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

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.