Tax evasion in Mexico

Tax evasion in Mexico involves deliberately underreporting or omitting income, overstating deductions, or failing to pay taxes due, as defined in the Federal Fiscal Code (Código Fiscal de la Federación). If detected by the tax administration service – Servicio de Administración Tributaria (SAT), the consequences include:

• Fines ranging from 55% to 75% of the omitted tax.
• Interest accrual on unpaid taxes until full payment is made.
• Criminal liability – severe cases may result in imprisonment, with penalties ranging from 3 months to 9 years, depending on the amount evaded.

How do authorities typically discover tax evasion?

The Mexican tax authorities employ various mechanisms to uncover tax evasion, including:

1. Automatic Exchange of Information (AEOI): Under agreements like the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA), financial institutions report cross-border accounts and assets.
2. Electronic invoicing – the Comprobante Fiscal Digital por Internet (CFDI), also known as a digital tax receipt, ensures transparency in transactions.
3. Data cross-referencing compares declared income with third-party reports and bank transactions.
4. Audits and investigations: Targeted reviews based on risk indicators or irregular patterns.

One of the most prominent examples of tax evasion by foreigners in Mexico involves individuals who own rental properties in popular tourist destinations such as Cancún, Playa del Carmen, Puerto Vallarta, or Los Cabos. These properties are often rented out on platforms like Airbnb, VRBO, or Booking.com, generating significant income that often is not declared to the Mexican tax authorities.

In recent years, SAT has aggressively targeted foreign property owners who fail to report their rental income. A notable case involved a US citizen who owned a beachfront villa in Puerto Vallarta. The villa was listed on Airbnb and generated an estimated USD 500,000 annually in rental income. The property owner did not declare this income in Mexico, believing their US tax filings were sufficient.

What opportunities are available to amend tax declarations or declare additional income?

Taxpayers in Mexico may amend their declarations voluntarily by:

• Filing complementary tax returns (“declaraciones complementarias”) to correct errors or omissions.
• Declaring previously unreported income before an official audit or investigation begins.
• Taking advantage of specific amnesty or regularisation programmes when available.

What are the conditions for voluntary disclosure of tax evasion?

To benefit from voluntary disclosure:

1. Disclosure must be made before the SAT initiates an audit or investigation;
2. Taxpayers must provide complete and accurate information; and
3.  Payment of outstanding taxes, penalties, and interest is required, although penalties may be reduced.

What are the consequences of voluntary disclosure of tax evasion?

Voluntary disclosure can lead to:

1. Reduced penalties: Depending on the programme, penalties may be reduced by up to 100% for specific periods.
2. Avoidance of criminal charges, provided the disclosure is made in good faith and fully satisfies legal requirements.
3. The opportunity to regularise compliance, and restore the taxpayer’s good standing with tax authorities.

When is voluntary disclosure of tax evasion no longer possible?

Disclosure is no longer an option once an audit, investigation, or legal proceeding has been initiated, or when the authorities have independently identified the evasion through cross-referencing or third-party reporting.

What are the main areas where voluntary disclosure of tax evasion plays a major role?

1. Offshore income and assets, especially under the CRS framework.
2. Unreported domestic income – e.g. rental income or informal business transactions.
3.  Incorrect deductions or credits: Improperly claimed benefits.

What is often overlooked by foreigners but considered tax evasion in Mexico?

Foreigners living in or investing in Mexico often unintentionally commit tax evasion due to a lack of understanding of local tax obligations. While ignorance of the law is not an acceptable defence, many of these issues stem from lack of due diligence rather than deliberate evasion. Below are some common scenarios where foreigners unknowingly evade taxes and the implications of such actions.

Failure to declare rental income from Mexican properties 

Foreigners who own properties in Mexico often rent them out through platforms like Airbnb, VRBO, or even via direct agreements. While this can be a lucrative income source, many fail to realise that rental income from properties located in Mexico is taxable in Mexico, even if the owner resides abroad. Taxes such as income tax (ISR) and value-added tax (IVA) are applicable on short-term rentals, and non-payment constitutes tax evasion.

Misreporting residency status

Foreigners may inadvertently evade taxes by misunderstanding Mexico's tax residency rules. According to Mexican law, an individual is considered a tax resident if:

• They spend more than 183 days in Mexico within a calendar year; or
• Their primary centre of vital interests (e.g. business, family, or significant economic activities) is in Mexico.

Foreigners who qualify as tax residents but fail to declare their global income to the SAT are in violation of Mexican tax laws. For example, an American who spends the majority of the year in Cabo San Lucas or San Miguel de Allende, conducts business remotely, and maintains a Mexican bank account is likely a tax resident of Mexico. If they only report income in the United States, they risk significant penalties in Mexico.

Unreported capital gains on property sales

Another common issue arises when foreigners sell properties in Mexico and fail to pay the required capital gains tax (ISR por enajenación de inmuebles). While many rely on their notary public to calculate and withhold the tax, some bypass this process or underreport the sale price to reduce their tax liability.

Non-compliance with VAT on services

Foreigners operating businesses or providing services in Mexico – such as consulting, coaching, or renting equipment – often overlook their obligation to charge and remit VAT (IVA). For example, a US-based consultant conducting workshops in Mexico may assume their earnings are only subject to US tax law. However, as the service is performed in Mexico, it is subject to local VAT regulations. Non-compliance can result in back taxes, interest, and penalties.

Lack of asset reporting

Foreigners with significant assets in Mexico, such as bank accounts or trusts, may be unaware of mandatory reporting requirements. For instance:

• Bank accounts exceeding USD 30,000 must be disclosed to the SAT.
• Trusts (“fideicomisos”) holding real estate – e.g. for beachfront properties – may require annual reporting.

Overlooking social security obligations

Foreigners who hire domestic workers, such as housekeepers or gardeners, often fail to register them with Mexico’s social security institute (IMSS). This is considered tax evasion as employers are required to register employees and pay contributions to the IMSS and other applicable labour taxes.

What do you recommend to clients who had committed tax evasion and how do you act as a professional in these cases?

As a tax professional, it is crucial to conduct a thorough review of the client’s financial and tax records, advise immediate voluntary disclosure if conditions allow, negotiate payment plans or settlements with the SAT to mitigate financial strain and finally maintain confidentiality while ensuring full compliance with ethical and legal obligations.

Acting as a professional, you must provide clear, timely advice on risks and benefits, assist in preparing and filing accurate voluntary disclosures, collaborate with legal counsel if criminal liability is a concern, and emphasise long-term compliance to avoid recurrence.

We are responsible for guiding clients through the legal and financial implications of their actions and also for promoting a culture of compliance and responsibility. This dual approach safeguards the client’s long-term interests while reinforcing trust in our profession and adherence to ethical standards.

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Prof Sergio Guerrero Rosas, managing director at Guerrero y Santana, has over 25 years’ experience advising companies from SMEs to multinationals, and individuals, on tax and estate planning.