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COVID-19 and Tax Reform Creating Uncertainty for Mexican Taxpayers

Posted on Apr. 27, 2020

Luis R. Salinas is counsel with Creel, García-Cuéllar, Aiza y Enríquez in Mexico City and former head of the Taxpayers’ Advocate Office. Ramon de la Torre is an associate with Creel, García-Cuéllar, Aiza y Enríquez in Mexico City.

The authors thank Luis Vazquez for his helpful insight. The views expressed in this article are those of the authors and do not necessarily reflect the views of Creel, García-Cuéllar, Aiza y Enríquez.

In this article, the authors discuss how the combination of the coronavirus pandemic and Mexico’s recent tax reforms may create uncertainty for taxpayers trying to comply with tax rules.

A sweeping tax reform entered into force January 1 in Mexico. The package includes measures addressing base erosion and profit shifting and domestically designed rules to fight tax evasion. They include the country’s first-ever general antiavoidance rule; anti-hybrid, fiscal transparency, and earnings-stripping rules; new inspection powers; and tax crime prosecution scenarios that taxpayers are just beginning to understand and deal with.

While President Andrés Manuel López Obrador technically kept his campaign promise to refrain from introducing new taxes or increasing existing rates, the tax reform did introduce tight restrictions on tax deductions, created new withholding tax obligations, and generally increased tax compliance burden for taxpayers. The Mexican Tax Administration Service (MTAS) collection and enforcement actions also became more aggressive, including sending taxpayers informal “invitation letters” to pay taxes, and stringent sanctions when noncompliance is detected.

The much-needed1 tax reform was guided in part by OECD recommendations and a desire to put an end to an ongoing battle against tax evasion rooted in significant tax uncertainty. Taxpayers had just begun to get acquainted with the new rules and how they affect their ordinary course of business when they were hit with the economic fallout created by COVID-19. Unfortunately, the new tax rules do not help the situation.

The COVID-19 pandemic has altered our daily lives and every country’s economy. The world is in turmoil and economic activity has decreased sharply. Many countries have implemented tax relief actions, and the OECD has recommended specific tax administration and policy measures.2 In Mexico, however, no tax relief has come from the federal government, although the private sector has been clamoring for it.

The fall in oil prices resulting from the Saudi-Russian disagreement has put enormous stress on the Mexican government’s liquidity. Oil revenue is a major part of the federal government’s projected income in the 2020 budget. As an alternative, the government is banking on tax collection to generate revenue.

On March 30 Mexico’s General Health Council declared a sanitary emergency. The next day, the Ministry of Health ordered that only essential activities3 continue to operate — tax collection, along with health services, were classified as essential. The determination came at a rough time for business tax certainty. On March 18 the judiciary and the Tax Court suspended nonessential activities, and with a national lockdown in place taxpayers are scrambling to determine what to do if the tax authority decides to pay them a visit or to request information.

The Mexican government’s approach to the pandemic has differed greatly from those followed by developed and developing economies. On April 5 López Obrador addressed the nation to present his pandemic economic relief plan. It is based on three guiding principles:

  • increased public investment for economic and social development;

  • employment creation via governmental agencies and government-run companies; and

  • honesty and austerity.

No tax relief measures for businesses were announced in the plan. Taxpayers were left with the sole promise of no new taxes, accelerated VAT refunds, and the continuance of tax incentives for the northern border region (that is, a VAT rate reduction to compete with U.S. sales tax). If no federal tax relief plan is implemented, Mexican taxpayers will be forced to deal with the new and more stringent international and domestic measures of the 2020 tax reform, while managing to keep their businesses afloat amid the COVID-19 lockdown and subsequent economic fallout.

Most businesses have been ordered to close down. But they still must comply with any action of the MTAS related to ongoing audits, information requests, tax assessments, or new inspections. Failing to respond to an information request from the MTAS during an audit may result in a fine or an extension beyond an audit’s usual one-year term. Also, if the MTAS serves a notice and finds the taxpayer’s business closed, the MTAS may post the notice on the agency’s electronic bulletin, which forces taxpayers to constantly review the bulletin or risk missing a notice that may have detrimental effects on ongoing audits. During an official lockdown, this is a likely scenario.

Failure to address MTAS proceedings (other than an audit) could at best result in a fine and at worst result in the seizure of a taxpayer’s assets or bank accounts. It could also result in the cancellation of the digital stamp necessary to issue invoices and payroll stubs.

While no specific tax relief measures have been announced or implemented by the federal government, the tax code does provide a few alternatives to ease the burden of taxpayers in a crisis. These include:

  • reduction of monthly advance payments;

  • suspension of penalty enforcement actions and reduction of interest on taxes owed; and

  • deduction of losses derived from nonperforming credits.

Reduction of Monthly Advance Payments

Taxpayers must make monthly payments of estimated income tax in advance of the annual tax. These payments are due no later than the 17th day of the immediately following month. The advance monthly payments are not based on actual profits but rather on estimated profits, using a profit quotient from the prior year applied to the month’s gross income. In the event of an emergency or economic fallout, therefore, a taxpayer is forced to pay based on the previous year’s profits, even though it may be incurring losses now.

If the profit quotient is higher than the actual profit of the year as of the second half of the year, the taxpayer may file a request to reduce the advance payment amounts. Many taxpayers know today that their profits will be considerably lower than last year’s, so the monthly payments they will make from now until July (the earliest they can ask for relief), will likely result in overpayment.

Penalties and Enforcement Actions

The coronavirus health emergency constitutes an event of force majeure, which has a more extensive meaning than an act of God. The Mexican tax code provides that no penalties will be imposed if taxpayers commit a tax violation because of this kind of situation.

Also, no enforcement actions are to be applied once taxpayers file under oath before the MTAS that they are unable to fully or partially comply with the relevant request because of the force majeure event. Taxpayers must prove their situation by producing corresponding evidence. The General Health Council’s declaration of a health emergency should suffice as evidence. Taxpayers with good compliance records may also request a reduction of interest for taxes owed from 1.47 percent to 0.98 percent per month.

Deferral or Installment Tax Payments

At the taxpayer’s request, tax authorities may authorize the payment of unpaid contributions, along with corresponding inflationary adjustments and surcharges, either in installments or as a single deferred payment. The term for a deferred payment may not exceed 12 months and for installments may not exceed 36 months.

Conclusion

Without any tax relief except those measures already in the federal tax code, Mexican taxpayers will now have to deal with increased tax collection powers and new stringent international and domestic measures enacted within the 2020 tax reform. Furthermore, taxpayers must manage to keep their businesses afloat amid the COVID-19 lockdown and subsequent economic crisis, bearing in mind that tax collection has not been quarantined.

FOOTNOTES

1 Mexico ranked 36th out of 36 OECD countries in terms of the tax-to-GDP ratio in 2018, having a ratio of 16.1 percent compared with the OECD average of 34.3 percent. OECD, Revenue Statistics 2018.

3 Essential activities: (i) medical, paramedical, administrative, and support sectors of the entire National Health System, including those that participate in its services and supply, among which the pharmaceutical, production, and distribution sectors stand out; (ii) entities belonging to the fundamental sectors of the economy: financial; tax collection; distribution and sale of energy; generation and distribution of drinking water, food, and non-alcoholic beverages industry; passenger and cargo transportation services; agroindustry; chemical industry; hardware stores; courier services; guards performing private security tasks; nurseries and children’s day care; nursing homes and care centers for the elderly; telecommunications and the media; private emergency services; funeral and burial services; and logistics (airports, ports, and railways).

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