New Tax Litigation Procedure and Administrative Appeal of Substance Over Form
On 27 January 2017, it was published in the Official Gazette of the Federation, the Decree that amends and adds various legal provisions to the Federal Law of Administrative Litigation and the Federal Fiscal Code, that creates a new tax litigation procedure and an administrative appeal of substance over form. Such procedures must comply with the principles of orality, celerity, and must be focused on the economic substance of the matters over the form (substance over form).
Based on the above, the ensuing lines describe the most important characteristics, rules and particularities of each legal remedy:
Tax Litigation Procedure
- Only substantive arguments can be resolved through this procedure, when they are contesting final resolutions issued within a tax audit. This analysis must be made even though the tax authorities assess an omission based on formal aspects.
- The amount of the resolutions must be higher than 200 times the UMAS (unidad de medida yactualización) elevated per year (currently MXN 5,507,750).
- The tax litigation will be processed and resolved before the new Specialized Chambers created by the Federal Administrative Court (FAC). This new procedure will enter into force, the following working day after the new Specialized Chambers initiate functions (ie, no later than 30 June 2017).
- It is not possible to file this new litigation procedure against resolutions issued within an administrative appeal procedure, whereby the appeal has been withdrawn, not admitted, or against illegal notifications.
- The claim should expressly state the willingness to apply the substance over form litigation, and once this option is elected it is not possible to change it to the traditional, summary or online procedure.
- It is not necessary to guarantee the tax interest during the procedure to suspend any collection action (this benefit does not apply in further instances).
- Only that evidence which was submitted within the audit stage, the conclusive agreement (acuerdo conclusivo), or the administrative appeal will be admitted in the procedure.
- The expert witness testimony must be attached to the claim or its extension with the respective testimony.
- The Magistrate may summon the expert witnesses who rendered their opinions and the parties to an "expert oral hearing" with the aim to answer doubts or technical questions. During that hearing the parties may extend the expert questionnaire.
- The Magistrate may also appoint a third expert in order to resolve only the contradictory topics.
- The litigation procedure contemplates an oral hearing to set the controversy, where the topic sunder controversy will be confirmed. If one of the parties does not appear to the hearing, it will be deemed as accepting the topics under controversy and will preclude his right to file pleadings.
- In addition, private hearings could be held with the Magistrates with the presence of both parties in order to discuss the matter. If one of the parties is not present, it can be held with those present.
- As mentioned in the tax litigation procedure, the appeal should expressly state the willingness to apply the substance over form procedure, and therefore only those substantive arguments will be analyzed and resolved.
- The amount of the resolutions subject to this procedure must be higher than 200 times the UMAS elevated per year (currently MXN 5,507,750).
- The expert witness testimony must be attached to the appeal, and the experts could also be summoned to answer doubts or questions. During that hearing the parties may extend the expert questionnaire.
- If any of the formal requirements are omitted, it will be necessary to correct the omission within the following five business days. Otherwise, the appeal will be processed in the regular procedure.
- An oral hearing is contemplated with the presence of the authority that issued the resolution and the taxpayer, in order to discuss the matter. Such hearing must be requested through the administrative appeal.
- This procedure will enter into force, within the 30 calendar days after the publication of the decree.
We consider appropriate the creation of these new procedures in order to resolve the controversies between the taxpayers and the tax authority, since they will allow companies to reach rulings where the analysis and resolution of the substance will prevail over the form.
It is important to mention that these types of procedures will be useful to resolve disputes in a shorter time, without the need to guarantee the fiscal interest at least during the first instance, where it is possible to seek technical discussions and resolutions with the participation of the parties, expert witness and Magistrates specialized in tax matters.
In our opinion, this new alternative to decide on the substance of the matter will permit to enhance the audit processes as the tax auditors will be more careful by not focusing in formal transgressions only.
However, taxpayers that have the possibility to challenge an illegal tax assessment must analyze the advantages and disadvantages of filing a legal remedy including only substantive arguments, since the election of that route could mean losing the opportunity to allege formal transgressions, which in any event, could help to obtain a resolution that revokes the total tax liability.