Mexico’s legal tax practice has undergone many changes over the last several decades. Years ago, this field was dominated by accounting firms which were entrusted with the most significant tax work in Mexico. Lawyers did not play an important role and, in many cases, were only responsible for assisting accountants in tax controversies. Since only a handful of full-service law firms had significant tax practices, it was not uncommon that law firms relied on accounting firms for transaction-related tax issues.
Today, things are very different. Mexico’s legal tax practices are booming. It is inconceivable to think of a major full-service law firm without a tax practice. Tax lawyers play an important role in day-to-day business transactions and are no longer viewed as ancillary support for accountants. In fact, tax lawyers provide the primary tax advice in many business transactions. Accounting firms have consequently grown their legal tax departments and, together with in-house accountants, provide integrated tax advice to clients.
The relevance of legal tax boutiques in Mexico is ever-increasing. Traditionally, tax boutiques in Mexico were only active in representing clients in tax litigation and were not actively involved in other areas. Now, they provide clients with a wide range of tax services and are no longer viewed exclusively as tax litigators.
Tax litigation in Mexico has also evolved greatly over the past few years. Tax cases were previously litigated in Mexico by arguing failure to comply with formalities in the process by the tax authorities. Amparo lawsuits were also common. An amparo lawsuit challenges the constitutionality of a provision in the tax statute. Historically, most major tax reforms have been challenged by taxpayers through amparo lawsuits, and many times the decisions were favourable to the taxpayers. The consequence was that some taxpayers were exempted from the application of certain provisions of tax statutes until legislative changes were made to eliminate the unconstitutionality of these provisions. As legal tax practices have evolved, so too has tax litigation in Mexico. There are still tax cases in which the main arguments are based on flaws in the statutes, but most of the major tax litigation has become very sophisticated. In addition, when challenging the constitutionality of recent tax provisions, the Mexican Supreme Court has frequently ruled against taxpayers.
The latest data available indicates that the Mexican Treasury prevails in 52.58% of the cases that it litigates against taxpayers (January–March 2016). This was not the case some years ago. For instance in 2007, the Mexican Treasury only prevailed in 43.8% of the cases that were litigated.
The elimination of trade and investment barriers that stemmed from the adoption of the North American Free Trade Agreement, and the fact that Mexico was included as a member of the Organisation for Economic Co-operation and Development, has resulted in the legal tax practice in Mexico transforming from a domestic-oriented practice to a more international practice. Many of the recent tax controversies arising in Mexico have to do with international tax topics, whereas in the past, few Mexican practitioners dealt with international tax issues. Mexico has a network of over 50 international treaties to avoid double taxation, allowing businesses established in Mexico to benefit from the advantages that these treaties bring to international transactions. The Mexican legal tax practice currently has relevant practitioners with sound international tax capabilities that make multinational corporations confident that they will obtain the same sophisticated tax advice in Mexico as they do in other jurisdictions.
For the most part, Mexico has a tax system that is anchored in federal taxes, such as income tax and value-added tax (others include import and export taxes, social security and other excise taxes). The current corporate income tax rate is 30% for entities, and the highest tax rate for individuals is 35%. Additionally, Mexican residents are taxed on their worldwide income. The states levy some minor taxes such as payroll tax, property tax and taxes on hotel accommodation, as well as through co-operation agreements through which they are also entitled to collect federal taxes in certain circumstances. The system is indexed to neutralise the effects of inflation and has undergone several major reforms in recent years.
Foreign investors doing business in Mexico should be aware that, as opposed to many other countries where substance prevails over form, the tax system in Mexico has traditionally been very formalistic. It would be fair to say that the real substance of transactions has not been as relevant as their formalities. Failure to comply with formalities can result in severe tax contingencies for taxpayers.
The government of President Enrique Peña Nieto promised an important and significant reform of the Mexican tax system to take place the second half of 2013, although the reform enacted on 1 January 2014 was considered to have less significant an impact than expected. The following are among the most relevant aspects of the aforementioned reform: (i) the flat tax was eliminated; (ii) consolidation for tax purposes was eliminated; (iii) the tax on cash deposits was eliminated; (iv) a new tax on dividends of 10% applicable to foreign residents and Mexican individuals was included; (v) the gains from sales of shares through the Mexican stock market are now taxed at a rate of 10%; (vi) the top individual income tax rate was increased from 30 to 35%; and (vii) activities in the border region are now subject to the general 16% rate of VAT (instead of the former preferential 11% rate).
Mexico had an important energy reform resulting from the December 2013 amendments to the Mexican Constitution that allows the participation of the private sector in the oil and gas market. As part of said reform, on 11 August 2014, the Hydrocarbons Revenue Law was published. Among other things, this new tax law sets forth the rules under which the private sector and the State Productive Companies make payments to the Mexican federal government (conducted through the newly-formed Mexican Petroleum Fund) derived from revenues associated with contracts or assignments.
Additionally, in October 2015, rules for the creation of trusts for investment in energy and infrastructure (the so-called “FIBRA E”) were published. Since then, several tax rules have been released (the latest ones were published on 1 April 2016) to promote and enhance this new investment vehicle which should provide access to private investment primarily in mature cash-generating projects related exclusively to the energy and infrastructure sectors.
Finally, on 1 January 2016, amendments to Mexican tax statutes were enacted to require from multinational corporations the filing of a master information return, local information return and country-by-country report on a yearly basis. These new rules resulted from the application of Action Plan 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting of the OECD/G20 Base Erosion and Profit Shifting Project.