British Embassy Mexico City
Mexican government continues to be on the front foot in following OECD best practice on tax policy. Mexico’s tax authority now empowered to increase audit of, and prevention against, aggressive fiscal planning by multinationals, including profit shifting.
On January 14th 2014 the Ministry of Finance (SHCP) and Internal Revenue Service (SAT) jointly hosted a seminar on “The fight against tax base erosion and profit shifting”. The purpose of the seminar was to discuss how the recent Mexican fiscal reform would enable closer supervision of multinationals’ tax affairs, in line with actions 5, 11 and 12 of the OECD Action Plan on Base Erosion and Profit Shifting (BEPS) (http://www.oecd.org/ctp/BEPSActionPlan.pdf). Whilst the seminar was for an internal Government audience, the OECD and Spanish Treasury were present, along with a consultant working for the American Chamber of Commerce.
The Head of SAT, Aristoteles Nuñez, did not name and shame foreign companies but said that there are foreign companies currently operating in Mexico that pay no corporate tax, instead paying tax at a rate of 14% or less in the tax havens where they are registered (locally know as fiscal paradises). The Government believes that 270 out of 16,000 firms identified as large taxpayers engage in base erosion practices. The Ministry of Finance is already hosting informal audits with multinationals in order to tackle and eradicate this ‘aggressive fiscal planning’, which Nunez denounced as an act of defiance against the Government. Whilst he made it clear that there would not be a witch-hunt, he warned that SAT would use all the legal instruments available to it to punish those companies which engage in illegal tax avoidance practices, as well as actively discourage and block those which engage in legal, but morally questionable, actions.
SAT will also join countries such as the UK, Denmark, Finland, Greece, Ecuador and Costa Rica in publishing a ‘blacklist’ of companies and/or people who have not paid taxes. This has been controversial because of the perceived lenient Governmental response towards big businesses which engage in tax avoidance and receive lenient late payment terms or are absolved from payment altogether.
The Executive Council of Global Enterprises and the American Chamber of Commerce have declared that they will publish a statement on the new SAT regime as more detail is revealed. But it is considered unlikely that these new fiscal measures will create tensions between the federal government and large businesses.
Mexico is not alone in facing this problem with multinationals, and has been an active participant in discussion of the issue within the OECD and G20, as well as being the first developing country to sign up to the UK-led pilot initiative for automatic information exchange around last year’s G8 Summit, which Peña attended. Mexico also put the issue on the agenda of a meeting they recently hosted for Asia-Pacific parliamentarians. Mexico supported the views of Japanese legislator Mikishi Daimon who highlighted the need for G20 action over governments’ race for lower corporate tax rates, which hurt the fiscal base of both developed and developing countries.
The new rules came into force on 1 January under the Mexican Fiscal Reform bill, which empowers the government to prosecute domestic and multinational companies for aggressive tax planning activities, as well as track credits, loans and cash deposits throughout the financial system as proxies of the current gross income of taxpayers.
The benefits of getting this right in Mexico are clear, with the potential for significantly increased government revenues. The recently-passed energy reform will reduce the Government’s income from the state-owned oil company, Pemex, and so it has a strong incentive to toughen its tax collection system.
The challenge for Mexican authorities will be to design an institutional scheme that allows the SAT to punish illegal activity and discourage questionable practice but, at the same time, respects international agreements (i.e. double taxation agreements) that Mexico has signed with other countries. It is clear that tax rate homologation agreements across economic regions and special taxes on speculative capital could discourage the race for lowering tax rates. The responsibility for this problem needs to be jointly shared by developed countries and emerging markets, and is already being taken forward by the OECD, G20 and G8.
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