Mexico Needs Its Regulators to Help a Tax Risk Program Succeed

The value of tax certainty has become increasingly important for multinational companies as international tax controversies grow more prevalent and complex. Traditional tools to mitigate double taxation and achieve certainty under local rules and tax treaties are still effective, but the growing number of audits and disputes have shown their limitations in timing, cost, and effectiveness.

Because of this, innovative tools to achieve tax certainty, such as the International Compliance Assurance Program, have been welcomed by a growing number of countries. The program, created by the OECD, allows companies to discuss their tax positions with governments. More than 20 countries, including the US, participate.

The Mexican Transfer Pricing Competent Authority plans to issue rules later this year to allow as many multinational groups operating in Mexico as possible to participate. If Mexico implements ICAP effectively, participating multinationals will experience increased tax certainty for their transfer pricing and tax matters. This will lead to a lower risk of tax audits and disputes, with reduced compliance burdens in terms of transfer pricing documentation and reporting.

Successful implementation also would improve the overall tax audit environment in Mexico for large taxpayers and tax administrators due to the sharing of information and coordinating risk assessments with other jurisdictions. This would reduce the need for separate, individual, and broad-scope audits, leading to fewer and more targeted tax audits for large taxpayers.

ICAP doesn’t provide the legal certainty of an advance pricing agreement, a mutual agreement procedure or, at a domestic level, a conclusive agreement—the latter being a domestic mediation process whereby taxpayers may settle an audit.

Nevertheless, if implemented in Mexico, it will be an attractive tool for taxpayers seeking for a degree of certainty in high-profile transactions not yet subject to audit in a shorter period of time compared to an APA.

Success for ICAP in Mexico requires a robust legal framework, such as the one provided for APAs, which has a clear set of rules and procedures that have been stable over the years. Ideally, the Mexican tax administration would issue an official letter determining the risk assessment and assurance situation of the relevant taxpayer. This letter could serve as a non-legally binding precedent for the taxpayer in an advance pricing agreement, mutual agreement procedure, or conclusive agreement procedure.

Robust legal certainty is crucial for taxpayers given some unfortunate precedents established by the Mexican tax administration, such as the recent audit campaign carried out to taxpayers that had voluntarily adhered to the last repatriation program that Mexico implemented back in 2017.

ICAP’s base of mutual understanding among jurisdictions might help assure taxpayers that its outcomes would be respected, but the Mexican treasury and tax administration must provide certainty to taxpayers that adhere to the ICAP through both regulations and day-to-day actions. This would avoid unfortunate experiences such as the repatriation program as the reviews against taxpayers who decided to apply such programs dwindled the trust in tax authorities given the nature of the aforesaid program.

Implementing ICAP is highly desirable to potentially avoid controversies with the way in which Mexican tax authorities carry out audits, but also due to Mexico being a formal member of the Organization for Economic Cooperation and Development. As such, it is expected to implement the highest and most innovative international tax standards.

Its effectiveness will largely depend on the robustness and clarity of the terms and conditions set forth in the future administrative rules for taxpayers—but also for tax officials across the Mexican administration.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Nadja D. Ruiz Euler is tax partner in Baker McKenzie’s Mexico City office focused on domestic and international tax advisory and controversy matters.

Carlos Linares-Garcia is managing partner of Baker McKenzie’s office in Monterrey, Mexico, and head of the firm’s North America and Latin America transfer pricing and economics practices.

Write for Us: Author Guidelines