Analyzing the Constitutionality of Taxes

Q: How can real estate developers better manage the due diligence aspects of their projects?
A: There are several factors to take into account. Regarding legal certainty, institutions have been proven to have a certain degree of corruption, which causes the industry to be more cautious with due diligence, elevating project costs. Also, the fiscal burden for the construction industry is growing extensively as Mexico City is imposing new taxes and other states are replicating this, affecting the feasibility of several projects.
Our firm aims to encourage the analysis of the constitutionality of taxes. A great part of the fiscal costs of a project can be recuperated, but about 70 percent of developers are clueless about this. As for the execution of the project, I advise my clients to really comply with applicable law. In a hurry to construct quickly, developers often overlook procedures and end up being shut down. A great deal of the litigation we solve could have been prevented by complying with due diligence.
Our clients are mainly Fibras, real estate developers and multinational supermarket chains across Mexico. Some are afraid to contest taxes, which often enables abuse by the authorities. The best way to prevent any corrupt practices is to ensure the project is within the legal framework and complies with all procedures. If the developer falters at any stage, it is going to increase times and costs of projects. Carrying out thorough due diligence allows developers to contest any possible objection to the project from a legal standpoint without giving way to bribes.
Q: How can real estate developers better contest and manage the tax-burden of their projects?
A: There are two paths for fighting an excessive fiscal burden. The first is how to structure the business to pay a lower amount of taxes without resorting to adversarial dispute settlement. The second relates to the land acquisition process as there are several notarial and procedural strategies to reduce times and costs. There are some taxes that must be contested from the very beginning of projects. For example, certain taxes must be paid in accordance with the amount of land developed, and this can reach up to 10 percent, both for commercial and residential projects. This is one example of a tax that we address from the beginning, because to lose 10 percent of the land beforehand is very harmful.
The day-to-day work of our firm is to contest construction taxes; of the taxes paid by a developer, up to 90 percent are unconstitutional. Very few developers are aware of this, and of those that are aware, even fewer launch dispute actions against the authorities. This requires extensive explanation to the clients so they can better understand which institutions are involved in the process.
Q: How do you reduce a developer’s project costs through legal strategies?
A: We must ensure that normativity is being complied with; it is not viable to build an industrial park in a residential area or to build a 60-story building in an area with heights restricted to 30 stories. The key is to draft the executive plan according to the land regulations and always be very clear so the developer understands the legal constraints.
To reduce land costs, it is important to have a thorough negotiation process with the ejido. The first owner after the ejido is not subject to taxes, which can mean a significant cost-savings for the developer. Our goal is to conclude the first transaction to avoid this tax. In cases when the first-ownership premise is not applicable, it is a good strategy to make the landowner a partner of the project to avoid taxes over immovable property and income tax. How much we can reduce costs depends on the type of project. For example, for a commercial real estate development, such as a shopping mall, taxes represent 12-15 percent of total costs. We have been able to retrieve up to 90 percent of these taxes and our clients end up paying only around 3 percent of project costs.