It is common practice in Mexico for Individuals to create legal schemes were they are assured that their income will not be taxable. Figures such as unions, civil associations, cooperatives among others have been used for this, which at the end of the process will make a deposit in to the bank account of the individual, either as an employee or a services provider.
Due to the lagging fiscal legislation and regulation, some consultants with little fiscal knowledge or lack of ethics, have made their own interpretations of the law, concluding that some payments made to individuals are exempt of income tax payments.
This is a black or White meter, if the income of an individual comes from a working relationship, were the person works on a regular basis all year long and is subordinated to his employer, how is it possible that this person receives its compensation trough a union indicating that is some sort of help to “improve its way of life”?
The meter in this newsletter its not to discuss if concepts such as financial assistance “to improve the way of life” it’s an exempt benefit for the worker. It’s more a matter of defending in a court, that the worker receives minimal or no compensation for its work and has millions given to him as social assistance.
On article 109 of the federal fiscal code it stated that “the criminal offence of fiscal fraud is committed by the person that with the use of deceit or by taking advantage of errors, omits totally or partially the payment of a contribution or gains an undeserved benefit in detriment to the federal tax authorities (…)”. Its evident that in the after mentioned “strategy” contains deceit, and if deceit occurs the criminal offence of tax fraud has been committed.
If you are being proposed a scheme based on a cat and mouse game or if it’s based on the chances of being caught, be very careful, even more so if it’s based on influence peddling.
How can you be caught?
In Mexico bank secrecy is gone, it is very naïve to think that the tax authority will not review deposits made to your bank account to confront them to your declared taxable income. Believing that deposits made in the United States will not be detected is wishful thinking, as the Fair and Accurate Credit Transactions Act makes this deposits transparent to the tax authorities.
Mexican Income Tax Law (MITL)
On chapter IX of title IV of the MITL, it is stated that individuals, that gain income different from the concepts provided on chapters I to VIII, will be taxable at the moment they are obtained.
Article 141 of the MITL basically states that all income perceived by individuals must be declared, as long as they are not covered in chapters I to VIII, these chapters depict specific cases were income could be tax exempt for individuals, as long as the requirements are met.
Article 142 dictates some assumptions were income will be taxable for individuals, which are the following:
· Condoned debts by the creditor
· Exchange rate gains
· Interest gains
· Benefits from securities
· Income from any type on investments in foreign entities
· Dividends or profits distributed by foreign entities
· Earnings for copyrights
· Default interest, conventional late fees
· Royalties (among others)
It’s worth noting that the article states: “it is understood, among other things, that the income in terms or this chapter are the following: (…)”, so in case that you have income no contemplated in other chapter and you advisor states that that income is not taxable, you’ll have to explain to the tax authority why that income does not fall under chapter IX described here.
Law against money laundering
With “The Federal Law for the Prevention and Identification of Operations with Resources from Illicit means” (Ley PIORPI in Spanish), it becomes practically impossible for an individual to deposit, into the formal economy, cash resources from a non-illicit activity that was informally saved in order to avoid income tax
As it is possible to use part of that cash trough shady means, such a constructing a house trough an informal contractor and buying the materials for vendors that do not issue invoices, this only creates a snowball effect. If you are audited by the tax authority, and they detect that in the land that you own a house was constructed they can enforce the MITL chapter regarding acquisition of goods, they can determine that you are in fiscal discrepancy and if you decide to sell the building there will no means of proving costs. It seems that a tax of 30% o 35% is worth paying in exchange of financial freedom
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