Stormy Skies From a Tax Perspective

For the first time in years, there were no year-end legal amendments to the federal tax provisions in Mexico. This represents good news, as it provides legal certainty for the upcoming fiscal year and reduces the administrative burden of understanding and implementing the new requirements, limitations, and obligations imposed. However, this should not be interpreted as a less aggressive position from the tax authorities in the upcoming months.  

It used to be a common practice that, every year, the president would propose a bill to Congress with amendments to the income tax, value-added tax, excise taxes, and federal duties laws. Article 74 of the Mexican Constitution provides that Congress must approve the Federal Budget no later than Nov. 15, prior to the approval of the contributions that should be levied to cover the same. 

During this yearly proceeding, the tax authorities considered it necessary for Congress to amend different tax provisions, enhance their powers, impose new obligations, reduce benefits, and deter what they consider negative practices from taxpayers. 

Sometimes the modifications were substantive and very aggressive. Other times, they were minor or even positive. Nevertheless, every December, the business, legal, and tax community's attention was drawn toward analyzing the new provisions entering into force in January. A considerable amount of time and human resources were dedicated each year to discussing the changes and becoming familiar with them. 

Despite the fact there is national and international consensus on the urgent need for a long overdue tax reform to simplify the Mexican tax system, reduce the informal economy, lower tax rates, and increase revenue through a broader base of taxpayers, the current administration committed when entering office to avoid any increase in taxes or the creation of new ones. As a consequence, the focus of the tax authorities has been to increase the number of audits, enforcement, and collection actions against captive taxpayers. 

In particular, the current administration's focus has been targeting its efforts against the biggest taxpayers. Those taxpayers represent 0.02 percent of the registered taxpayers but contribute 47 percent of the total tax revenue. In addition to those entities, the rest of Mexico's corporations contribute 24 percent of the total revenue. According to data published by the Tax Administration Service, the income derived from enforcement actions during 2022 grew 75.8 percent compared to 2018. In the same way, during 2022, the audits of big taxpayers increased by 80 percent compared with 2018. 

The Tax Administration Service is proud of the results of its program and efforts to increase collection efficiency. It includes a set of actions that allow timely identification of omissions or inconsistencies in fulfilling obligations, as well as carrying out enforced collection actions. With the implementation of the compliance reviews and a deep surveillance program, the scrutiny and control of taxpayers have been more efficient, which allowed the federal government, in 2022, to have additional income of  MX$147.541 billion, 86 percent more than in 2018 and 40.2 percent more than in the same period of the previous year.

Despite the success of these actions, the budget requirements of the federal government continue to grow, as the non-contributory pensions and social assistance programs increase, along with the resources transferred to the three major infrastructure projects favored by the current administration (Dos Bocas Refinery, Felipe Fuentes International Airport, and the Mayan Train). This puts significant pressure on the public finance balance and a permanent need to increase federal revenue. Furthermore, oil is no longer a safeguard, as PEMEX production continues to decrease.  

Under this scenario, it is clear that the federal tax authorities will continue, and even accelerate, their efforts to raise more revenue through collection and enforcement actions. We foresee a more aggressive position from the tax authorities, pursuing the objective of raising more revenue from captive taxpayers. The number of audits and refund denials will likely increase, which has become a significant source of revenue for the tax authorities in recent  years. 

Now, more than ever, it is imperative to be prepared and have a robust tax and legal team to face any requirement or proceedings from the federal tax authorities. We should always keep in mind that any request, assessment, or even threat from the tax authorities is by no means final since there are several legal remedies available for taxpayers to defend their legal rights. 

We have seen multiple cases where the current officials have not been particularly keen on abiding by the rule of law nor determined to adhere to actual facts and due process. While the tax authorities are entitled to review the proper compliance with the applicable tax provisions and obligations, taxpayers are equally entitled to pursue legal actions to defend themselves, considering that in any event, the final word will come from our Federal Judicial Branch, which has the obligation to act according to the Mexican Constitution.