MEXICO: An Introduction to Tax: Controversy

MEXICO TAX CONTROVERSY PRACTICE AREA OVERVIEW – CONCLUSIVE AGREEMENT PROCEDURE

On 1 July 2018, Andrés Manuel López Obrador was elected the President of Mexico with 53% of the popular vote - the first candidate in the country’s multiparty political system to obtain a majority of the vote since 1988. López Obrador, also known by his acronym “AMLO”, ran his presidential campaign on a platform of reducing economic inequality and favouring the poor over the rich with his policies.

On assuming the Presidency, AMLO promised that his government would not increase new taxes but that it would adopt measures to combat tax evasion and elusion, as well as increase the percentage of active taxpayers. While the latter of these measures has largely failed, the Mexican government has managed to levy a greater amount of taxes, mainly from large multinational corporations, some of them involved in high-profile cases mentioned by the President himself.

The Mexican Tax Administration Service, formerly headed by Raquel Buenrostro Sánchez and, recently, by Antonio Martínez Dagnino, has been making use of innovative tools such as tax data analytics to implement increasingly targeted audit procedures to Mexican taxpayers. With an emphasis of combatting tax elusion and avoidance, the audit procedures that are practised to multinationals generally have the aim of disallowing the deduction of payments, such as those deriving from those made to foreign-related parties under the concept of services, royalties, and interest.

At the same time, the tax authorities are adopting aggressive administrative measures such as the cancellation of taxpayer’s certificates to issue invoices, that affect or jeopardise the day-to-day operation of the taxpayers. Taking in consideration the complex tax environment currently faced by taxpayers in Mexico, it is important to briefly explain the nature of the conclusive agreement procedure as an effective tool for taxpayers to more efficiently handle tax audits and support their operations.

PRODECON – Mexico’s Tax Ombudsperson 

The Procuraduría de la Defensa del Contribuyente, or “PRODECON” per its acronym in Spanish, is an entity of relatively recent creation - being incorporated in 2011 - which has done much to change Mexico’s tax landscape for the better. PRODECON is a decentralised public organism which means that, even though it is part of the Executive Power and its head is chosen by the President and ratified by the Senate, it has functional and economic autonomy. PRODECON is Mexico’s tax ombudsperson and has three main functions: the first is to protect taxpayers' rights from being violated by the tax authorities and issue non-binding recommendations on how they should act in particular, as well as general cases; the second is to act as an attorney for taxpayers, generally of low income, in trials and controversies against the tax authorities; and the third is to act as a mediator in the conclusive agreement procedures.

Conclusive agreement procedure 

In a normal audit procedure, authorities usually request taxpayers' information and documentation. If they find any inconsistencies or there is a lack of information regarding a certain item, the tax authorities will proceed to issue its preliminary findings letter or a final audit report (depending on the type of audit that is being practised). The taxpayer has just one opportunity to file its arguments and evidence to disapprove the observations made by the tax authorities. If unsuccessful, the taxpayer will receive a tax assessment.

During audit procedures, taxpayers and the tax authorities themselves are normally time-constrained to provide all the information and documentation that is required in a timely manner and, regarding the tax authorities, to meet the legal terms set forth in the legal provisions regarding the duration of the audit procedures. According to the Mexican tax laws, taxpayers must have certain documents on hand or, in some instances, must provide them in periods ranging from six to 15 business days, with a possibility to request a ten business-day extension if the documents are difficult to obtain. Additionally, the Mexican tax laws do not provide expressly the possibility for taxpayers and auditors to sit down and discuss the information provided, and a lack of understanding of the taxpayer’s operations commonly occurs, especially in complex matters.

Considering the above, the conclusive agreement procedure has become, in complex tax audits, a necessity for taxpayers who wish to deal with aggressive positions and to support their operations and avoid excessive tax assessments.

The conclusive agreement procedure is a mediation-type procedure in which the taxpayer may discuss the items that were determined in a preliminary findings letter or a final field audit report. In such procedure, PRODECON serves as a mediator, channeling communications between the parties and sometimes issuing recommendations. The conclusive agreement procedure is independent and parallel to the audit itself.

This procedure is ruled by the principles of flexibility, celerity, immediacy, and is characterised by a lack of excessive formality which has plagued other Mexican legal procedures, such as tax audits. This entails that, even though there are fixed terms for the parties to provide and analyse information, PRODECON is flexible allowing the reception of information via email or other electronic means and may grant extensions if the original term was insufficient to one of the parties.

Likewise, PRODECON may summon the parties to attend technical or work meetings. This allows the taxpayer to sit down with the tax authorities and personally explain some of the information and expose any technical arguments to convince the tax authorities of its position. The tax authorities even may ask questions to the taxpayer if they have any doubts or inquiries regarding the evidence.

An additional benefit of using this procedure is that it gives taxpayers extra time to produce all the necessary evidence to support their position regarding observed items. This is because the time to conclude the audit is suspended until the conclusive agreement procedure is concluded. Originally, this procedure was not constrained to a time limit. However, as of tax year 2022, PRODECON must close the procedure within a one-year period from the date in which the initial petition is filed.

Also, in the conclusive agreement procedure, if a settlement is reached by the parties, this may be more attractive by the possibility established in the Mexican legal provisions for the taxpayers to receive a one-time benefit of having the reduction of the 100% of the fines that would have been determined in a tax reassessment. Furthermore, if no settlement is reached by the taxpayer, the conclusive agreement is ended and the audit procedure continues without any prejudice for the taxpayer.

The conclusive agreement procedure as an alternative legal remedy for resolving tax controversies has been highly successful. According to a report published on 2020 for the end of the first head of PRODECON’s term, it was reported that since its inception in 2014, more than 10,000 conclusive agreement procedure requests had been filed, and that in 67% of all opened files an agreement had been reached.

Taking into account the complex environment faced by taxpayers today, we consider that taxpayers should keep in mind the existence of the conclusive agreement procedure, as it remains a viable alternative to solve problems arising from increasingly aggressive audits carried out by the tax authorities.

Ramón Orendain and Daniel De la Parra are partners at Chevez, Ruiz, Zamarripa y Cía. Ernesto Silva is an Associate at the same Firm.