Tax discrepancy in Mexico and beyond: what you need to know
By Sergio Guerrero Rosas, Guerrero y Santana, S.C.
The word “discrepancy” itself has many negative connotations: uneven, unequal, possibly even unfair. Indeed, this is how it is considered in tax terms. So tread with caution, treat it with a healthy dose of respect, and, most importantly of all, be aware of the significant risks that tax discrepancy carries.
What is tax discrepancy?
Tax discrepancy refers to the difference that occurs when a taxpayer is shown to have paid out more in expenditure and investment than they have declared in income within the same tax year. The implication here is that some income has not been properly reported, a matter that has gained in importance in recent times for both businesses and individuals.
How do the authorities view it?
As far as the tax authorities are concerned, tax discrepancy is not only a sign of additional wealth, but also of a lack of control. It shows a lack of discipline regarding income and spending, and it will be assumed by the authority that the taxpayer has omitted certain revenues from their declarations.
Why has it become a bigger issue in recent years?
In a nutshell, the tax authorities are getting better at what they do. Digital evidence is easier to record, trace and calculate than any paper trail, and with so many resources now available to them, authorities are much more efficient and accurate in their investigations into outgoings.
Empowered by a series of reforms and motivated by the will to combat money laundering, profit shifting and tax evasion – as well as to preserve the integrity of the tax systems themselves – tax authorities are supported by a network of automated systems that are in constant operation. Access to a host of databases, and reporting from financial institutions and other third parties, means that all kinds of payments can be taken into account that previously might not have been recorded. Credit card payments in particular allow authorities to view spending on travel, clothes, furniture, cars, boats, jewellery and more – and all with relative ease.
What are the consequences? Tax!
The taxpayer will be notified of their new tax debit balance, which will include all the respective recalculations, surcharges and related fines. In Mexico, this must be paid or guaranteed within 30 days of that notification, or the taxpayer will have to go to court.
El Código Fiscal de la Federación (the Federal Tax Code in Mexico) establishes that tax discrepancy offenders will be sanctioned with the same penalties as those who commit tax fraud. This means that, in Mexico, a proven case of tax discrepancy could bring a prison term of anything from three months to nine years.
Overview and recommendations
We must accept – and absorb – the fact that the automated systems of tax authorities allow them to follow up tax discrepancies with relative ease. Just one touch of a keyboard is enough to reveal inconsistencies between declared income and expenditures. Because of this, it is difficult to imagine that anyone could easily escape this far-reaching tax procedure.
For this reason, we strongly recommend that taxpayers take great care to maintain control of their expenses, especially electronic transactions, while remembering that it is necessary to declare all income including donations, loans and inheritances. With this kind of prudency, our clients and partners can be confident of avoiding any risk of tax discrepancy, and the threat of being investigated, charged or sentenced.
Sergio Guerrero RosasGuerrero y Santana, S.C., Tijuana, Baja California, Mexico
T: +52 664 634 2523
Sergio Guerrero Rosas is the founder and Managing Partner of Guerrero Santana. He has 12 years’ experience consulting for Austrian, Italian, Japanese, Chinese, Mexican and American companies, which has shaped his professional profile. Sergio is fluent in Spanish and English. He provides tax and management consulting services to a wide variety of organisations.
Guerrero Santana S.C. was founded in 2003 with a team of business, tax and legal experts, and is today one of the most important professional service providers in Mexico, offering personalised and comprehensive support to individuals, sole traders, corporations and multinationals.
Published: October 2016 l Photo: Colourbox.de - Syda Productions