In an overly simplified manner, the year 2000 and 2003 amendments to the Civil Code, the Code of Civil Procedure and the Commercial Code can be summarized to conclude that electronic signatures are, for legal purposes, as equally binding for the signatory or the entity the signatory legally represents as printed signatures. Moreover, electronic data which includes electronic signatures is admissible and valid evidence in judicial proceedings. Hence, if an electronic data message includes an electronic signature, the Mexican Courts, both Federal and local (based on amendments to each State’s Civil Code), will admit such documents as evidence in the event of litigation.
As a Civil Code and very form driven country, Mexico has required that all items of legislation be codified as a basis for its rules and regulations. The codification process for e-commerce in Mexico began in 2000, with the enactment of amendments to the Civil Code, the Code of Civil Procedure and the Commercial Code. These rules, however, were insufficient and were complemented by Administrative Regulations published in 2002 and additional amendments to the Civil Code and Commercial Code in 2003.
The 2003 amendments, however, establish the rules and guidelines which Digital Certificates which encompass electronic signatures must include. There are three guiding principles that safeguarded electronic signatures and the Digital Certificates which encompass such signatures, which are sanctioned by the Civil Code and the Commercial Code to provide legal certainty, these are:
- That the electronic signature be attributable to its author or e-signatory;
- That the information contained in the electronic data which is signed remain intact and whole;
- That the information be accessible for future review;
Notwithstanding the existence of legislation which could have prompted an increase in e-commerce since the year 2000, the formalities for invoicing in Mexico inhibited the true development of e-commerce. Requirements such as invoices that needed to be printed by authorized print houses and the need to comply with a number of formalities in order to deduct expenses, caused for paper invoicing to slow down Internet and non-Internet based e-commerce. Fortunately, amendments to the Federal Fiscal Code ("FFC") that were delayed in Congress for a couple of years came into effect on January 2004.
The FFC, as amended, enacts the same principles which in 2003 were inserted in the Civil Code and the Commercial Code, which establish the use of electronic signatures, or rather Advanced Electronic Signatures ("AES") as defined in the FFC.
The amendments introduce the possibility of issuing electronic invoices, a critical element for the development of Internet and non-Internet based e-commerce in Mexico. The implementation of electronic invoicing can provide human, material and storage resource savings of up to 75% of the cost of issuing and managing paper invoices. These savings are so worthwhile that a significant number of Mexico’s taxpayers with active purchasing and sales activities should be able to recuperate the infrastructure investment required to implement e-invoicing on a very short term.
But the amendments to the Federal Fiscal Code do not stop on electronic invoicing, the amendments encompass the following:
- Electronic filing of ALL returns, notices, writs and communications with the Tax Administration Service (or SAT for its Spanish acronym) must be filed through electronic media and contain an AES.
- Electronic invoicing.
- Electronic servicing of notices issued by the SAT
Moreover, the FFC establishes rules which complement or apply to all federal tax and customs regulations. Hence the repercussions from the amendments will affect matters pertaining to income, value added and assets tax and could also affect matters pertaining to the Customs Law. The application of the amendments to the Social Security, Employee Housing and other items of legislation which establish the FFC as supplementary legislation, will require specific regulations pertaining to these matters in order to apply thereto.
A) Advanced Electronic Signatures and E-Filing
The Federal Fiscal Code establishes that upon the upcoming enactment of the administrative regulations which provide guidelines for e-filing of returns, notices, writs, administrative appeals and any other communication with the SAT, all Mexican and foreign taxpayers, except for a limited number of minor taxpayers and taxpayers engaged in agricultural, livestock breeding, fishing and forestry activities; must file ALL such communications through electronic media using the AES issued by the SAT.
Consequently, all taxpayers, individuals and legal entities alike, now have to obtain their Advanced Electronic Signature. The AES entails a number of responsibilities and also a number of legal presumptions based upon which the SAT can initiate its legal actions in the future. Hence, adequate policies must be enacted by taxpayers and management in order to ensure the proper use of such binding electronic signature.
AES are evidenced the Advanced Electronic Signature Digital Seal ("AESDS"). The AESDS can only be issued by the SAT to legal entities, individuals can process their AESDS through the SAT or through independent certifying entities authorized by Banco de México (Mexico’s Central Bank). However, such individuals must first appear before the SAT in order to be photographed and fingerprinted prior to having their AESDS issued by such independent certifying entities. The same photograph and fingerprint process will be applied to the legal representatives of legal entities. Moreover, such legal representatives must hold a power of attorney for acts of administration or acts of domain, in order to be acknowledged as such for purposes of registry of the legal entities representative, the granting of which can have implications far beyond the appointment as legal representative for SAT purposes.
To process the AESDS, prior to the personal appearance before the SAT, taxpayers must download the software for the processing of the AESDS from the SAT web page. With this software the technology of which is based on the PKI (public key infrastructure), two keys are generated. The first key is the taxpayer’s private identification key or private key, which must be placed under very strict and confidential storage. The second key is the public key the information of which must be stored in a disc, a copy of which must be presented along with other documents and forms to the SAT upon personal appearance to process the AESDS. To schedule the personal appearance meeting, the taxpayers must call the national scheduling hotline of the SAT. In said call, the taxpayers will provide certain information and will receive an appointment to appear before their local SAT office to complete the AESDS registration process. The rules for processing the AESDS are very clear as to the documents and supporting documentation which must be accompany the AESDS processing and the process itself is rather pain free if the proper documents and timely scheduled appearance before the SAT occurs. The only real headache is the fact that personal appearance by the legal representative is required hence directors, general managers and senior managers of legal entity taxpayers will have to schedule themselves to comply with this process.
AESDS have a two year validity life only. Prior to the completion of the two years, taxpayers must renew their AESDS through the SAT web page or, if the AESDS expires they will have to perform the entire registration process discussed above. However, with Mexico being Mexico, form remains a driving form even when talking about the AESDS. The various formal requirements that the seal must contain lengthy and very specific, hence for purposes of this analysis we limit ourselves to call the attention to such fact but discussing said requirements is beyond the scope of this article.
In addition to the passage of its two year life, AESDS become void by request of the seal holder, by judicial or administrative resolution, upon death of the seal holder, upon dissolution, liquidation or extinction of the legal entity, upon merger or spin-off if the seal holder disappears, upon completion of the term of validity of the AESDS, unless its renewed as discussed above; upon loss or damage of the electronic media through which the AESDS is kept, if the confidentiality of the information used to create the AESDS is jeopardized and if evidenced that upon issuance not all of the requirements were complied with.
The seal holder is obligated to act with due diligence and put in place reasonable means to secure the unauthorized use of the AESDS and its creation data. If the AESDS is used to file returns, it must make sure that the information contained in the return are true and correct and that the AESDS used is valid. Also, it must request the cancellation of the AESDS upon any exposure which could jeopardize the privacy of the AESDS creation data or the AESDS itself. The foregoing, due to the statutory presumption that the seal holder’ is the only user of the AESDS and that is responsible for its use. Please note that legal entities are provided the alternative by statute to register the AESDS of their individual legal representatives instead of having the entity use its own AESDS. If the AESDS used is that of the legal entity itself, and not that of the legal representatives, the use of the AESDS is attributed to the sole administrator, the chairman of the board or the person or people who are appointed as general administration, the management of the administration of the entity at the time the AESDS was used.
B) Electronic invoicing
As indicated above, the most noteworthy amendment to the FFC is the enactment of the electronic invoice. Implementation of e-invoices is a voluntary affair. However, if a taxpayer elects to implement e-invoicing, it will have cease and desist in its use of paper invoices. Notwithstanding, if a taxpayer that elects to issue e-invoices receives a request from a customer for a printed invoice, it will be obligated to print out an invoice in an ordinary printer, with this printed invoice being equally valid from that of an e-invoice or a traditional paper invoice.
In order to be able to issue e-invoices, the taxpayer that wishes to do so must keep its accounting records electronically. Taxpayers that pretend to issue invoices will have to file a request for issuance of a Digital Seal Certificate ("DSC") through a petition which included the AESDS. The DSC is the equivalent of the AESDS, but its use is limited to inclusion in the e-invoices, and its purpose is to authenticate and attribute e-invoices to its issuer. Taxpayers with multiple branches can elect to have a single DSC or have a different DSC for each of its branches. E-invoices also include registered numbering, which are issued by the SAT upon request of the taxpayer. The registered numbers of the invoice and the DSC must be authenticated by beneficiaries of invoices in the SAT invoice upon receipt thereof, failure to do so could jeopardize expense deductions. Issuing taxpayers must file a monthly report of the beneficiaries of the e-invoices indicating the registered invoice number and its beneficiary. Hence, the SAT will control the issuance of registered invoice numbers, it will receive a notice from the issuer as to who the beneficiary of the invoice is and it will have the registered number verified by the beneficiary of the invoice, closing the loop on unlawful use of invoices. Strict electronic control mechanisms must be put in place to ensure the adequate use of e-invoicing in order to comply with a significant number of mechanical requirements set forth for e-invoicing by the SAT the discussion of which goes beyond the scope of this article.
The requirements listed above do not preclude the obligation to comply with some of the more traditional invoicing requirements, i.e. that the invoice include the issuing taxpayers name, address and taxpayer identification number; the place and date of issuance; the beneficiaries taxpayer identification number; the amount and type of merchandise or services covered by the invoice; the unit value and the total invoice value with a break down of taxes, if applicable; and the date, number and customs house of the through which imports of first hand sale of imported goods took place. Additionally, the registered numbering discussed above and certain other formalities such as the number of payments, among others.
Whether physical or electronic, invoices must be stored during the five year statute of limitation term. Electronic storage requires that complete access to review of e-files must be granted to SAT auditors if requested upon audit.
C) Electronic servicing of notices by the SAT
The third most relevant FFC amendment included in the January 2004 amendments refers to the service procedure. Particularly as it refers to the servicing of administrative acts in the events discussed further below. Administrative acts are defined in the FFC to be the actions through which the authorities (i.e. the SAT) generate a unilateral expression of intent toward the taxpayer by means of which the authority’ make use of their power of coercion, creating an individual situation destined to satisfy a collective need. An example thereof is the act through which the SAT attempts imposes a sanction or fine for an overdue tax payment.
As a result of the amendments to the FFC, administrative acts that require personal service are considered to have been properly performed not only if the service procedure takes place personally, but also if it is performed by registered mail. Because of the amendments, personal service procedure is considered to be properly performed if served through e-mail. Such actions must be issued in writing through physical or electronic documentation, indicating the issuing authority, establishing the legal basis and reasoning to support the action and its purpose and include the signature of the issuing officer, if electronic it must include the AESDS of the issuing officer and the name of the person or persons to who it is issued against. Electronic servicing of notices must be encrypted. Evidence of receipt must be generated through a return receipt mechanism which is self generated by the encrypted electronic service notice. This process has not yet been used. However, a number of arguments regarding the validity of such service process will surely be triggered by litigating attorneys. Hence the final word as to the validity, legality and constitutionality of such service of process is a matter that will require being addressed by Judges and, almost certainly, the Mexican Supreme Court.
E-served notices will become effective on the day which follows that on which the due service of the process takes place. This holds true even for internationally served notices, a matter which in the past was always a cause for controversy with the SAT. In the service procedure itself, the SAT must attach and evidence delivery of the administrative act which is being served, in this case the document must be issued in electronic format with the requirements discussed above.
Clearly the implementation of the AESDS, the DSC, electronic invoicing and electronic due service of process seems a titanic task. However, the SAT and the Ministry of Finance and Public Credit are wholeheartedly committed to the successful implementation of such mechanisms as a means to improve their control and oversight on tax compliance. The implementation of these mechanisms in conjunction with the receipt of electronic informative returns which are filed by banks, notary publics, employers and a number of other taxpayers, will allow the authorities to improve their tax compliance oversight through electronic means significantly. Last year, with the support and funding of the World Bank, the SAT submitted to public bidding a software and hardware platform which will allow the various SAT divisions (Customs, Tax Collection, Audit Administration, etc) to communicate and cross reference their individual data bases. Among the bidders well known players such as Oracle, SAP and People Soft participated. The results of said bid were published earlier this year and the winner of such process was People Soft. Hence, the SAT will be cross referencing its various data bases and increasing these with the information it receive from various sources, thus taxpayers must put an equal effort to ensure that their tax and foreign trade matters are in order, to avoid surprises once the SAT begins enforcement.
Additionally, matters such as systems security, documentation policies to ensure collections and labor policies to cover dismissals of legal entities legal representatives and the implications of such regarding the AESDS must be addressed upon implementation of electronic signature and electronic invoicing mechanisms. However, discussion of these issues is beyond the scope of this article.
* Ricardo Leon-Santacruz is a partner of the Tax Practice Group and Adriana Ibarra and Hernan Gonzalez-Moneta are associates of the Intellectual Property and Tax Practice Groups, respectively, of Sanchez-DeVanny Eseverri in its Monterrey, Mexico office.
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.