Global Tax Alert (News from Americas Tax Center) | 28 August 2013

Mexican Tax Authority increases focus on auditing supply chain structures

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Recent developments within the Mexican Tax Administration Services (SAT, for its acronym in Spanish) demonstrate an increased focus on auditing supply chain restructurings. This increased focus appears to be a consequence of personnel changes within Mexico's Treasury Department, including the SAT. Specifically, the newly appointed SAT's General Administrator for Large Taxpayers has expressed in several forums his intent to identify and challenge companies that have undertaken restructurings to reduce their tax liabilities in Mexico while maintaining their business functions and customers in Mexico, including maquila conversions. This audit program initiative is intended to challenge companies that have been engaged in what the SAT considers “aggressive tax planning,” whereby profit shifting has been identified.

Moreover, an announcement published on the SAT's webpage in August 2013, notified taxpayers about the SAT's tax audit strategy focusing on supply chain structures. The notice expressly addresses cases in which non-Mexican residents perform business activities in Mexico without performing these activities through a permanent establishment (PE). The purpose of this initiative is to verify that proper tax compliance is followed under such supply chain structures.

This audit initiative presumably targets maquila conversions, toll manufacturing conversions, contract manufacturers, limited risk distributors or commissionaire structures, as well as migration of intangibles outside of Mexico.

In practice, we are aware that the SAT is aggressively challenging exit taxes in cases of conversions and migrations, but also assessing PEs to Principals carrying out activities in Mexico, rejecting certain deductions, imposing transfer pricing adjustments, recharacterizing operations and, in certain extreme cases, arguing that these types of structures are shams.

In addition, in light of the recent report issued by the OECD on base erosion and profit shifting (BEPS), and the OECD's recommendation to the Mexican tax authorities to discourage aggressive tax-planning strategies, the SAT has more pressure on it to quickly identify abusive corporate restructures in Mexico.

All that said, Mexico's tax and customs laws continue to provide a friendly framework for supply chain planning and thus, companies with the appropriate set of facts should not be discouraged by these developments and should continue to evaluate tax-efficient structures for their manufacturing and/or distribution activities in Mexico.

Finally, please note that although no specifics have been communicated as to the procedures that the SAT will follow under these audits, companies should perform a review (“health check”) of their structures to confirm that proper documentation supporting the structures in question is in place and that functions, assets and risks are properly allocated and compensated pursuant to the guidelines established upon implementation of their restructures.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Chicago
  • Michael Becka
    +1 312 879 3370
Mancera, S.C., International Tax Services, Mexico City
  • Estela Miranda
    +52 55 110 18 404
Mancera, S.C., Business Tax Advisory, Mexico City
  • Jorge Libreros
    +52 55 528 31 439
  • Enrique Ramirez
    +52 55 528 31 300

EYG no. CM3769