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New Substance-Over-Form Litigation Procedures In Mexico

Author:Mr Bernardo Ramírez Figueroa and Valentin Ibarra Melero
Profession:Chevez Ruiz Zamarripa
 
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Mexico has introduced new substance-over-form procedures that change the country's formal approach into one more compliant with the BEPS Project. Taxpayers should take note of these developments as they may impact tax disputes, writes Bernardo Ramírez and Valentín Ibarra of Chevez, Ruiz, Zamarripa y Cía.

Resulting from a G20 world leaders' request, the OECD created an action plan to deal with base erosion and profit shifting (BEPS) issues. The 15 actions of this plan provide governments with instruments to confront tax avoidance and seeking to tax profits in the jurisdiction where the economic activity is performed, considering the actual economic nature and substance of the said activity.

For years, the tax system in Mexico has been mainly formal. Therefore, taxpayers, tax authorities and tax courts have interpreted tax law based on a strict approach, with greater emphasis on formal procedures and compliance of formal requirements.

However, in recent years tax authorities have begun to carry out audits and assessments of tax deficiencies where they intend to tax the transaction according to its economic substance, prioritising the actual nature of the transaction, rather than its formal structure and more often, pushing into the background the compliance of formal requirements, in spite of the fact that such a substance approach exceeds the powers granted by the law to the tax authorities (With the exception of cases regarding criminal offenses and transfer pricing situations).

In this context, even some tax courts have begun to analyse cases and issue their judgments based on the economic substance of the transactions carried out by taxpayers, in spite of its form.

Following these local and international trends, in 2016 the Executive Branch proposed an amendment to the Federal Tax Code and the Federal Administrative Litigation Procedure Law, to introduce a new administrative procedure (substance-over-form administrative appeal) and a new law suit (substance-over-form annulment suit). This provides legal support to resolve tax controversies weighing economic substance of the business transactions involved, over formal requirements.

In January 2017, a legislative reform was published, allowing taxpayers to challenge a tax assessment through traditional means of defence (in which the form and the substance of the transaction would be analysed) or, alternatively, through the new substance-over-form procedures. According to this reform, only...

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