Mexico authorities publish third set of effective tax rates for large taxpayers

By Arturo Treviño Villarreal, Tax Partner, Fratelli Consultores, Monterrey, Mexico

Mexico’s authorities on September 5 published the third set of metrics related to effective rates for income tax purposes applicable to large taxpayers. The metrics prescribe effective tax rates for large taxpayers engaged in various industries and activities that are more likely to garner scrutiny from tax authorities.

Together with previous metrics published on June 13 and August 1, the metrics now cover around 203 economic activities and 21 economic sectors which are currently under close scrutiny (payment of income tax for fiscal years 2016 and onwards).

According to relevant provisions of the Federal Fiscal Code (CFF), in the context of exercising their taxing powers, local authorities in Mexico should provide free of charge assistance to taxpayers. Such authorities may frequently publish benchmarks or reference standards in relation to profits, deductible items or effective tax rates corresponding to other entities or legal arrangements which obtain revenues, proceeds or profit margins from the performance of their activities based on the economic sector or industry to which they belong.

By publishing such information, the government intends to encourage tax risk assessments by taxpayers and to facilitate and incentivize tax compliance and voluntary self-correction.

All the metrics of the first, second, and third set take into account information contained in institutional databases, including, among others, annual tax returns, tax audit reports, data related to the fiscal status of taxpayers, information returns, electronic invoices, and customs declarations.

Key concepts

For purposes of the metrics, there are a series of concepts to be considered. “Tax risk” is defined as a contingency related to non-compliance of fiscal provisions which are applicable to a taxpayer or group of taxpayers, and which impact the correct payment of income tax.

“Effective tax rate” is computed based on information contained in the last annual tax return corresponding to the relevant fiscal year. The rate should be computed for the relevant fiscal year by dividing the income tax due by taxable revenues.

Local authorities recognise that effective tax rates may vary between fiscal years (either increasing or decreasing). Such variation may give rise to higher or lower tax risks for the same economic activity. Analyses prepared by authorities take into account the tax behaviour of taxpayers which form part of each economic activity. However, some elements such as macroeconomic factors may also differ between fiscal years, and therefore the effective tax rate could increase or decrease.

Additionally, “economic activities” are those contained in Appendix 6 of the current omnibus tax bill in force and effect.

Mechanism for a tax risk assessment of large taxpayers

The local tax authorities have issued answers to frequently asked questions (FAQs) on the risk assessment process, e.g., to determine if there is a higher or lower tax risk and the applicability and comparison of effective tax rates.

For example, authorities perform a grouping of taxpayers with a similar or identical principal or primary economic activity (information declared before the federal taxpayers’ registry is taken into account). The grouping specifically addresses the taxpayers’ economic activity, which corresponds to the main source of income.

The effective tax rate is computed based on the information declared in the last annual income tax return corresponding to the relevant fiscal year (2016 to 2019). A taxpayer is required to compute its own effective tax rate, and once this is determined there will be a comparison with the one published by local fiscal authorities. For comparison purposes, a taxpayer will need to look at the economic activity corresponding to its main source of income irrespective of the information provided to the federal taxpayers’ registry (e.g., principal/primary economic activity). Therefore, a taxpayer must compare its effective tax rate with the one corresponding to the economic activity effectively performed by such taxpayer, and which corresponds to its main source of income.

In case a taxpayer performs more than one or multiple economic activities, the comparison of effective tax rates must take into account such rates of the economic activity corresponding to the main source of income.

Deep tax audits

Taxpayers are encouraged to compare effective tax rates on a yearly basis (e.g., 2016 to 2019). Tax risks should be assessed, and, if necessary, taxpayers must self-correct their tax status through the submission of additional (supplementary) annual tax returns.

In case a taxpayer modifies its annual tax return, and consequently, there is an unlawful or artificial decrease of the effective tax rate, then this may trigger deep audits to be conducted by local fiscal authorities. Such audits would be directed to confirm that tax obligations were duly complied with and to identify the reasons and motivation for the reduction of the effective tax rate.

If a taxpayer’s effective tax rate would represent a higher fiscal risk in one or more fiscal years, such taxpayer would be allowed to self-correct its tax status. As mentioned, it would be necessary to submit additional (supplementary) annual tax returns.

Large taxpayers are required to review, and, if necessary, reverse the effects of tax planning strategies, related and non-related party transactions, domestic and cross-border corporate restructuring, interpretation of legal provisions, tax treaties application, tax-deductibility of payments, simulated transactions, etc.

Notably, tax authorities may exercise their audit powers at any moment to confirm that taxpayers have duly complied with fiscal compliance and reporting obligations under domestic law. The so-called deep tax audits may represent another tool for authorities to encourage taxpayers to opt for voluntary correction (self-correction). However, fiscal controversies may be expected as it appears that official rates look at taxable income/revenue and not profits.

Additional remarks

The publication of these sets of metrics may represent a step forward by tax authorities in closely supervising and scrutinising tax compliance by taxpayers, particularly large taxpayers. Although it is claimed that tax compliance programmes facilitated and sponsored by authorities are voluntary, and not mandatory, in reality they are used as pre-audit activities as well as a means to assess the willingness of a taxpayer to self-correct.

It is likely that in fiscal year 2022, there will be much more fiscal pressure from authorities to collect tax revenues while avoiding long and time-consuming tax court cases and administrative proceedings. Again, it is expected that large taxpayers will constitute the primary target for fiscal audits, although certain industries – such as automotive, mining, pharmaceutical, and digital/online platforms, as well as certain resident individuals – will be added to the list of preferred targets for reviews.