the tax authorities a report of the relevant transactions they carried out.

In terms of such modification, in order 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 due 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 the taxpayers.

Due to the above, a section 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 the information in an incomplete or erroneous manner, they will have a 30-dayterm 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 established a catalog of 36 operations considered relevant contained in different fields, such as:

  1. financial operations;
  2. transfer pricing operations;
  3. reorganisation and restructuring operations, and
  4. other relevant operations.

We consider taxpayers should take into account the obligation of reporting such relevant operations to the tax authorities and be aware of its importance.

ii Amend on human rights

Also, it is important to point out that in 2011, an amend was made to the Federal Constitution, which basically obliges all Mexican authorities, including the Judicial Branch, to always apply the human rights to private parties, including taxpayers. Derived from such amend, all judicial authorities, including the Federal Tax Court, the Collegiate Tribunals and the Mexican Supreme Court of Justice, should issue their decisions taking into consideration the taxpayers human rights, especially those provided by international treaties or agreements entered by Mexico.

Even though the aforementioned amend was a big step to respect human rights at all levels, the Supreme Court of Justice has already issued a criterion in which it established that if an article of the Mexican Constitution goes against a human right provided in a treaty entered into by Mexico, such provision must prevail, which, from our standpoint, is a regression for the evolution of human rights.

iii Value added tax refunds

As previously commented under the introduction section, in recent years the tax authorities have denied tax refunds in a very visible manner, mainly refunds related to value added tax.

In fact, the tax authorities sometimes fail to respond to such refunds, or when they do so, they merely limit their response to the request of additional documents in order to proceed to such refunds.

Also, it is important to point out that the tax authorities in recent years have requested from taxpayers documents that are not related or irrelevant to the respective tax refund, in order to deny such refund.

XI OUTLOOK AND CONCLUSIONS

Even though the Mexican Taxpayers' Ombudsman (PRODECON) has played an important role in the past years in order for taxpayers to negotiate with the tax authorities and to solve disputes between such parties, we consider that there is much work to be done in order to challenge the tax authorities' position in many matters.

With respect to the above, we propose that PRODECON continue with the important role that it has been playing.

Also, we consider that it would be advisable to afford greater power to such organisation so that its recommendations become mandatory for tax authorities.

In recent years, we have also realised that the Supreme Court of Justice has issued its decisions regarding tax matters, in a manner that does not benefit taxpayers.

In view of the foregoing, taking into consideration that the Supreme Court of Justice is the highest court in Mexico, we strongly believe that the designation of new judges must be made preferring officers with a judicial carrier 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 in order to become a judge for the Supreme Court of Justice, is that the candidate has never worked (or at least for a long period of time) in the public administration, particularly in the Tax Administration Service.

Originally published by Law Business Research Ltd.

Footnotes

1. There are also other causes for tax disputes, such as fines, but tax assessments and tax refunds are the most common, so we will focus on them in this chapter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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