Interview with Mauricio Martinez-D'Meza, Spanish-LATAM Tax Controversy Leader, Deloitte Mexico
What is the most significant change to your region/jurisdiction’s tax legislation or regulations in the past 12 months?
Practically every Latin America (LATAM) jurisdiction, has enacted legislation to increase the tax authorities’ reach and access to the taxpayer information. This has been done either by way of electronic accounting records or by increasing the amount of information the taxpayer needs to provide on a regular basis. This was a predictable shift, given the two years of the pandemic which compromised tax collection. Also, Latin America is moving towards a more substance-over-form approach for interpreting operations and contracts.
What has been the most significant impact of that change?
Taxpayers are litigating more than ever, since a lot of governments are assessing (or stating that they will assess) very large amounts of taxes as a means to encourage negotiated taxpayer settlements. This puts taxpayers in a corner to either settle for a much higher amount than normal or go to court.
Also, this approach of the tax authorities is curtailing aggressive tax planning in a lot of jurisdictions.
In addition, tax authorities are shifting their focus to international issues, such as deduction of allocated expenses, withholding controversies, and transfer pricing challenges.
How do you anticipate that change impacting your work and the market moving forwards?
We are seeing an increase in tax controversy services, be it tending to audits, formal negotiations, or litigation. The more interaction there is between tax authorities and taxpayers, the greater the need for these types of services. Taxpayers are engaging more outside counsel to deal with audits or are strengthening their internal tax departments with professionals with tax controversy experience.
Also, commercial controversies are becoming more common, in addition to tax-only challenges, as more governments from the LATAM region are turning to a more isolated, domestic-oriented commercial policy.
How has this changed the way you offer tax advice?
This has increased the need to maintain legal support for any tax advice, since it is now perceived that the tax authorities will know about tax planning faster and, in more depth, than ever. In other words, taxpayers are making tax decisions assuming they will get audited sooner rather than later.
Also, this means that a good tax controversy professional needs to be aware of the various international means to solve controversies, such as Mutual Agreement Procedures and Arbitration. These international processes are becoming more popular due to the decrease in efficiency of domestic controversy processes.
What potential other legislative/regulatory changes are on the horizon that you think will have a big impact on your region/jurisdiction?
Although some jurisdictions are further ahead in the curve, digital platforms are clearly the next step in the evolution. Governments are likely to move to electronic control of tax obligations and digital access to the taxpayer’s information, which, of course, poses an interesting challenge to tax controversy professionals and the opportunity and form in which these types of services are rendered. We need to be able to serve our clients faster and more efficiently than ever.
What are the potential outcomes that might occur if those changes are implemented?
In the countries in which these changes are already in place, tax controversy services have to be rendered in a much “tighter” window of time, and tax authorities start audits with a lot of taxpayer’s information already accounted for. From the tax authority’s standpoint, they receive and process the tax information in a much more automatic fashion, which in turn results in faster assessments.
From the taxpayer’s perspective, as mentioned before, they are much more aware that the tax administration (government) will be mindful of a lot more details than ever before.
Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?
It will depend on the perspective. From the tax authorities’ perspective, these changes clearly foster more compliance and an easier, faster collection process. From the taxpayer’s perspective, this means more compliance work and higher expenses in dealing with their tax obligations. From the perspective of a tax controversy professional, it certainly means that our clients will need a better, more streamlined way of rendering tax controversy services and a capability to adapt the nature of these services to the challenges posed by ever-evolving legislation and tax administration by the government, i.e., international means to solve controversies, as explained later.
Are there any regulatory/legislative changes you believe should be implemented in your region/jurisdiction?
A common concern within the region is the strengthening of the judicial and administrative courts that solve tax controversies. This strengthening must lean towards more independence (both financial and technical) by these courts from the executive branch.
Also, there is a clear need to enact formal and transparent negotiation processes, which allow the taxpayer to avoid costly and lengthy litigation processes while ensuring a fair and timely collection via settlements, absent of corruption, by the tax authorities.
In addition, legislation should be enacted to ensure that criminal prosecution is only applied when it is clear that the elements of tax fraud and similar illegal activities have taken place and not as a means to “force” a non-compliant taxpayer to settle, which is becoming the norm in various jurisdictions.
How do you believe those changes would help improve the tax landscape in your market?
These changes would foster tax collection as the taxpayers would be able to engage in their trade or business knowing that, if they comply with the law, the courts will side with them and that, as long as they are not delinquent, the impact of tax non-compliance will only be of a financial nature. Settlements, upon audit, would become normal since no taxpayer is inclined to engage in costly, risky, and lengthy litigation if they know they have underpaid tax and would much rather settle if the terms are fair and transparent.
How are issues surrounding the taxation of the digital economy affecting your work?
They are pivotal. It’s clear that the digital economy impacts every aspect of the economic landscape, and countries in Latin America are moving towards taxation of these economic aspects.
Nevertheless, these taxation efforts run, more often than not, against internationally accepted principles and practices, which pose a serious challenge for taxpayers.
How would you describe the tax authorities’ approach in your region/jurisdiction?
The common feature would be aggressiveness, paired with an increase in the caseload of the tax authorities. Budget cuts may sometimes create additional operative burdens for the tax authorities, which could compromise the governments’ ability to efficiently collect taxes, thus impacting the business environment as taxpayers are obligated to deal with lengthy tax audits that, in more cases than not, end up in large assessments that need to be addressed from a litigation standpoint.
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