FATCA Clears Way for Mexican Authorities to Investigate U.S. Accounts

The Mexican Tax Administration Service (SAT) can access information on thousands of U.S. bank accounts held by Mexican citizens “automatically” under a new collaboration with the IRS.

The agreement is part of a reciprocity mechanism between the U.S. and Mexican tax systems stemming from the Foreign Account Tax Compliance Act (FATCA), through which IRS can access information on U.S. citizens holding taxable bank accounts or financial assets in Mexico.

FATCA also applies to foreign financial assets or offshore accounts held by U.S. citizens around the world.

As SAT authorities have increased information-sharing with IRS, the IRS is doing the same for SAT, according to leading accountants in Mexico City.

“This comes as a reciprocity response from the U.S. to allow the SAT to look into large bank accounts held by Mexicans in the U.S. to ensure they are paying the correct tax, or the tax they claim to be paying,” said Carlos Martinez, PricewaterhouseCoopers LLP senior accountant in Mexico City.

Collaborating on banking information should help lower Mexico's tax evasion rate, which currently stands at 23.3% or 316 billion pesos ($24.5 billion) a year—equivalent to 2.62 per cent of its GDP.

In the past, Mexican tax officials interested in a particular individual's account had to ask IRS to provide it with information—a process that sometimes took significant time.

This is in line with what the SAT is already doing for IRS, observers said.

Martinez said SAT is interested in catching big Mexican tax evaders holding millions of U.S. dollars in accounts across the border.

Under Mexican law, citizens holding U.S. accounts must pay tax on interest and foreign exchange gains.

Depending on the amount to be taxed, the rate is gradual, capped at 30%.

While Mexicans can pay some tax under special double-tax agreements in the U.S. or in other countries, most must be paid in Mexico, Roja noted.

Also, under Mexican law, Mexican businessmen operating businesses abroad must report their earnings to SAT.

Roja said the newly strengthened collaboration between IRS and SAT will give the latter a lot more flexibility in policing Mexicans who flout their tax obligations.