Mexican Tax Authorities Increase Scrutiny of Portfolio Entities and Company Transactions

2020’s fiscal overhaul in Mexico – the most aggressive in recent years – has significantly impacted the way business is done in the country. In the context of global subsidiary governance, it has had a particularly large effect on the rules that apply to supervising bodies regarding the transactions companies perform, contracts they execute and associated compliance requirements.

The Tax Administration System (SAT) criteria and regulations have shifted attention towards the task of tackling schemes that may result in tax avoidance or, in general, disrupting reporting/paying taxes that otherwise would have been taxed differently. Hence, Mexico’s fiscal reform is not just about creating new tax systems or reforming existing ones. Instead, it looks into ordinary commercial dealings with a rigor and scrutiny never seen before. This now imposes an unprecedented burden on businesses to demonstrate, not only the existence of such a commercial transaction, but that the deal was actually realized and deliverables met. The aim, ultimately, is to crack down on fictitious transactions.

In many cases, the tax authority is allowed to request further information on the transactions in question, or associated formalities, in order to ensure the probity of tax compliance mechanisms, especially where companies have been seeking deductions or any other intended tax benefit.

Additionally, the recently reformed Federal Fiscal Code, which came into force this fiscal year, also puts far more scrutiny on the actions of General Directors, Managers or any person responsible for the companies’ management, including board members. It means that these parties could be personally and jointly liable for serious misconducts, including:

  • Being unreachable for the Tax Authorities at their reported business address, either because the fiscal address is non-existent or inaccurate or no one is available to respond for the company’s affairs;
  • Failing to contribute previously withheld or collected resources from third parties as required by tax laws;
  • Issuing irregular tax receipts or supporting accounting and tax compliance filings through irregular tax receipts, even those issued by third parties with whom the company conducts its business activities, and;
  • If a company is deemed non-compliant by the Tax Authority due to the above events or for seeking a tax deduction or credit based on transactions that were not properly supported.

Corporate Law provides the legal framework for managerial duties and responsibilities, including fiduciary duties towards shareholders and partners. These duties include liability for a series of corporate obligations, such as:

  • Keeping compliant accounting systems and records;
  • Properly executing business plans as directed by shareholders;
  • Ensuring that capital contributions are properly and fully made.

This new, progressive fiscal regulation imposes additional burdens on board members, representatives and senior officers to the extent of holding them personally and jointly liable for ensuring the full compliance of the companies they operate.

Whilst by its nature, the onus of this regulation falls primarily on those authorities responsible for ensuring fiscal legislation and those whose role it is to investigate any potential irregularity, there is much companies can do to improve existing corporate governance practices vis-à-vis commercial transactions to avoid prospective risks. Critically, this includes evaluating preventive measures and ensuring management bodies begin a full scale review of existing corporate and commercial practices. This is increasingly vital, not only to mitigate potential exposure for the company, but also risks that now can be transferred to the personal liability of shareholders, board members and representatives due to unforeseen events.

Carlos Murillo, partner in the corporate practice of DiazIgareda (diazigareda.com)
Citco GSGS Focus – Summer 2020