Introduction.

In Mexico, federal tax audits (exercise of auditing powers) can be conducted by different authorities, among them we highlight the Large Taxpayers General Administration and the Federal Tax Audit General Administration (through the decentralized administrations) as well as the state tax authorities, exercising their powers under the Administrative Collaboration Agreements in Federal Tax Matters.

In the absence of a tax reform, tax audits (on‑site visits, desk reviews and electronic reviews) and other review mechanisms such as in‑depth reviews and invitation letters are very relevant for the Government to reach its collection goals, so it is very common for companies, at some point in their operating cycle, to receive the tax authority’s attention.

In this scenario, our experience indicates that there is a key piece to defend the taxpayer’s position: the existence of robust documentation that evidences and gives substance to the transaction. This is relevant even when dealing with ordinary day‑to‑day operations (loans, capital contributions, payments to suppliers), because in all audits it is very common for the authority to question whether the transaction actually took place, something that in the tax jargon is known as “materiality.”

The purpose of this note is to illustrate some of the best practices we have seen to reduce questioning by the tax authorities.

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A Common Story

Company X is a subsidiary of a multinational group that provides specialized technical services to other group companies. As part of its everyday operations, it entered into several service agreements and received monthly payments from foreign resident companies, to which it applied the 0% VAT rate by considering them an export of services pursuant to article 29, first paragraph, section IV, subsection a) of the VAT Law.

Company X was subject to a desk review by the SAT. In its first request, the authority asked for documentation to support the services received and rendered: contracts, CFDIs, work reports, deliverables, evidence of communication with the client and accounting records.

Although Company X had valid CFDIs (electronic invoices) and signed agreements, the authority questioned the materiality of the transactions. In particular, it pointed out that:

• The work reports were generic and lacked service details.

• There was no evidence of emails, minutes or specific deliverables.

• The agreements were signed after the CFDIs were issued and lacked a certain date.

• The personnel who actually performed the service were not identified and the agreements were not followed “to the letter.”

As a result, the authority concluded that the existence of the transactions had not been proven and proposed, in the observation letter, to disallow the deductions, with a potential tax contingency that includes the allegedly omitted tax, surcharges and penalty.

What Elements Make Up the Accounting Records?

Pursuant to article 28 of the Federal Tax Code (CFF), a taxpayer’s accounting encompasses a wide range of elements. It is not limited only to books or accounting records, but also includes bank statements, working papers, corporate books, electronic accounting systems and equipment, and all supporting documentation related to the company’s transactions. In other words, all documents and reports that evidence the entity’s income, expenses, deductions and compliance with its tax obligations form part of the accounting. This ranges from contracts, invoices (CFDIs), to communications and project deliverables, among others.

Maintaining robust and well‑documented accounting records is essential to give substance to the company’s transactions. Our experience shows that, in an audit, having complete documentary support can be the difference between disproving an observation for alleged non‑compliance with the tax provisions proposed by the authority or facing a tax contingency.

As previously noted, tax authorities, when conducting audits, often challenge the existence or materiality of transactions, even when they involve routine and legitimate operations, in an effort to detect sham or simulated arrangements. The concept of materiality in tax matters, although undefined in court precedents, refers precisely to the documentary, technical and operational evidence that demonstrates that a service or transaction actually existed and was effectively carried out, beyond the mere issuance of an invoice. Therefore, it is not enough to have valid CFDIs or signed agreements; the authority expects to find concrete proof that the transaction was carried out and, in many cases, that it had economic substance.

Considering the above, it is essential that companies keep all elements of their accounting in an orderly and accessible manner. This includes everything from formal accounting records to supporting documentation for each transaction. Below, we address some of the best practices we recommend adopting to properly document certain common transactions and thus reduce the risk of tax questioning.

Best Practices for Tax Documentation

• Loans (between related parties or with third parties): Formalize the loan through a duly signed agreement (preferably before a notary public to give the document a certain date) and make sure you have evidence of the receipt of funds. This includes keeping the deposit or bank transfer slips for the loan amount into the company’s account. Also document the destination of those resources: for example, if the loan was used to purchase machinery or working capital, keep the invoices for those acquisitions or specific accounting records. The Tax Administration Service has emphasized that, to prove that a bank deposit corresponds to a loan and not to omitted income, there must be an agreement backed by other evidence of its materiality, such as bank statements and CFDIs for the interest. All this documentation must be preserved during the term of the loan and until it is fully paid, and preferably even afterwards.

• Capital contributions: When shareholders make capital contributions to the company, it is crucial to keep evidence of both the inflow of funds and their proper accounting record. Make sure to issue the corresponding corporate certificates or minutes (shareholders’ meetings, capital increases) and keep the account statements or bank transfer slips through which the funds were received. These contributions feed the company’s CUCA (Paid‑in Capital Account), which for tax purposes records the updated amount of the partners’ contributions. A correct determination of the CUCA must be supported by documentary evidence of the contributions made (and any withdrawal, such as capital reimbursements), and this documentation should remain part of the accounting throughout the life of the company. Keeping these documents permanently is a best practice, as they will be essential when, for example, demonstrating that a future capital reduction does not constitute a taxable dividend thanks to the CUCA records.

• Service agreements and transaction materiality: In the provision of services (whether between related parties or with third parties) it is advisable to implement additional measures to document the actual performance of the service. First, try to have service agreements signed before or at the beginning of performance (ideally with a certain date through ratification before a commercial broker, notary public or equivalent legal mechanism) to attest to the existence of the agreement on a certain date. Second, accompany those agreements with purchase orders, approved quotations or schedules detailing the scope of the service. Then, during and at the end of the service period, collect all evidence of performance: work reports, deliverables (e.g., technical reports, plans, studies, designs, product deliveries), correspondence with the client (emails, meeting minutes tracking the service), activity logs (such as workbooks, attendance lists, photographs of results, etc.) and any other indication that the service was rendered as agreed. It is also important to keep proof of payment to the service provider (such as transfers or checks) and verify that the payment matches what is stipulated in the agreement and the CFDIs issued. It is advisable that the agreements realistically reflect the service conditions (terms, personnel involved, obligations of the parties) and that the company complies with those terms, as discrepancies between what was agreed and what was executed are also often observed by the tax authority.

These are only some examples of day‑to‑day transactions and, of course, each specific case must be analyzed to define the best evidence to demonstrate the reality of the transaction.

Accounting records must be kept for a period of five years, counted from the date on which the tax returns related to them were filed or should have been filed. In the case of accounting records and related documentation for acts whose tax effects are prolonged over time, the reference period shall begin to run from the day on which the tax return for the last fiscal year in which such effects were produced is filed.

In the case of the articles of incorporation of legal entities, joint venture agreements, minutes evidencing the increase or decrease of share capital, mergers or spin‑offs of companies, and certificates issued or received by legal entities when distributing dividends or profits, such documentation must be kept for as long as the company or agreement in question subsists.

Conclusion and Final Reflection

Mexico’s tax reality teaches us that the best defense against an audit is good prior preparation. In the absence of a new tax reform, the tax authorities will continue resorting to exhaustive audits and other review mechanisms to reach their collection goals. At the same time, the uncertainty generated by structural changes, such as the recent reform of the Judiciary Power, has raised alarms about the strength of the rule of law and confidence in institutions. Various analysts and organizations have warned that such uncertainty could affect investment and the business environment in the country, which underscores the importance for companies to remain especially cautious and prepared.

In this context, fully complying with formal obligations and having solid documentation for each relevant transaction not only serves to satisfactorily respond to any SAT request, but also provides additional protection in the face of a potentially more complex legal environment. If the legal landscape is uncertain or adverse, having our “papers in order” minimizes the need for lengthy legal battles and increases the likelihood of prevailing at any stage of the procedure.

At Matus‑Ruiz we firmly believe that the legal certainty of our clients begins with prevention and timely compliance. We place ourselves at your disposal, as tax and legal advisors with experience in the matter, to support you in the assessment, organization and strengthening of your accounting and materiality.

Do not hesitate to contact us for personalized advice; we are ready to help you navigate these challenges with confidence, reduce tax risks and provide certainty to your operations even in times of change and uncertainty.

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