A Q&A guide to civil and criminal tax litigation in Mexico.
This Q&A provides a high level overview of the key practical issues in civil and criminal tax litigation, including: pre-court/pre-tribunal process, trial process, documentary evidence, witness evidence, expert evidence, closing the case in civil and criminal trials, decision, judgment or order, costs, appeals, and recent developments and proposals for reform.
To compare answers across multiple jurisdictions, visit the Tax Litigation: Country Q&A tool.
The Q&A is part of the global guide to tax litigation. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxlitigation-guide.
Overview of tax litigation
Issues subject to tax litigation
1. What are the most common issues subject to tax litigation in your jurisdiction?
The tax court system provides a forum where taxpayers can challenge the legality of administrative resolutions issued by the tax authorities through tax litigation. The most common issues subject to tax litigation initiated by taxpayers are based on the following grounds:
- The administrative resolution or law violates the Mexican Constitution.
- The tax authority that issued the administrative resolution or law had no legal basis for issuing it.
- Incorrect interpretation or application of tax provisions.
- Missing the exhibition of all the proper evidence during the audit process to challenge the tax authorities' conclusions.
- Rejection of the methodology, comparable companies and adjustments used by taxpayers for the transfer pricing analysis.
A new ruling issued by Mexico's Supreme Court provides that if a taxpayer fails to submit in a timely manner the information and documentation requested by the tax authorities during an audit, the taxpayer cannot then later file that information and documentation as evidence in a subsequent court action for annulment.
A taxpayer can either file a complaint in writing to the Federal Tax Court, or submit an online application through the Online Justice System.
2. Outline the legislative framework and principal pieces of legislation governing both civil and criminal tax litigation.
Civil tax litigation
Mexico follows a Civil Code system. In Mexico, like other countries which are influenced by the European judicial system (that is, the Roman system), the judicial process is based on the existing laws and court precedents issued by judges.
The power to impose taxes in Mexico rests primarily with the federal government. The Constitution grants exclusive powers to the Congress to levy taxes on the following matters:
- Domestic and foreign trade.
- The development and exploitation of natural resources.
- All commercial and industrial activities, including those of financial institutions and insurance companies.
- Certain public services.
- Several products (such as tobacco, petroleum, and products derived from petroleum).
The states also have tax levying powers but they are restricted by the Constitution from levying taxes in areas exclusively reserved for the Congress.
There are many tax agreements entered between the states and the Congress for avoiding double taxation at both federal and state level. Under those agreements, tax revenues collected by the federal government are allocated and transferred to the states in cases where their powers to levy taxes have been limited.
The most important laws and regulations governing the Mexican tax system are as follows:
- Federal Fiscal Code (FFC) and its Regulations.
- Income Tax Law (ITL) and its Regulations.
- Value Added Tax Law (VATL) and its Regulations.
- Special Production and Services Tax Law (SPSTL).
- Federal Taxpayers' Rights Law.
- Omnibus Tax Regulations.
- Tax authority standards (non-binding tax criteria) and jurisprudence.
In addition, Mexico has entered several Conventions for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with other jurisdictions with respect to taxes on income.
Finally, the executive power submits a Tax Reform Bill to Congress for each year with proposed amendments to the major federal taxes. Those amendments are usually enacted into law and become effective on 1 January of the following year.
Criminal tax litigation
In July 2016, Mexico adopted a new oral adversarial criminal justice system which is governed by the National Criminal Proceedings Code (NCPC).
Tax evasion and other criminal tax offences
3. What are the key elements that constitute tax evasion and other main criminal tax offences in your jurisdiction?
In general, the main tax offences in Mexico consist of the following (among others):
- Tax fraud.
- Crimes concerning the Federal Tax Registry.
- Crimes concerning tax accounting records.
- Non-disclosure, alteration or destruction of accounting systems and records.
- Claiming false tax losses.
- Omitting information from Informative Declarations.
- Disclosure and illegal use of confidential information.
- Crimes concerning official seals and marks.
- Illegal tag possession.
Liability for committing criminal tax offences will arise where a party does any of the following acts:
- Plan an offence.
- Engage in the conduct or commit the act described in the law.
- Jointly commit an offence.
- Use another person as an instrument to commit an offence.
- Deceive another person and encourage him to commit an offence.
- Intentionally help another person to commit an offence.
- Assist another person after the offence has been committed, in fulfilment of a prior commitment.
- Act as guarantor as a result of a legal provision, a contract or the byelaws, in crimes of omission which have material consequences (as a result of the overriding legal obligation that exists to prevent the crime).
- As a result of a contract or agreement that implies the development of an independent activity, propose, determine or carry out by themselves (or through an intermediary) acts, operations or practices, the implementation of which directly results in the commission of a tax crime.
Mexico makes a distinction between tax evasion (which is not regulated under the Federal Fiscal Code (FFC)) and tax fraud (which is a criminal offence under the FFC).
The offence of tax fraud is the main offence that is committed. It consists of either resorting to deceit, or taking advantage of mistakes, to avoid paying all or part of a tax contribution, or to obtain an undue benefit, to the detriment of the federal tax authorities.
The offence of tax fraud will be aggravated when it arises as a result of:
- The use of forged documents.
- The repeated failure to issue supporting documentation (invoices) for the activities conducted (if the tax provisions require that such documentation be issued).
- The submission of false data to obtain an undue refund of contributions from the tax authorities.
- A failure to maintain accounting records or systems required by the tax provisions, or recording false data in those records or systems.
- Failure to pay withheld, collected or charged contributions.
- The provision of false data to improperly offset contributions.
- The use of false data to credit or reduce contributions.
Assessment, re-assessments and administrative determinations in civil law
4. Outline the procedure for tax assessments, re-assessments and administrative determinations in civil law.
The Mexican Tax Authority (Servicio de Administración Tributaria) (SAT) (www.sat.gob.mx/Paginas/Inicio.aspx) is the main tax authority.
Mexico has a self-reporting tax system. Mexican taxpayers must file several tax returns during each year (for example, income tax and value added tax returns). Taxpayers must comply with several different tax obligations.
Therefore, to ensure that taxpayers (and parties jointly and severally liable with them, including third parties related to them) have complied with the relevant tax provisions, the tax authority has the power to conduct an audit of any taxpayer.
Whilst conducting an audit of a taxpayer, if the tax authorities become aware of acts or omissions which imply a failure to comply with the tax provisions, they will assess the unpaid contributions, surcharges and penalties in a ruling. A personal notification of that ruling must be given to the taxpayer within a six-month period following the date on which the audit was concluded. The tax liability of a taxpayer for a given tax year is determined based on the tax laws in effect during that year.
Under the tax provisions, the tax authority can modify tax profits or losses by using presumptions to estimate the price for which taxpayers purchased or sold assets, as well as the consideration amount involved in any transaction (other than sales).
Taxpayers have the right to file an administrative appeal against the review conducted by the tax authority prior to commencing formal litigation (see Question 5).
Resolving disputes before commencing court proceedings
5. What are the main procedures used to resolve disputes before commencing proceedings in a civil court/tribunal?
Taxpayers have 30 business days to file an administrative appeal with the tax authority against the ruling issued by the tax authority to resolve the dispute prior to formal litigation (the time limit runs from the day on which the taxpayer receives the notification of the ruling from the tax authority). It is not mandatory to file an administrative appeal with the tax authority before bringing an action in the Federal Tax Court, and this course of action is entirely at the taxpayer's discretion. However, the benefit of this appeal procedure is twofold:
- Taxpayers are not obliged to guarantee the payment of the tax assessment until the administrative appeal ruling is issued and served.
- Taxpayers can submit evidence which was not initially submitted to the tax authority during the audit.
If the tax authority fails to issue a ruling on the administrative appeal, and notify the taxpayer of that ruling, within three months following the date on which the appeal was filed, the silence of the tax authority can be taken as confirmation of the tax assessment. Provided the tax authority does not expressly dismiss the administrative appeal, the taxpayer can file a nullity claim with the Federal Tax Court.
Once the tax authority has issued a ruling on the appeal and notified the taxpayer of that ruling, the taxpayer has 45 business days to file a claim to nullify that appeal ruling with the Federal Tax Court. The taxpayer, upon filing a nullity claim with the Federal Tax Court, then has ten business days to guarantee the payment of the tax liability assessed in the appeal ruling.
A new settlement procedure was introduced in 2014, so that taxpayers who have been subject to a tax audit by the tax authority can elect to agree to a settlement. Where a taxpayer disagrees with the facts or omissions described in the last preliminary audit report, the final audit report or the provisional ruling, and believes the audit report or ruling constitutes a breach or misinterpretation of the tax provisions, the taxpayer can request that the tax authority adopt a settlement. The settlement is agreed by considering the fact(s) or omission(s) that the taxpayer disputes.
Taxpayers must submit a written application for a settlement with the Taxpayer Advocate Office. The written application must:
- Describe the fact(s) or omission(s) with which the taxpayer disagrees.
- Describe what qualifications the taxpayer believes should be attributed to those fact(s) or omission(s).
Any documentation deemed necessary can be enclosed with the application.
Once an application is received, the Taxpayer Advocate Office will request that the tax authority declare, within 20 days from the day on which the tax authority receives the request:
- Whether it accepts the terms of the settlement or not.
- The factual and legal grounds for not accepting the settlement, or the terms under which the settlement will be adopted.
Once the Taxpayer Advocate Office acknowledges receipt of a tax authority's answer, it will have a 20-day period within which to conclude the procedure. Whenever the procedure concludes with the execution of a settlement, it must be signed by the taxpayer and the tax authority, as well as by the Taxpayer Advocate Office.
In order to promote the adoption of settlements, the Taxpayer Advocate Office can organise round work tables, encouraging at all times that the tax authority and the taxpayer agree to the execution of a settlement.
Taxpayers who have executed a settlement will be entitled, on a single occasion, to a 100% remission of penalties. In cases of second or subsequent executions of settlements, the rules regarding the remission of penalties under the Federal Taxpayers' Rights Law will apply.
Elements of the offence in criminal law
6. What are the elements of the main criminal law offences in tax litigation?
The main criminal law offences subject to tax litigation are:
- Tax fraud.
The elements of the criminal offence of tax fraud are that a taxpayer intentionally deceives the tax authority to either:
- Avoid full or partial payment of any tax contribution.
- Obtain an undue benefit to the detriment of the federal treasury.
Every defence against tax fraud is different, but generally the taxpayer must prove the following:
- The failure to pay was not intentional.
- The behaviour did not cause any injury to the federal treasury.
- The expert opinion concerning the accounting that the tax authority has relied on to determine the existence of a credit or the lack of payment of a contribution is discredited.
The elements of the criminal offence of smuggling consist of importing goods into Mexico, or exporting goods from Mexico, and either:
- Omitting the total or partial payment of a tax contribution which was due.
- Failing to obtain the required permission of a competent authority to import or export the goods.
- Knowing that those goods being imported or exported have been prohibited from import or export.
The general defences against an indictment for the offence of smuggling are as follows:
- Proof of the legal import of the goods.
- Proof of payment that the corresponding contributions were made in order to legally import the product
- Proof that the imported goods are legally allowed.
7. What are the main procedures used for the early resolution of criminal law offences before trial?
The National Criminal Proceedings Code (NCPC) provides the following alternative dispute resolution solutions for the early resolution of criminal proceedings:
- Compensation agreements.
- Conditional suspension of the process.
- Summary procedure.
- Plea bargaining.
These are agreements between the victim and the accused which aim to settle the dispute between them that originated the criminal proceedings. Such agreements must be approved by the Public Prosecutor or by the judge, depending on the procedural stage at which they are granted, and can be agreed at any stage of the proceedings (even before the decision to open the trial procedure is reached).
This alternative solution can be used for the following offences:
- Tax fraud.
- Crimes committed against the Federal Register of Taxpayers.
- Printing or producing illegal reproductions of tax receipts.
Conditional suspension of the process
This can be formulated by the Public Prosecutor or the accused, and it consists of providing a detailed report on the payment of compensation for the damage caused, and creating conditions that guarantee the rights of the victim. Where a conditional suspension of the process is agreed, this extinguishes the right to proceed against the accused in a criminal proceeding.
The judge will set a time limit which applies to a conditional suspension of the proceedings, which cannot be less than six months or more than three years. The judge will also authorise the programme to repair the damage caused by the accused, and the accused can have one or more conditions imposed upon him to ensure that the damage is fully compensated.
Conditional suspension of the process can be used for the following offences:
- Tax fraud.
- Crimes committed against the Federal Register of Taxpayers.
- Printing or producing illegal reproductions of tax receipts.
This is a special procedure which is used to speed up the criminal proceedings. In this procedure, the defendant waives his right to trial and admits responsibility for the crime to obtain benefits in sentencing and save financial resources and time. The defendant is charged and agrees to be sentenced with the evidence presented by the Public Prosecutor.
Unlike plea bargaining (see below), the summary procedure does not imply an admission of guilt, only an admission of responsibility for the crime.
The accused benefits from a minimum reduction of one-third of the minimum sentence for the alleged offence, which can be further reduced to up to one-half of the minimum sentence for the alleged offence, depending on the legal classification of the offence and the facts of the case.
The summary procedure is carried out in open court before a judge, where the Public Prosecutor must be present along with the accused. The presence of the victim or his legal adviser is not required unless there is justified opposition to carrying out the summary procedure.
At the hearing, the judge ensures that the legal requirements are met, and that there is evidence to substantiate the allegation made by the Public Prosecutor. The judge listens to the arguments of the parties and finally provides a judgment, explaining the rationale and reasons taken into consideration.
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