Héctor Silva Meeting breakfast October, SAT’s auditing procedures

SAT’s current environment © 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C.2 Budgetary pressure, channeled towards the SAT. The SAT has internal collection goals to which must get, and for that reason is focusing on collecting any taxes from the taxpayer. The tax authority has the perception that taxpayers have abused from certain figures, structures and / or tax planning for profit at the expense of the treasury. Aristoteles Nuñez, head of the Tax Administration Service (SAT), during interviews shows somewhat resentful attitude to taxpayers, as it has stated that there are actually some cases where they are reviewing the operations of companies or taxpayers because of the abuse in detriment of public finances. Even in the preamble of the tax reforms mentioned that some taxpayers abused certain figures, structures and / or tax planning.

SAT’s current environment © 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C.3 It is important to note that tax planning is legal. Since it is not a resource to avoid the fulfillment of obligations. On the contrary, it is a discipline that can be applied to obtain the best position provided by the laws according to the activities of the taxpayer, in order to optimize resources and comply with all tax requirements. Therefore, we should take note: The tax planning itself involves no risk, but rather, it prevents and provides security setting the course with certainty. Planning cannot be corrective of the past, must be preventive for the future.

Certain aggressive behavior in the tax control and methods to intimidate the taxpayer. Increase of tax audits. Freeze bank accounts. Securing of the accounting records. Some times it has an attitude of “getting even” when exercising its audit procedures As the authority thinks that taxpayers have abused the provisions to their benefit, it can be perceived as in a position of revenge, with the implementation of tax reforms implemented from © 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C.4 SAT’s current environment

New modus operandi: Letters of invitation. Delaying tax refunds. Criminal issue. The invitation letters lately are more an official request than an invitation, since its almost a must to have to address them; as failure to do so can result in an audit or visit. © 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C.5 SAT’s current environment

Bias of Administrative and Judicial Courts to the Tax Authoritiy, specifically the Supreme Court of Justice. Lately there is a trend when litigating brought by taxpayers, in favor of SAT. The court cannot favor all taxpayers since this can result in bankruptcy of the Country. Delay refunds and authorization of offset of taxes. The terms granted by the tax provisions are not respected. Slow to resolve and end for any reason may consider not refunding, the application should start all over again. © 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C.6 SAT’s current environment

When applying for tax refunds: Initiating audits, requesting a lot of documentation. Opening comparison audits (“compulsas” in Spanish) to suppliers. If the supplier is not complying its tax obligations, the refund is rejected, transferring control activities to taxpayers: −The authority may reject deductions and accreditations if no "credible evidence" of those is provided. −This is defendable because the taxpayer is not required to monitor the supplier. −The taxpayer complies having the tax receipt and payment evidence. −For this reason this should not be cause for non- VAT return authorization. © 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C.7 SAT’s current environment

© 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C.8 SAT’s current environment Even rejecting tax refunds because of failing to comply with other legislations (labor, environmental, social security) for which they have no faculties to review. Tasks forces aimed to screen large groups (consolidation).

© 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C.9 Specific issues concluded at court Inability to produce documents subsequent to the exercise of powers Applicable to desk reviews and for the documents specifically requested by the authority. Consequence of not providing: cannot be offered at trial (can be provided in the appeal “recurso de revocación”). Practical Tips: −Always provide as requested. −Submit request for revocation (appeal). −No pre - or post- manufacturing of documents ( criminal result )

© 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C.10 Specific issues concluded at court Date of private documents to be enforceable against third parties The authority is deeming that everything that is not notarized, can have no effect against third parties. −This could compromise deductions or tax credits. Practical Tips: −Document all operations. −It is recommended that the relevant operations are raised to public deed and registered at the public registry of commerce.

© 2014 Galaz, Yamazaki, Ruiz Urquiza, S.C.11 Specific issues concluded at court Tax receipts are valid even though the supplier is not found when doing comparison audits (“compulsa”): Authority tends to reject deductions and accreditations to errors in vouchers. Courts have developed an important principle : the negligent conduct or infringing a third party can not cause harm to the taxpayer that seeks to make a deduction or crediting.

Deloitte se refiere a Deloitte Touche Tohmatsu Limited, sociedad privada de responsabilidad limitada en el Reino Unido, y a su red de firmas miembro, cada una de ellas como una entidad legal única e independiente. Conozca en la descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro. Deloitte presta servicios profesionales de auditoría, impuestos, consultoría y asesoría financiera, a clientes públicos y privados de diversas industrias. Con una red global de firmas miembro en más de 150 países, Deloitte brinda capacidades de clase mundial y servicio de alta calidad a sus clientes, aportando la experiencia necesaria para hacer frente a los retos más complejos de los negocios. Cuenta con más de 200,000 profesionales, todos comprometidos a ser el modelo de excelencia. Tal y como se usa en este documento, “Deloitte” significa Galaz, Yamazaki, Ruiz Urquiza, S.C., la cual tiene el derecho legal exclusivo de involucrarse en, y limita sus negocios a, la prestación de servicios de auditoría, consultoría fiscal, asesoría financiera y otros servicios profesionales en México, bajo el nombre de “Deloitte”. Esta publicación sólo contiene información general y ni Deloitte Touche Tohmatsu Limited, ni sus firmas miembro, ni ninguna de sus respectivas afiliadas (en conjunto la “Red Deloitte”), presta asesoría o servicios por medio de esta publicación. Antes de tomar cualquier decisión o medida que pueda afectar sus finanzas o negocio, debe consultar a un asesor profesional calificado. Ninguna entidad de la Red Deloitte, será responsable de pérdidas que pudiera sufrir cualquier persona o entidad que consulte esta publicación. Héctor Silva Rodríguez Tax Partner (664)