Q COULD YOU OUTLINE SOME OF THE KEY DEVELOPMENTS AND CHANGES RELATING TO TAX LAWS THAT YOU HAVE SEEN IN MEXICO OVER THE LAST 12-18 MONTHS?
BARRERA: For the last four years, the Mexican government has passed a number of strategic reforms designed to make the economic environment in Mexico more appealing and competitive for foreign and domestic investors. An increase in investments would naturally result in higher tax revenues. However, these reforms have not brought the expected results. The pace of economic growth is slower than the government had expected. Therefore, the government was compelled to backpedal on some of the previous reforms. They amended the Income Tax Law to include some tax incentives, particularly for energy and infrastructure investments, such as accelerated depreciation, release of thin capitalisation rules and granting a tax credit on reinvestment of dividends as well as a repatriation capital plan for Mexicans holding investments abroad. The government also created 'special economic federal zones' to grant tax, customs and financial benefits to investments in these special zones.
Q TO WHAT EXTENT HAVE RECENT TAX REFORMS BEEN DRIVEN BY THE POLITICAL AGENDA OR A PERCEIVED NEED TO COUNTER TOUGH FINANCIAL CONDITIONS?
BARRERA: The so-called 'structural reforms', including tax reforms, as well as recent tax amendments which reverted some of the original aspects of the tax reform, have been driven by the global economic changes. The government's expectation was that structural reforms would result in such a massive boost to the Mexican economy that investors would not mind paying higher taxes. In other words, investors would be doing so well that the tax cost would be almost irrelevant. As it turned out, the current economic reality is quite different and the newly enacted reforms intend to shyly revert some of the structural tax reforms as those had clearly reduced the attractiveness of investing in Mexico.
Q TO WHAT EXTENT IS TRANSFER PRICING A KEY CHALLENGE FOR MULTINATIONAL ENTERPRISES? ARE TOO MANY COMPANIES UNDERESTIMATING THE IMPORTANCE OF COMPLIANCE AND RISK MANAGEMENT IN THIS AREA?
BARRERA: Transfer pricing has become the most relevant collection tool for tax authorities and, by the same token, also one of the most important specific items to consider, at least for multinational companies. Tax authority statistics show that in recent years, transfer pricing audits have increased more than tenfold, probably because they have proven to be more effective in terms of collection than traditional audits. For many years, transfer pricing obligations were perceived by taxpayers as mere statutory obligations with almost no consequence at all. This situation gave taxpayers the false perspective of protection as long as filings have been made. Years later it turns out that tax authorities are looking at the transfer pricing reports and they have in-depth questions and observations, which are resulting in headaches for taxpayers.
Q HOW WOULD YOU DESCRIBE THE TAX LAWS IN MEXICO AS THEY RELATE TO FOREIGN ENTITIES? ARE YOU SEEING MORE INCENTIVES DESIGNED TO ENTICE SUCH ENTITIES, OR HAS THERE BEEN AN EFFORT TO TIGHTEN LAWS AND CRACK DOWN ON ISSUES SUCH AS OFFSHORE TAX JURISDICTIONS?
BARRERA: Mexico is looking to attract foreign investment just like any other country but at the same time has clearly made a stand against the use of offshore tax jurisdictions. Mexico has executed a vast net of international tax treaties, including tax treaties to prevent double taxation, as well as other treaties to help tax collections such as treaties for the exchange of tax information, the Convention on Mutual Administrative Assistance in Tax Matters and even FATCA. So it is clear that Mexico intends to attract foreign investment by mainly inviting clean money.
Q HAVE YOU SEEN AN INCREASE IN TAX DISPUTES AND LITIGATION IN MEXICO? WHAT LESSONS CAN COMPANIES LEARN FROM RECENT PROSECUTIONS, PENALTIES AND COURT RULINGS?
BARRERA: When it comes to tax there are two types of litigation cases: litigation vs. assessment cases and constitutional proceeding cases (known as Amparos) against laws which are not aligned with constitutional principles. The number of litigation vs. assessment cases has been fairly stable, while Amparos have decreased dramatically. Unfortunately, the reason for the decrease in Amparo litigation cases is not that laws have become more reasonable or consistent with the constitution, but rather that taxpayers have lost their confidence in the judiciary. This is particularly the case with the Supreme Court, where some justices are clearly biased in favour of the government. The lesson to learn for taxpayers is that it is worth a enlisting a good tax lawyer, as lawyers who are not tax specialists will pretend to defend a tax case but only complicate the legal situation for the taxpayer.
Q IF A COMPANY DOES FIND ITSELF THE SUBJECT OF A TAX-RELATED AUDIT, INVESTIGATION OR ENQUIRY, WHAT STEPS SHOULD IT TAKE TO MANAGE ITS RELATIONSHIP WITH TAX AUTHORITIES?
BARRERA: Just as with any other specialisation area, prevention is the first issue to keep in mind, so seeking proper advice is indispensable. This fact becomes even more demanding when an audit or investigation process starts. Then, the taxpayer should not attempt to attend to the process on its own, but rather seek a professional adviser who can manage the case and follow his or her recommendations. Frequently, taxpayers neglect to properly attend the first stages of an audit or an investigation process, lest they make their situation worse. It is therefore better to get professional help as soon as a tax process begins, even if it seems straightforward.
Q WHAT GENERAL ADVICE WOULD YOU GIVE TO COMPANIES ON EFFECTIVE TAX PLANNING? HOW IMPORTANT IS IT TO CREATE TAX EFFICIENT STRUCTURES AND IMPROVE INTERNAL FUNCTIONS AND PROCESSES ACROSS THE ORGANISATION?
BARRERA: Complete and accurate information is crucial when it comes to taxes. There are different profiles of taxpayers, with different aversions to tax risks. However, it is imperative for a taxpayer to understand perfectly the facts and expectations in each situation in order to make the best decision according to its interests. For this purpose, it is important to seek objective and professional tax advice. From our experience, the best tax adviser is not the one who tells the taxpayer what he wants to hear, but the one who is willing to tell the client the truth. In addition, it is important to bear in mind that effective tax planning requires maintenance, as a formula which works today might not work in a few years given that regulations, laws and the criterion of the courts change. So, it is of the utmost importance to periodically revisit tax planning structures to assure that they are in good standing or else have enough time to act early in the case of any potential risk.
Originally published by Financier Worldwide Limited.
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.