Within business, tax is always a contentious issue. It is a significant consideration for all businesses, and one which needs considerable attention to remain compliant and trouble-free. This can be tricky; with the ever-increasingly complex tax and accountancy regimes to which businesses are bound, as well as growing globalisation, getting access to the right tax advice and guidance is now more vital than ever.
Discussing tax issues that arise in her work, the tax-related challenges within the Mexican M&A sphere, and detailing her thought leadership in this complex sector, is Ana Paula, Partner at SMPS Legal, a boutique Mexican law firm.
As a professional whose practice focuses highly on tax matters, what would you say are the most common tax issues that businesses face in Mexico?
Lately and most commonly, the base erosion and profit shifting project being analysed by the Mexican taxing authorities, bring into play all the intercompany transactions and payments. In connection therewith, the tax authorities are nowadays focusing on these types of payments denying the deductions based on the “reality of the service” or the excess payment under certain related issues, i.e. marketing and publicity expenses.
Another area that is common between all taxpayers, and on which they are struggling the most, is value added tax (VAT) refund requests. The review processes undertaken by the authorities and the requests for information and documentation have been extremely extensive, complex and in some instances absurd. They may be asking to deliver certain information in a particular format or even to create files that need to be prepared and as such delivered during the review process, even though the taxpayer is not legally bound to have it like that (e.g. specific cross-references of accounting registries with bank account statements).
You also advise on M&A matters, what tax challenges are involved in advising Mexican clients in this regard?
The challenge that we face with every transaction is to become more creative within the framework of the law, without giving grounds to challenge, and if so challenged, have the necessary business reasons, supporting documentation, and properly drafted documents to justify our client’s position and our decision to implement the recommended structure.
We have to be diligent on the formal requirements and the times involved in the transaction, i.e. try to match the timing of the transaction to the time required to properly analyse it, in order to offer the best alternatives. Mexico continues to be very formalistic in addition to the substance; there is still a high level of formalism to complete a transaction offering the greatest certainty on legal and tax outcome.
Is there a specific tax-centred case you have dealt with, where you would say you applied particular thought leadership?
Every case is different and has it specialty, and you always need to treat it like that and apply the best of your knowledge to reach the best result for your clients. We recently had a transaction where there were several jurisdictions involved, as well as individuals and corporations which were put in place prior thereto. This particular structure required us to prepare and put in place the necessary protections and contractual language to avoid risk being shifted to our client.
There are many instances where targets have to be prepared well in advance of a transaction, and we have to bring ourselves up to speed much quicker than usual, so that we properly identify any potential loopholes which may result in liability to our client.
What is commonly the process you adopt in tax audits and are there any particular difficulties involved?
It is advisable to be involved in any audit process from the beginning. Difficulties commonly arise at the time of the filing of information and document requests, by the way audit queries are responded to, and on the assessment of the matters questioned by the tax authorities.
In Mexico, if during the audit process with the tax authorities, all the documents and information are not filed when due, there is no opportunity to submit them during litigation.
I have been particularly successful in the mediation stage of an audit prior to entering into litigation, both in reaching a settlement directly (i.e. proving no wrongdoing) with the authorities, as well as having PRODECON review and mediate in the audit process. PRODECON has gained increased relevance and has acted autonomously (as required by law) in its review and analysis of matters brought to its attention, and helped to a great degree in favourably closing audit processes.