Criminal prosecution touted in Mexico’s new anti-tax-evasion law

At just 13% of GDP, Mexico’s tax revenue is the lowest of all countries in the Organization for Economic Cooperation and Development (OECD). In an effort to increase revenue and compliance, in 2010 Mexico began enacted e-invoicing and e-accounting regulations focusing on government audit efficiency. In 2016, the Servicio de Administración Tributaria (SAT), which is Mexico’s tax authority, further legislated mandatory “electronic invoicing” called Comprobantes Fiscal Digital por Internet (CFDI). Mexico uses these new e-accounting reports to conduct real-time audits. In 2017, the SAT announced modifications to the standard CFDI, allowing Mexican authorities and their international counterparts to cross-reference transactions and ensure proper tax treatment and reporting in global business.

Unfortunately for the Mexican tax authorities, more than 8,000 companies between 2014 and 2019 dodged the system by selling fake invoices, often registering the invoices to phantom companies. In total, these companies issued over nine million fake invoices, defrauding the system of more than 350 billion pesos (~USD$18 billion) during that period.

Mexico to punish tax evaders with criminal penalties

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On Oct. 15, 2019, Mexico’s Congress (with majority of the new ruling Morena party) passed new legislation designed to punish companies that use fake invoices or are accused of tax dodging, noting that “they will be penalized as harshly as drug traffickers.” The new rule is part of President Andrés Manuel López Obrador’s increased efforts to eradicate ingrained corruption.

Starting on Jan. 1, 2020, anyone accused of serious tax irregularities, such as the use of a fake invoice by the company or its counterparts – including suppliers and service providers – regardless of accepting the invoice in good faith, could now face prison without bail under this new provision. This new law effectively enables the government to enforce mandatory pre-trial detention for those accused of malfeasance with faking electronic invoices. During the investigation process, this could lead to asset seizures and the freezing of bank accounts. There is a risk of business owners losing control of their companies, even before being found guilty or being exonerated.

With these changes coming into effect in 2020, the Mexican government will have broad statutory authority to criminalize a company that makes a good faith invoicing error, including incarcerating executives in maximum security jails. Even if found not guilty at the end of the process, it is unlikely that the Mexican authorities compensate accused parties for lost assets.

Considerations for U.S. companies operating in Mexico

With these changes, more than ever before companies operating in Mexico should be ready for when, not if, their invoices and transactions will become subject to government audit. Mexico’s new administration is relying on a budget surplus to fund social programs and keep voters content. President Obrador and his government have already begun providing more money directly to individuals, doubled pension benefits to current retirees, and is expecting to give scholarships and grants to 2.3 million young adults.

To maintain a budget surplus, the administration has instructed SAT to ramp up their enforcement efforts. SAT has a direct instruction to increase the amount collected in 2018 by 10% in 2019. The SAT announced that they collected 94,287,000 pesos in the first semester of 2019 just from audits; which is a record for the agency in a half-year period.

SAT accomplished this record with actually fewer revisions, but by selecting target companies that are showing anomalies in the system. The logic is that if they see one in the system, they will find more during the actual physical audit. Most of the money collected came from tax correction penalties to corporate taxpayers, and the second biggest collections came from foreign trade provisions violations or inaccuracies.

Companies doing business in Mexico, even when making transactions in good faith, need to implement robust internal policies, procedures, and controls that ensure compliance. The numerous changes to Mexico’s CFDI standards in the past five years demonstrate how quickly solutions and internal financial infrastructure can become outdated. Also, for U.S. companies in Mexico, increased scrutiny on invoices and receipts for tax purposes may undermine the credibility of other financial reports, and even draw the attention of other domestic and international regulators. The U.S. Justice Department and/or SEC may take interest in non-compliance that the Mexican government observes.

To learn more about how to identify and reduce risk for your business in Mexico, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.