Taxpayers should review their processes to ensure they can meet the demands of an e-audit. Taxpayers also should be prepared to respond to and challenge a pre-assessment made by the tax authorities.

The Mexican tax authorities (SAT) have announced that e-audits will begin in full during September 2016. These audits will identify inconsistencies between the tax obligations reported by taxpayers and the financial information available to the SAT in its database, which is updated in real time. At least 5,000 electronic audits are expected to begin over the next few months.

Background

Digital tools and reporting have been progressively introduced in Mexico since 2004, with the option to issue digital invoices. These digital processes include: (1) obtaining tax identification numbers electronically; (2) establishing taxpayer-registered email accounts and tax e-drop boxes; and (3) electronic filing of accounting records on a monthly basis.

In the near future, the SAT should have access to additional sources of taxpayer information with the implementation of the OECD's Automatic Exchange of Information form, which is expected by the end of 2017. In addition, country-by-country transfer pricing reporting is due for the first time in Mexico by December 31, 2017.

E-audits

Starting in September 2016, e-audits will focus on identifying compliance inconsistencies between the taxes filed, claimed or paid by taxpayers and the information available to the SAT — mainly submitted by the very same taxpayer via the issuance of e-invoices, electronic accounting or other informative returns. In addition, during the audit process, the SAT has the ability to request additional information electronically.

The SAT will identify inconsistencies in certain areas, such as: (i) differences between the tax liabilities reported in a tax return and the amount of taxes actually paid; (ii) income tax or VAT withholding omissions; (iii) incorrect credit of estimated tax payments against the annual income tax liability; (iv) deduction of donations over the amounts allowed; (v) incorrect calculations of accruable or deductible inflationary adjustments; or (vi) incorrect deductions for interest expense.

Procedure

The entire process from the first notice, which will include the pre-assessment, until the conclusion with a final assessment will be done by electronic means and should last no more than 71 days. The SAT will use the taxpayer's tax email box to send notices and correspondence to the taxpayer. Once the SAT begins the audit and reviews the electronic information, the process should occur as follows:

1. The SAT will notify the taxpayer of the review through an email to the taxpayer-registered email account, directing the taxpayer to the taxpayer drop box. The pre-assessment will be found in the taxpayer drop box. The taxpayer will have three days to access the pre-notification or will be deemed to have received it on the fourth day.

2. The taxpayer will have 15 business days to challenge the pre-assessment by providing information and documentation. Under this procedure, the burden of proof is shifted to the taxpayer, after an assessment has already been calculated (i.e., the pre-assessment), although not officially issued.

3. The SAT will then have 10 days to review the information and documentation provided by the taxpayer. As part of this review, the SAT may request additional information from the taxpayer and the taxpayer will have 10 additional business days to respond to this request by the SAT.

4. The SAT will then have 40 days to issue and notify the taxpayer of a final assessment.

5. If the taxpayer does not challenge or respond to the pre-assessment, the SAT will treat the pre-assessment as accepted and may issue an assessment against the taxpayer, again through the taxpayer drop box. By issuing the assessment, the SAT will open the process to collect any amount owed.

Are you prepared for an e-audit?

The manner in which taxpayers record, store, deliver and retrieve information has become critical in this digital world. Taxpayer financial and tax information must be up to date and current as it is reported to the SAT. Automated processes, specific tools and formats, tracking and matching of invoices, validation reports, data security, and comprehensive analytics are some of the demands that e-audits are now placing on taxpayers' systems and operations.

Under this new digital framework, it is essential that taxpayers perform data analytics on their information, including validating suppliers and customers, in order to anticipate how the government will match, analyze and audit their operations.

As an example, taxpayers can make a basic risk assessment by cross-referencing their trial balance, chart of accounts, journal entries and e-invoices filed against information with the SAT.

Also, taxpayers can monitor e-invoices with technology to assess their integrity, avoid duplications and map, in its entirety, the supply chain used by the taxpayers.

Compliance with direct and indirect tax reporting and filing obligations should be aligned, taking into account that e-tax returns, e-invoicing and e-accounting will be the main sources for assessments under the e-audit process. As such, delays or errors in recording information will trigger inconsistencies that may give rise to an auditor review.

With this new tax landscape in Mexico, it will be crucial for taxpayers to be ready to respond to and challenge any issues raised in the pre-assessment made by the SAT. This will require the ability to support the electronic requests and understand and defend inconsistencies detected by providing the right information. This will be critical to completely or partially eliminate assessments and to avoid penalties. Furthermore, taxpayers must be responsive to the electronic correspondence, as a non-response can result in missed deadlines and an unexpected assessment.

On the controversy side, taxpayers should be aware of how to respond to the pre-assessments and SAT requests, and should be aware of the options available for handling the audit and possible assessments. For example, a taxpayer may consider requesting a "conclusive agreement" through the Mexican Taxpayers' Ombudsman or "Procuraduría de la Defensa del Contribuyente" (PRODECON) beginning with the pre-assessment made under an e-audit. The taxpayer will also have options to challenge the assessment once made by the SAT.

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