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New rules that entered into effect January 1, 2008, allow the Mexican tax administration (SAT) to disregard a transaction and assess tax on what the SAT determines to be the "real" transaction in order to arrive at the "appropriate" tax effect. According to Article 213 of the Mexican Income Tax Law (MITL),* the tax authorities may, during the course of a normal audit and for purposes of the preferential tax regime (Title VI) in the MITL and to determine Mexican-source income, conclude that a particular transaction has been fabricated or "simulated" and tax the operation in accordance with the "real" transaction.
The addition of Article 213 to the MITL is the result of a protracted effort by the tax authorities to enhance their ability to combat tax evasion and it represents a "better-than-nothing" outcome from the SAT's perspective. That is, the SAT initially insisted on an all-encompassing ability, which was to be introduced in the Federal Fiscal Code rather than the MITL (thus capable of being applied to all taxes/operations regardless of whether the parties were related). Fortunately, this amendment was repealed by Congress without ever taking effect.
When the SAT determines that a simulation has taken place, it must make a declaration that includes the following:
* Identification of both the simulated and the real acts;
* Quantification of the tax benefit derived as a result of the simulation; and
* Identification of the elements considered to be the basis of the simulation, including the intent of the parties.
The SAT is permitted to use presumptions in determining whether a simulation exists.
"Simulation" as a Tax and Civil Law Concept
The existence of a "tax simulation" is essential to the tax authorities' power to recharacterize a transaction. There are four categories of tax strategies that must be considered in the context of finding a "tax simulation":
1) "Option economy": Traditionally this particular tax optimization strategy relates to a taxpayer's choosing between two alternatives clearly provided for in the law. The strategy is not traditionally considered harmful, and its effects are covered by a particular tax provision.
2) Tax planning: This strategy covers any tax optimization decision by the taxpayer that does not directly or indirectly contravene any tax rules. This alternative is not...