,

Mexican Tax Reform Introduces Anti-Abuse Rule

Victor Duarte
December 17, 2019

Mexico is introducing a tax reform to be enforced on 1 January 2020, implementing a general anti-abuse rule.  Its aim is to increase governmental control over the transactions carried out by taxpayers. To counter abuse of tax law, the anti-abuse rule will allow tax authorities to adjust the nature of the operations reported and, consequently, also the tax that has been accounted.

The New article 5A of the Federal Fiscal Code (es. Código Fiscal de la Federación -CFF-), allows the tax administration to recharacterize a transaction that doesn’t reflect any economic rationality and which has been carried out with the aim of gaining a tax benefit; a benefit that was not intended nor foreseen by the legislator when the law was created.

This new rule doesn’t seek to tackle tax fraud or tax evasion.  Its real purpose is to be able to disregard transactions that comply with the formal requirements of the law, under the premise that those transactions constitute an abusive practice, even though the taxpayer’s behavior is not strictly violating the written tax law according to its literal interpretation.

Comparative view: EU’s approach to prohibit abusive practices

These kinds of measures against the abuse of tax law are not a new concept.  Several territories like Australia, Canada, Hong Kong, India, Israel, New Zealand, South Korea, among others, embrace similar mechanisms in their legal framework to stop abusive practices from taxpayers.

In the EU, The Court of Justice of the European Union (CJEU) has developed an unwritten principle to the same effect through its jurisprudence for more than 40 years.

In the sphere of VAT, the principle prohibiting abusive practices was invoked in 2006 for the first time, in the landmark case Halifax, in which the CJEU established guidelines to assess why, when and how to apply this principle in order to modify certain transactions artificially created to obtain a tax benefit not foreseen or intended by the lawmaker. This judgement introduced a test based on two requirements that must concur in order to assess the abusive practice:

  1. An objective element consisting in the tax advantage obtained contrary to the purpose of the VAT provisions laid down by the Directive and the national legislation despite formal application of the conditions settled in those provisions; and
  2. A subjective element consisting in the essential aim of the transactions to obtain a tax advantage, based on objective factors.

Only these circumstances can determine whether the operation performed by the taxpayer should be deemed as abusive and be recharacterized to reflect the real purpose of the transactions.

Mexico’s general anti-abuse rule

In Mexico the new article 5-A of the reform to the Federal Fiscal Code envisages the possibility to recharacterize legal acts when the following concurrent circumstances occur:

  1. The legal acts lack business purpose.
  2. The gain of a direct or indirect tax benefit.

If those two factors are present, the result will be that the effects of that legal act will be the same as if the taxpayer had carried out the transaction to obtain the expected “reasonable” economic benefit. In other words, that transaction will be recharacterized to produce the legal effects as if the transaction would have a reasonable economic purpose.

The implications

This general anti-abuse rule, as it was approved, bestows a broad discretionary power to the tax authority to decide if a transaction falls under the scope of the rule. In practice it means that for the taxpayer to counter a tax authority decision, it must be able to demonstrate not only that the transaction was effectively carried out, but also that it has a congruent business or economic motive other than the fiscal benefit gained.

The main issue with this provision is the lack of a comprehensive and well-established test based on objective circumstances or elements of the legal acts to assess whether a transaction is abusive from a tax perspective. On the contrary, it heavily relies on the subjective assessment of the business purpose of the transactions and the reasonable economic benefit sought by the taxpayer. Consequently, the legal certainty risks being jeopardized when this rule is applied, and the foreseeability of the tax law and the legitimate expectations of the taxpayers could be diminished.  This in turn would make it even harder for economic operators to plan the fiscal effects of the transactions carried out in their businesses, creating an uncertain an unpredictable economic impact. 

The application of this general anti-abuse rule for VAT risks creating tensions with the principle of fiscal neutrality because certain operations could be recharacterized directly affecting the right to deduct input VAT or hinder the expected VAT recovery.       

The application of this new rule entails a big responsibility for the tax authorities and courts of Mexico. Taxpayers are entitled to organize their economic transactions in the most favorable way also taking into consideration the most favorable tax planning. To assess the abusive nature of a tax scheme is certainly a difficult task and it is therefore possible that the legislative branch of the government will have to re-evaluate and improve this general anti-abuse rule after the impact of its application has been assessed in practice. However, for the time being, businesses operating in Mexico must consider the possibility of having their transactions recharacterized to the detriment of their carefully crafted tax schemes.

Take Action

To find out more about what we believe the future holds, download Trends: Continuous Global VAT Compliance and follow us on LinkedIn and Twitter to keep up-to-date with regulatory news and other updates.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Victor Duarte

Victor is a Regulatory Counsel at Sovos TrustWeaver. Based in Stockholm and originally from Venezuela, he obtained a Law degree and a specialisation degree in Tax Law in his home country. Victor also earned a Master´s degree in European and Internal Tax Law from Lund University in Sweden.
Share This Post
Share on facebook
Share on twitter
Share on linkedin
Share on email

ShipCompliant
December 3, 2021
Top 3 Reasons to Monitor Brand Labels for Beverage Alcohol

The first step in bringing a new beverage alcohol product to market, whether for sale through the three-tier system or by direct-to-consumer (DtC) shipping, is registering it with the Alcohol and Tobacco Tax Bureau (TTB). This must happen to get a Certificate of Label Approval (COLA), which ensures that suppliers and producers comply with federal […]

North America Sales & Use Tax
December 2, 2021
Sovos Global Tax Determination Seamlessly Handles Black Friday, Cyber Monday Sales

While Black Friday and Cyber Monday 2021 didn’t break records for ecommerce sales, the numbers still showed that online shoppers were out in full force. A return to in-store shopping, global supply chain issues and the continuing pandemic were all cited as likely key factors in the small drop in online shopping numbers this year. […]

EMEA Tax Compliance VAT & Fiscal Reporting
December 2, 2021
How to Prepare for a VAT Audit

In our previous blog, we looked at the challenges that businesses face in submitting VAT and other declarations on an ongoing basis. However, the compliance cycle doesn’t end there as tax authorities will carry out audits for a variety of reasons to validate declarations. Why do tax authorities carry out audits? When VAT returns consisted […]

ShipCompliant
December 1, 2021
Looking Back at Beverage Alcohol Regulatory Change in 2021

As 2021 comes to a close, perhaps there is small comfort in knowing that the old adage of “the only constant is change” remains true for beverage alcohol. Rules and regulations on direct-to-consumer (DtC) shipping are adjusted, more states are opening options for DtC shipping and economic nexus continues to impact how suppliers, shippers and […]

North America Tax Information Reporting
December 1, 2021
IRS Grants Permanent Relief for ACA Recipient Forms 1095-B & C

The IRS released Proposed Regulations this week that permanently extends the time for businesses to provide the Recipient copy of Forms 1095-B and 1095-C. Rather than continue to issue annual Notices to extend the date to issue the statement to the recipient, these regulations propose to permanently amend §1.6055-1(g)(4)(i) i to automatically grant filers a […]