MEXICO Law and Practice Contributed by: Ángel Escalante, Gabriel Rojas, Daniel Colunga and Brenda Favela, Escalante & Asociados
Recharacterisation of Transactions Tax authorities may also apply Article 5-A of the FFC to recharacterise transactions lacking a business pur - pose and Article 69-B of the FFC to presume the non- existence of transactions supported by tax invoices when the issuer lacks sufficient economic substance. Furthermore, the tax authorities may determine the simulation of legal acts for tax purposes and reclassify them accordingly, particularly in the context of related- party transactions and transfer pricing adjustments. In such cases, the authorities may recharacterise trans - actions according to their true economic substance, assigning the tax consequences that would reason - ably correspond to the transaction capable of gener - ating the expected economic benefit. Under Article 69-B of the FFC, the tax authorities may presume the non-existence of transactions document - ed through electronic tax invoices when the issuing taxpayer lacks the assets, personnel, infrastructure or material capacity required to carry out the activities or services described in such invoices. 6. Penalties and Sanctions 6.1 Tax Penalties Penalties are primarily established in the FFC and the MITL. The FFC Under the FFC, several administrative penalties are established, including monetary fines for the failure to comply with formal tax obligations, for example failure to: • file informative returns concerning related-party transactions; • report payments made to foreign entities; or • comply with reporting obligations related to prefer - ential tax regimes. The FFC also provides fines in cases of late payment or omission of taxes, and in certain circumstances the tax authorities may impose administrative measures such as the restriction or cancellation of the digital certificate required to issue electronic tax invoices. In
addition, it establishes tax crimes, including tax fraud and equivalent tax fraud offences, which may result in criminal sanctions including imprisonment and mon - etary penalties. The MITL The MITL also provides specific consequences in the context of international transactions. For exam - ple, if transactions between related parties are not conducted at arm’s length, the tax authorities may recharacterise the transactions according to their eco - nomic substance and determine the taxable profits that would reasonably have been obtained between independent parties. Similarly, under the preferential tax regime, income obtained through foreign entities subject to low taxa - tion must be recognised in the fiscal year in which it is generated, in proportion to the taxpayer’s direct or indirect participation, even if such income has not been distributed. For these purposes, the taxable result of the foreign entity must be determined in accordance with domes - tic tax rules, calculating the corresponding tax using the applicable domestic tax rate. Finally, national tax law also allows the tax authorities to deny treaty benefits under double taxation agree - ments when substantive requirements are not satis - fied, such as the existence of a valid business purpose or beneficial ownership of the income. Sanctions Administrative sanctions are imposed and enforced by SAT, while criminal offences are investigated by the Federal Public Prosecutor’s Office and adjudicated by the criminal courts. 6.2 Criminal Penalties Article 108 of the FFC establishes tax fraud offence, which is committed when a person, through deception or by taking advantage of errors, wholly or partially omits the payment of a tax or obtains an undue benefit to the detriment of the federal treasury. The applicable penalties vary depending on the amount of tax evaded but may include:
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