Mexico: Challenges and opportunities of litigation or settlement with the tax authorities

September 11, 2011

Manuel Sainz Orantes and Alejandro Torres Rivero of Chevez, Ruiz, Zamarripa y Cia discuss how tax litigation has changed in Mexico, noting that the tax authorities are complying more with the law. However, recent Supreme Court judgments have not always abided by legal provisions

Significant changes have taken place in tax litigation in Mexico, starting a new era concerning the courts' interpretation and application of tax provisions. The strictly formal system has been gradually abandoned, while the substance over form of operations has gained a major relevance in regard to the resolutions issued by the authorities.

Tax authorities have to abide by the many formal requirements established by the Mexican Constitution and legislation. Even so, they have often failed to comply with these requirements, and therefore, in most cases, tax litigation procedures have been resolved in favour of the plaintiffs, without a thorough analysis of the substance of the matter having been made.

Mexican legislation states that tax provisions establishing burdens or exemptions, are not subject to the authorities or courts' interpretation. Rather, they have to be applied as strictly provided by the law.

The Mexican Supreme Court, has determined that any legal provision, including tax regulations, are subject to the judges' interpretation, strictly applying the norm to the specific matter in litigation (in which no analogies or compelling reasons are applicable), the prevailing criteria being compliance with the legislators' intent.

Taxing authorities' compliance with the strict formalities established by the law has notably increased.

Sophisticated computer systems as well as increased and intensive training programmes provided to the personnel involved have provided added efficiency to tax proceedings.

In recent years, the Mexican government has hired high profile professionals who have gained experience through their work at the most important legal and accounting firms in the country. This has improved the quality and results of taxing strategies and proceedings.

There has been a considerable increase in the number of proceedings resolved in favour of the authorities, for the reasons mentioned here, as well as the increasing new generation of judges, who base their resolutions on the substance over form of the tax planning strategies implemented by taxpayers.

Globalisation has also played an important role in this regard. The participation of high-ranking officials from the Tax Administration Service (SAT) in the OECD tax committees, has given them access to information on tax planning operations implemented in other nations, mainly by multinational companies, providing a solid background for the implementation of taxing strategies in México.

In recent times, the sterile practice of auditing taxpayers without any specific purpose has been replaced by audits with clearly specific objectives and, in most cases, authorities have been able to identify the operations that are legally questionable.

A new situation, which might have seemed unthinkable in the recent past, has developed in which dialogue and negotiation within a legal framework has been made possible between taxpayers and the tax authorities, one in which they may reach agreements while still abiding by the law.

Intense scrutiny by taxing authorities of transfer pricing, the financial system, the pharmaceutical industry and companies that determine consolidated tax results, has been on the way for sometime now.

By the same token, the interpretation and application of the benefits established in the Treaties for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion, which Mexico has entered into, have been fully enforced.

Some mutual agreement procedures have been successfully undertaken and they have settled the disputes set out in the aforementioned treaties.

Mexican legislation has been recently modified to provide tax authorities with more flexibility while solving administrative remedies.

The administrative remedy (Recurso de Revocación) offers several advantages with respect to a tax litigation procedure:

The Recurso is solved within one year, whereas a tax litigation procedure would take two years to four years.
Reduction in the expense of posting the bond during the litigation, which consists of 2.5% a year of the disputed amount, plus interest for the following 12 months.
To initiate a litigation procedure, the taxpayer must have a solid case, based on documentary evidence, and expert counselling on the interpretation and application of the tax provisions, grounded on reason, and not based only, on legal loopholes or on an isolated interpretation of a specific legal provision.

Tax authorities have implemented successful lobbying strategies to generate the impression among some judges that taxpayers abuse the tax provisions based solely on the letter of the law.

Tax authorities have been trying to reform the tax legislation to include a general anti-avoidance provision, as well as more flexibility regarding the interpretation and application of tax provisions.

As for taxpayers, the possibilities of success in a tax litigation procedure are considerably increased, as long as their arguments are based on the interpretation and systematic application of legal provisions, and not solely based on tax benefits.

In regard to the contention of tax principles which breach the Constitution, The Mexican Supreme Court has recently radically changed its criteria.

From 2001 to 2005 having been contested through an amparo proceeding before the Supreme Court, several tax provisions were amended, included or eliminated, since they were declared unconstitutional.

However, in the last five years, the Mexican Supreme Court has issued its resolutions based mainly on economic and political considerations, notwithstanding legal considerations and the obvious constitutional violations, to the bewilderment of academics, Bar Associations and against the previous criteria expressed by the Supreme Court itself.

In this regard, although we do not fully agree with Jorge Castañeda, the Mexican politician and scientist, we are concerned with the opinion expressed in his book "Mañana Forever" that states: "…the rule of law in Mexico consists in wielding political power of influence, which is subsequently reflected in judicial rulings, not justice."

The trend clearly shown by the criteria of the Mexican Supreme Court in rulings in amparo proceedings, in which the unconstitutionality of the tax laws is questioned, seems to confirm Castañeda´s opinions, and if this is the case, Castañeda would, regretfully, be proven correct.

Enrique Ramírez Figueroa

Chevez, Ruiz, Zamarripa y Cia

Vasco de Quiroga No 2121 4to Piso

Col. Peña Blanca, Santa Fé

01210 México, DF

Mexico

Tel: +52 55 5257 7025

Fax: +52 55 5257 7002

Email: eramirez@chevez.com.mx

Website: www.chevez.com

Enrique Ramírez Figueroa is a partner of Chevez, Ruiz, Zamarripa y Cia. He began profesional practice in 1987 with Basham, Ringe y Correa, SC attorneys at law and joined Chevez in 1994, becoming a partner in 1996.

He has a law degree from the Universidad Panamericana (UP) and is a member of CCP, BMCA, IFA and IMEF (Mexican Institute of Financial Executives).

Manuel Sainz Orantes

Chevez, Ruiz, Zamarripa y Cia

Vasco de Quiroga No 2121 4to Piso

Col. Peña Blanca, Santa Fé

01210 México, DF

Mexico

Tel: +52 55 5257 7016

Fax: +52 55 5257 7002

Email: msainz@chevez.com.mx

Website: www.chevez.com

Manuel Sainz Orantes is a partner of Chevez, Ruiz, Zamarripa y Cia in Mexico City, which he joined in 1994. He is in charge of the legal area.

Manuel began professional practice in tax law in 1981, specifically in tax and constitutional litigation.

He has a law degree from the Universidad Panamericana (UP) and is a member of the IMCP (Mexican Institute of Public Accountants) and the BMCA.

Alejandro Torres Rivero

Chevez, Ruiz, Zamarripa y Cia

Vasco de Quiroga No 2121 4to Piso

Col. Peña Blanca, Santa Fé

01210 México, DF

Mexico

Tel: +52 55 5257 7072

Fax: +52 55 5257 7002

Email: atorres@chevez.com.mx

Website: www.chevez.com

Alejandro Torres Rivero is a partner of Chevez, Ruiz, Zamarripa y Cia in Mexico City. He joined the firm in 2001 in the legal area. Before that, he was with Ortiz, Sainz y Tron from 1989, becoming a partner in 1996. He began professional practice in Tax Law in 1987, specifically in Tax and Constitutional Litigation.

He has a law degree from the Universidad Iberoamericana (UIA), specialisation in taxes and international trade by the Universidad Panamericana (UP) and a specialisation in Amparo by the Legal Specialization Institute of the Supreme Court of Justice of the Nation.

He is a member of the International Bar Association, TTC and the BMCA.