19/05/2023

Progress in tax control in Mexico

Americas Tax

Acknowledging a country’s supervisory authority for its performance is not common, particularly in countries where taxpayers believe they do not receive adequate services in exchange for their taxes. Mexico is a prime example of this situation, where complaints about inadequate healthcare, education, and security services are heard daily.

Despite these challenges, Mexico’s tax control authority has made significant progress, which deserves recognition. Heavy investments were made in infrastructure and systems during the 2012-2018 term to correctly monitor taxpayers’ compliance with their obligations. Today, these measures bear fruit for the Mexican government and serve as a benchmark for other countries that are often considered more developed.

The Mexican government can now monitor taxpayers’ income costs expenses and cash flow. Their revenue authority has coercive alternatives to enforce compliance. However, some perceive these measures as excessive and abusive yet effective.

The Mexican government can now monitor taxpayers' income costs expenses and cash flow. Their revenue authority has coercive alternatives to enforce compliance.

Electronic Invoicing

Electronic invoicing has proven to be a powerful tool for the Mexican authorities to control expenditure. In Mexico, any transaction generating income, whether it is goods consumption, assets purchase, expense, or service, requires an electronic invoice known as Online Digital Tax Receipt (CFDI). Every CFDI is available in PDF and XML formats routed through servers monitored by the revenue authority. Every CFDI is assigned a unique alphanumeric string to validate its authenticity. Taxpayers can only claim a tax deduction if they possess the CFDI files that the issuer emails to the consumer. Sometimes, the supplier allows consumers to generate their CFDI on a website. Failure to issue the CFDI or keeping the consumer from creating it will render a penalty. This system ensures deductions will match income, and the authority can access real-time information through its servers.

The implementation of electronic invoicing in Mexico has brought about several significant effects, such as:

1. Real-time monitoring

Real-time monitoring is now possible in Mexico as the authority can match taxpayers’ income invoiced through CFDIs with their Income Tax (ISR) and Value Added Tax (VAT) tax reports. Payrolls paid to employees must also be documented with CFDI to enable verification that the tax withheld and the payments of social security contributions are correctly made. The authority can also supervise wage earners, representing Mexico’s most significant segment of taxpayers, but frequently need to file subsequent tax returns.

The Mexican authority needs to notify the taxpayer before conducting regular electronic inspections. If any discrepancies or inaccuracies are found, electronic invitations are sent to taxpayers to clarify those discrepancies. This approach eliminates the need for expensive physical audits, making auditing much cheaper and more efficient. Failure to respond to these invitations may result in a direct audit by the authority.

2. Control of taxpayers’ operation

Under certain circumstances, if the tax authority is dissatisfied with the taxpayer’s explanation, fails to receive a response, or receives claims of alleged tax debts, the tax authority may suspend the taxpayer’s ability to issue CFDI by interrupting the tool. This can have a negative impact on a company that is unable to issue CFDIs, leading to a loss of income and potentially causing customers to turn to alternative suppliers who can provide CFDIs. We view this measure as authoritarian and counterproductive, as it restricts taxpayers’ ability to obtain resources to pay their taxes if necessary. Additionally, there is a risk that the tax authority may be abusive.

3. Difficult path for individuals

Although these measures have been mandatory since 2010 and 2011, implementing them has been challenging for businesses and individuals. Companies must pay for a service to process electronic invoicing, including a fee for each invoice issued; they also need to invest in computer systems and equipment. Generating, giving, and sending CFDIs is susceptible to multiple issues, such as communication glitches, errors during CFDI generation, or inaccurate email addresses. Moreover, CFDI issuance is rarely expected in rural areas of Mexico. This can lead to inconveniences for travelers who need to process deductions or reimbursement from inexistent CFDIs; the customer may never again visit those businesses. On a positive note, electronic storage eliminates the need for physical paper or storage space; all files are stored on the authority’s servers.

4. 360º Audit

The tax authority oversees taxpayers’ billed income and expenses and has access to bank records and credit card transactions to compare this information versus cash flows. This has been instrumental in detecting and preventing money laundering operations, including those involving foreign entities.

In conclusion, the Mexican authority’s progress in monitoring tax payments is commendable. However, widespread recognition and acceptance would be more meaningful if it resulted in an increased taxpayer base and greater ease for taxpayers, which has yet to be achieved. Only a small percentage of Mexicans pay taxes, and obtaining CFDIs for all expenditures remains complicated. Nevertheless, countries that have yet to implement these measures would do well in examining Mexico’s case and preparing for analogous policies. The trend toward using tax instruments is global.

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