Mexican GAAR: Economic Substance and Business Purpose Scrutiny

2023

The Mexican Tax Administration Service (SAT) has applied the General Anti-Avoidance Rule (GAAR) in a recent case involving a taxpayer's transactions. The ruling clarifies how the SAT evaluates economic substance under Article 5 of the GAAR, where a lack of business purpose can lead to the invalidation of a transaction.

If Article 5 is deemed not applicable:

• Inexistence of Transaction: The SAT may disregard the tax consequences of the transaction, deeming it without economic substance.

• Recharacterization: The SAT has the authority to change the transaction's tax implications, provided the Article 5-A procedures are followed.

The case focused on whether the services were genuinely rendered and if they provided any real business value. The SAT questioned whether the transactions had substance and ultimately argued they were non-existent.

The decision underscores the critical relationship between economic substance and business purpose in applying the GAAR.

Full Link to English Translation: https://kpmg.com/kpmg-us/content/dam/kpmg/pdf/2024/mexican-gaar-recent-ruling-leads-to-more-questions-than-answers-0