The Mexican Fiscal Reform will bring an Avalanche of Lawsuits

Implications: The implementation of the fiscal reform will not be an easy task. As it happened with previous changes to the tax law, experts say that many companies are now preparing a multitude of requests for constitutional relief (“amparos”) against one or more provisions of the new law.          

Analysis:

The fiscal reform which was approved last September is expected to increase the Mexican government's (non-oil) tax revenue from 10% of GDP to 12% by 2012, bringing in an extra $10.3 billion in 2008. It will close the gap of the traditional evasion of income tax by companies, reduce dependence on Pemex’s oil revenue and boost public investment by 50%.

 

However, its implementation will not be an easy task. As it happened with previous changes to the tax law, experts say that many companies are now preparing a multitude of requests for constitutional relief (“amparos”) against one or more provisions of the new law. In the past, tax lawyers and accountants had a handful of lawsuit “models” that could easily be applied when needed.

 

This time though, the “amparos” will not be presented against the new Single Rate Tax Law (IETU) as a whole because not all taxpayers are equally affected. Fiscal lawyers and auditing firms will have to work on a case by case basis, and the plaintiffs will opt for a “menu a la carte” of possible complaints.

 

Following are some contentious aspects of the new IETU tax law that have been raised by tax experts:

 

·        Dissallowance of fringe benefits and interest payments as deductions from the IETU.

 

·        Dissallowance of a deduction for royalties. According to tax experts, there is no justification for forbidding the deduction of royalties between related parties because they represent indispensable expenditures for earning the revenues (object of the tax).

 

·        Different treatment for investments. For investments pending to be amortized and acquired between January 1, 1998, and December 31, 2007, the taxpayers are granted a 50% credit under the IETU. For investments between September 1, 2007 and December 31, 2007, 100% of these investments may be credited. This different treatment is unjustifiable since both cases refer to investments that foster company production. Consequently, the tax equity principle is violated.

 

·        IETU tax. The rates that will be applied in the next three years (16.5% in 2008, 17% in 2009, and 17.5% in 2010) do not guarantee the proportionality of the tax.

 

When considering that the IETU is a new tax, Mexican courts do not have jurisprudence on which to base their rulings. An amparo should be requested within 30 days after the entry into force of the IETU Law, on January 1, 2008, or within 30 days after the submission of the first provisional payment of the tax.

 

Tax experts anticipate that a good number of amparos will be granted because the fiscal reform creates tax inequalities and violates the principles of proportionality and judicial certainty.