Table of Contents

• Introduction
• Subjects of this Procedure
• Purpose of the Tax Discrepancy
• How the Tax Authority Proceed in a Tax Discrepancy
• Legal Remedies

Introduction

With the arrival of new technologies and the increasingly less frequent number of cash transactions, individuals have optimized the control and administration of their assets more efficiently and securely, which allows them to make better business decisions. However, with those same tools, the State perfected surveillance of taxpayers’ assets, allowing it to detect sudden changes in them. With this, the taxpayer becomes an open book before the tax authority.

Due to such openness, it’s now important that the taxpayer in Mexico has suitable evidence to support his real financial situation. Thus, he will avoid paying fines and even spending time in jail if the authority detects an inequality between what the taxpayer declared as income and his real spending. The last is relevant because you should know that in Mexico, paying taxes is governed by the principle of ‘self-determination’ pursuant to article 6, third paragraph^[1] of the Federal Tax Code, which,  in essence, implies the taxpayer is the one responsible for calculating and determining the amount of his contributions that must pay in accordance with the tax law.

On the other hand, as we may see, although the information the tax authorities have at their disposal allows them to presume inconsistencies between the income declared to the treasury by the taxpayer, and what the taxpayer spends, it’s not enough to sanction him. Instead, tax authorities, through a procedure called tax discrepancy, must verify these inconsistencies after allowing the taxpayer to present evidence to clarify the discrepancy. If not, the authority shall then commence a tax enforcement procedure to collect the omitted contributions and apply the corresponding sanctions.

That’s not all. After the authority verifies the tax discrepancy, it may also file a criminal complaint against the taxpayer for the crime of equivalent tax fraud contemplated in article 109 of the Federal Tax Code, whose penalties range from three months to nine years in prison and which are imposed depending on the amount resulting from the discrepancy. Hence, defending yourself at the administrative stage when the tax discrepancy procedure begins is important.

Finally, you should know that this legal institution (tax discrepancy) was created in the Income Tax Law of 1978, and although over the years, it has had substantial modifications in its terms and legal hypothesis, its object and scope have not changed by lawmakers. Therefore, despite its ancient creation, it was not until the development of computer science and electronic media that this figure gained new importance that must be taken into account by the taxpayer, especially if the global trend is to do more commercial transactions through electronic means of communication.

The creation of this legal institution is justified by the Mexican state’s goal of ensuring that taxpayers comply with their tax obligations correctly and in accordance with their real situation. This is derived from its fundamental obligation to contribute to the public spending of the different levels of government, provided for in article 31, section IV^[2] of the Political Constitution of the United Mexican States.

Subjects of this Procedure

The tax discrepancy procedure is aimed exclusively at taxpayers who act as natural persons due to the fact that this figure is regulated in Title IV, called Natural Persons of the Income Tax Law. Also, since legal entities as companies will never have discrepancy problems because there is greater control for them to acquire goods and services in the tax legislation itself. In any case, natural persons belonging to legal entities, such as their shareholders, could incur a tax discrepancy.

Finally, I want to clarify that the tax discrepancy applies to taxpayers who are registered in the Federal Taxpayer Registry and to those who have failed to do so. Hence, the fact that you have not been formally registered with the tax authorities does not prevent them from initiating this procedure against you or, much less, from forcibly registering you in their registry.

Purpose of the Tax Discrepancy

This procedure is enacted in article 91 of the Income Tax Law and, in essence, consists of verifying whether a taxpayer’s expenditures in a calendar year are greater or less than the declared income or those that it would have been up to the taxpayer to declare. Expenditures that, in terms of law, consist of expenses, acquisitions of goods, deposits in bank accounts, financial investments, or credit cards.

Said expenditures shall be preliminarily presumed by the tax authority as income when the taxpayer, being obliged to take notice of them, does not do so or, failing that, declares income lower than the expenditures. In the same sense, those ‘passive’ taxpayers who, without being registered in the Federal Taxpayer Registry, make expenditures for the acquisition of goods and services.

For this purpose, the tax authority has broad powers to use its information, either because it appears in its files, documents, or databases or because it has been provided by a third party or another authority, to determine the number of expenditures. It can also request, where appropriate, information that is only in the taxpayer’s possession.

Thus, the tax authority could have at its disposal information regarding payment statements of taxpayers, clients, and suppliers; tax payments and withholdings; notary public information statements; donations made; operations carried out that caused Value Added Tax; operations in tax havens; dividend payments; payments made abroad; information from public and private service companies; registrations with the Mexican Institute of Social Security (IMSS), Institute of the National Housing Fund for Workers (INFONAVIT); records of the Public Property Registry and information from the banking system in Mexico, among others.

How the Tax Authority Proceed in a Tax Discrepancy

At first, the tax authority must notify the taxpayer by letter informing them that it has presumptively detected a tax discrepancy between their expenditures and declared income. For this purpose, the notification of the letter shall contain: 1) the amount of the expenditures detected, 2) the information used to know them, 3) how it was obtained, and 4) the resulting discrepancy.

Once the notification has been made, the taxpayer shall have 20 business days, counting from the day following the date of notification, to clarify in writing the origin or source of the resources with which the expenditures were made in the investigation and to present suitable evidence to prove that the amount of these expenditures does not constitute income that must be taxed in terms of tax legislation.

On the other hand, at its discretion, the tax authority may, one time only, require information or documentation additional to that provided by the taxpayer, which must be presented within 15 business days counted from the day following the taxpayer’s requirement, which, in the absence of any special provision to the contrary, may be extended for another 10 business days in the case of information whose content is difficult to provide or obtain.

Once the taxpayer provides the information required, or the deadline for providing additional information has elapsed, the authority shall be able to resolve, and if it verifies that a tax discrepancy did exist, it shall formulate a delinquent tax declaration of the omitted contributions and the taxpayer, as a general rule, shall have a period of 30 days to pay them along with their accessories or guarantee them if they wish to challenge with a legal remedy such declaration.

Legal Remedies

By virtue of the fact that when the authority concluded that a tax discrepancy did exist and, therefore, determined the omitted contributions in its resolution, the taxpayer has as legal remedies those established in the Federal Tax Code and Federal Law of Contentious Administrative Trial to challenge such determination. These legal remediations include revocation relief and Ordinary Contentious Administrative, which I will discuss in another blog entry.

However, for now, you should know that in both legal remedies, taxpayers have 30 business days to file them, counting from the notification of the challenged resolution, keeping in mind that the revocation relief is optional before going before the Federal Court of Administrative Justice.

By Omar Gómez

Partner

beLegal abogados s.c

Abogados en Ciudad Juárez, Chihuahua, México

Mexican Tax and Administrative Attorney

Contact me at [email protected]

Visit my personal site www.ogomezabogado.com

Contact the firm: [email protected] or call (656) 774-75-73 for English assistance or (656) 271-41-43 for Spanish assistance.

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^[1] Article 6.- […]

It’s up to taxpayers to determine the contributions they are responsible for, except as otherwise provided

expressesly in the law. If the tax authorities must make the determination, taxpayers

shall provide the necessary information within 15 days following the date of the tax causation.

^[2] Article 31. The obligations of Mexicans are: […]

IV. Contribute to public expenses, both of the Federation, as well as of the States, of Mexico City and of the Municipality in which they reside, in the proportional and equitable manner provided by law.