Contributions Contemplated in Mexico

Introduction

Often, many people think that the only source of income a State receives is limited to taxes when these are one species within a broader genus. This type of contribution, together with other sources of financing, constitutes the instruments that states have to sustain themselves and carry out their functions.

Contributions are divided by scholars and law in Mexico as follows: I.- taxes, II.- duties, III.- social security contributions, and IV.- contributions for improvements. Topics that this entry will address, where I will address its main characteristics. All of this is in light of current regulations and the criteria or judicial precedents applicable to each figure so that its practical application is understood.

As for the rest of the income through which the State can finance its operation, such as: I.- loans, II.- issuance of public debt bonds, III.- devaluations, IV.- expropriations, V.- confiscations, VI.- privatizations, VII.- amortizations, VIII.- products, IX.- exploitations and X.- moratoriums and renegotiations are matters of Financial Law. These are legal figures that I may address in the future in another post entry. This is because their nature is a little more complex, and taxpayers rarely participate in them.

Without further ado, let’s start with the Mexican contributions!

List of Contents

1) Contribution’s Concept

Before addressing each of the contributions in Mexico, it’s pertinent to understand, even superficially, the concept of contribution. This will help the reader realize why I stated that contribution is a genus, while taxes, social security contributions, duties, and contributions for improvements are a species.

A) Doctrinal Concept of Contribution

Tax and Financial Law scholars of Mexican doctrine have presented very varied definitions based on French and Italian doctrine, as they have a tax system analogous to that of Mexico. I put the definitions below, considering that they seem to be the easiest for the reader to understand.

To begin with, what better definition than that of the distinguished administrative and tax expert Emilio Margáin Manautou, for whom on this topic he stated: “the tribute, contribution or tax income is the legal link by virtue of which the State, acting as an active subject, demands from an individual, called a taxable person, the fulfillment of a pecuniary benefit, exceptionally in kind^[1].”

Whereas for the tax expert Adolfo Arrioja Vizcaíno the contribution is: “the economic manifestation of the legal-tax relationship, represented by the right of collection in favor of the treasury and the correlative obligation to pay by the taxpayer.” ^[2]

B) Characteristics

From the definitions set out above, the following characteristics emerge:

I.- The existence of a legal link: which is nothing more than the relationship that arises between the State as an active subject (whether at the municipal, state, or federal level) and the taxpayer as a passive subject, of paying the tax due to the existence of a legal provision who command it. The last is in accordance with article 31, section IV of the Political Constitution of the United Mexican States^[3]. As stated in the famous Roman aphorism nullum tributum sine lege (no valid tribute can exist without a law that establishes it)

II.- The State as an active subject: since every obligation supposes the existence of an active subject (that is, in looser terms, a creditor), it’s logical to conclude that if contributions are obligations that Mexicans have to make to contribute to the public expenses of the nation, the only creditor of such contributions is the State, regardless of the order of government from which the contribution emanates.

III.- Individuals as passive subjects: a characteristic that is intertwined with the previous one, since generally, there cannot be a creditor without a debtor in a legal relationship. On the other hand, and although it is a truism, the concept of individuals in this relationship of legal subordination, of course, covers not only Mexicans but also foreigners who are also obliged to pay the corresponding contributions, which was recognized by the Supreme Court of Justice of the Nation since a long time^[4].

IV.- The payment or fulfillment of a pecuniary benefit, which exceptionally may be in kind: an issue that does not need to be expanded upon—for now—because this topic is most interesting to explain the cases in which the taxpayer can contribute to public expenses through of payments in kind, ranging from works of art to merchandise. In addition, economic theory has illustrated for years that the payment of contributions is, in reality, a form of validation of the existence of the State and political control.

C) Legal Definition of Contribution

As far as the law is concerned, this, as in the case of other tax concepts, does not define the term ‘contribution’ but is limited to naming them. Thus, in article 2 of the Federal Tax Code, the lawmakers established: “contributions are classified as taxes, social security contributions, contribution for improvements and duties […]”.

A similar sense of the article occurs with article 38 of the Tax Code of the State of Chihuahua, which, like the Federal Tax Code, is limited to naming the contributions as it indicates: “for the purposes of the tax provisions, contributions are taxes, contribution for improvements and duties […]”.

2) Taxes

This is the income par excellence—or at least it should be—that states have to cover their public spending and that, as I already mentioned, many times people think that it’s the only concept that, as taxpayers, they have to pay for contributing to the public coffers. Of course, with the constitutional limits that arise from article 31 of the Political Constitution of the United Mexican States and that I discussed in a different entry titled Constitutional Principles of Taxes in Mexico.

On the other hand, I must highlight that this income received by the State is really an imposition in its literal sense since the taxpayer who pays this concept does not directly receive compensation from the State, as they would, for example. , in dealing with the payment of duties, as we may see.

A) Doctrinal Concept of Taxes

Among the multiple definitions put forward by illustrious tax experts, one of the clearest is the one referred to by Francisco Nitti, cited by Ernesto Flores Zalava^[5], who stated: “The tax is a fee, part of their wealth, that citizens obligatorily give to the State and local administrative law entities to put them in a position to provide for the satisfaction of collective needs. Its nature is coercive, and its product is intended to perform services of general utility and of an indivisible nature.”

Finally, for this contribution, it’s true that no compensation is directed to the individual taxpayer but rather to a collective satisfaction that citizens may well not perceive that way as often happens in Mexico.

B) Legal Definition of Taxes

In the current Federal Tax Code, taxes are defined as: “the contributions established by law that must be paid by individuals and legal entities who are in the legal or factual situation provided for by it and that are different from those indicated in sections II, III and IV of this article” (2).

The same thing happens concerning the Tax Code of the State of Chihuahua, which again, does not state an exact definition of the term tax but rather excludes what it is not by stating in its article 38: “They are the contributions established by law that must be paid by individuals and legal entities who are in the legal or de facto situation provided for by it and which are different from social security contributions, contribution for improvements and duties.”

Previous definitions that, of course, are ambiguous for the layman in tax law, as the distinguished tax expert Adolfo Arrioja Vizcaíno^[6]pointed out, the definition established in article 2 of the Federal Tax Code in force from December 30, 1966, to on December 31, 1982, was more accurate because at least it was that: a definition. A definition that, although frugal, was direct: “Taxes are benefits in money or in kind established by law on a general and mandatory basis, payable by individuals and legal entities, to cover public expenses.

C) Type of Taxes

Finally, I must clarify that both the doctrine and the judicial precedents in Mexico recognize different types of taxes with unique characteristics (such as ecological, direct, indirect, real, personal, for fiscal or extra fiscal purposes, expenditure, and consumption), which makes it difficult to synthesize them in a space like this. So, later, in an autonomous entry, I will address them. Wait for it.

3) Duties

After indirect taxes, I can affirm that Mexicans pay the most for this contribution, even if they are unaware of it. However, unlike taxes, the benefit of duties is not ‘perceptible’ to the taxpayer.

Duties (Derechos in Spanish) are also known in the doctrine as ‘rates’ (Tasas in Spanish). Still, because the Anglo-Saxon language has influenced our tax system so much, we avoided using that last concept to avoid confusing it with impuestos (Taxes in Spanish), which means taxes in English. Also, if we consider that in the English language, the word duty could be equivalent to ‘derechos’ in Spanish, then we may now understand why the lawmakers decided to use the word derechos instead of tasas. For example, in the Federal Law of Rights at the federal level and the State Law of Rights of Chihuahua at the state level.

Finally, to avoid confusion, I translated the word derechos in the Mexican tax system sense as ‘duties’ because both definitions share similar characteristics when comprehended. Still, be aware that most English texts regarding this legal institution translate it simply as ‘right’.

A) Doctrinal Concept of Duties

Regarding the scholars, within the various definitions that various scholars have stated, I highlight the following: “Duties are contributions that consist of mandatory considerations paid to the State (or a smaller public entity) by the person who requests administrative or legal services in a particular way, whose provision is inherent to the sovereignty of the State^[7].”

Also, it is “the provision indicated by law and required by the active administration, in payment for administrative services or for the exploitation of goods over which the State exercises monopoly power^[8].”

B) Legal Definition of Duties

By duties, the Federal Tax Code defines them as: “the contributions established by law for the use or exploitation of the assets of the public domain of the nation, as well as for receiving services provided by the State in its public law functions, except when are provided by decentralized organizations or deconcentrated bodies when in the latter case, they involve compensation that is not provided for in the Federal Law of Rights. Contributions made by decentralized public organizations to provide exclusive state services are also duties”.

On the other hand, citing the definition of duties made by the Tax Code of the State of Chihuahua would be meaningless since, practically, the definition is a vile copy-and-paste of what is established by the Tax Code of the Federation.

C) Type of Duties

Like taxes, duties have their own characteristics that make it very difficult to develop a general theory of this contribution. This is so much so that even the constitutional principles contained in article 31, section IV of the Political Constitution of the United Mexican States, are applicable to this contribution with nuances other than taxes, as the Supreme Court of Justice of Mexico itself has repeatedly recognized. As an example: DUTIES FOR SERVICES. ITS PROPORTIONALITY AND EQUITY ARE GOVERNED BY A SYSTEM DIFFERENT FROM TAXES^[9].

Hence, tax laws, doctrine, and judicial precedents have differentiated some types of ‘duties’ with singularities that must be studied in each case. Also, although, in principle, the crux of this contribution is to support the material and financial expenses for the use or exploitation of public domain assets and the public services provided by the State, that’s not always the case.

This is because in several provisions of public services where the contribution of ‘duties’ ceases to have the aspect of mere compensation for the expense incurred by the State for the service if this affects the rights of third parties or the general interest. The most common case, of course, are the rights paid for drinking water where the lawmakers, with the endorsement of the Judiciary, established progressive quotas to discourage excessive spending on vital liquid by taxpayers under the excuse that they can pay the generated duties of such service. Quotas that, without a doubt, are far from the real and financial cost of providing the service by the State.

See for example:

WATER, DUTIES FOR PROVISION OF SUCH SERVICES. THE RATE OF THE REVENUE LAW OF THE STATE OF BAJA CALIFORNIA FOR 1993, FOR COMMERCIAL, INDUSTRIAL, AND GOVERNMENT USE MEASURED FOR THE CITY OF MEXICALI, DOES NOT VIOLATE THE PRINCIPLES OF PROPORTIONALITY AND EQUITY BECAUSE IT CONTAINS VARIOUS QUOTAS APPLICABLE TO THE DIFFERENT QUANTITIES OF CUBIC METERS CONSUMED ^[10].

Moreover, considering that both the Federal Court of Administrative Justice and the Judicial Branch of the Federation have created, with their precedents, a whole type of ‘duties’ such as rights for services, recovery tools, progressive rates, and many others that emerge from the interpretation of the law, it’s difficult to grasp what a duty is in Mexico’s tax system.

Therefore, left behind is the criterion that the taxpayer, in the payment of duties, must only weigh the cost of the State for the provision of the public service or the use of the assets of the nation’s public domain since it will depend on the matter from which the duty emanates where the real cost of the contribution is increased due to the interest of public order or third parties.

4) Social Security Contributions

An issue forgotten by a large part of taxpayers in Mexico is the issue of social security. How can it not be if, in Mexico, the informal sector is larger than the formal one? Hence, it’s understandable that employers and employees only have a vague notion of the social security contribution.

A) Doctrinal Concept of the Social Security Contribution

Regarding the doctrine, social security is understood as: “[…] an organized system of protection against the consequences of the risks to which every individual is exposed during the course of his life, the purpose of which is to contribute to his physical and intellectual development in society and its dignity until the end of its existence^[11].»

B) Legal Definition of the Social Security Contribution

Regarding the law, the Federal Tax Code defines this contribution as: “the contributions established by law paid by people who are replaced by the State in the fulfillment of obligations established by law in matters of social security or to “people who benefit in a special way from social security services provided by the State itself.”

C) Type of Social Security Contributions

I have already discussed this topic in a little more depth. Likewise, I explained the origin of such contributions, what they are, and how they should be calculated and paid by the obligated subjects. Therefore, I recommend that you check the entry titled Social Security Contributions and Obligations in Mexico that I wrote for the Legal Abogados blog at www.belegalabogados.mx.

5) Contributions For Improvements

If there is any contribution in Mexico whose practical application is rare but problematic, it’s undoubtedly the contributions for improvements or simply called ‘special contributions’. Above all, because it’s inconceivable for the taxpayer that after paying all kinds of taxes (direct, indirect, real, consumption, etc.) and duties to carry out their activities to, supposedly finance the State in the provision of public services and works public, then have to pay an extra contribution for them. However, although it may seem incredible, this is so.

A) Doctrinal Concept of Contributions For Improvements

Regarding the doctrine, the contribution for improvements has been understood as: “[…] a benefit that individuals obligatorily pay to the State, as a contribution to the expenses caused by the execution of a work or the provision of a public service of general interest, which benefited or benefits them specifically^[12]”.

Likewise: “special contributions or for improvements are the benefits that the State obtains for the performance of general and indivisible public services, normally constituted by urbanization works, taxing individuals who benefit directly and specifically due to the performance of such works, either on the unearned increase or capital gain obtained or through the proportional recovery of the cost of the works or services in question^[13].”

B) Legal Definition of Contributions For Improvements

The Federal Tax Code defines contributions for improvements as follows: “they are those established by law paid by individuals and legal entities that directly benefit from public works.” The Tax Code of the State of Chihuahua provides an identical definition.

C) Current Contributions For Improvements in Mexico

Due to the rarity of this contribution, as I stated, its practical application is strange in Mexico, but it exists and is contemplated in our legislation. Hence, I will give you some examples here. Regarding the municipalities in Chihuahua, articles 166 and 167 of the Municipal Code of the State of Chihuahua contemplate the Special Contribution on Paving Services. However, as it’s a complex contribution, the code above does not provide for the base and rate but rather establishes that the cost of the works executed shall be established in laws issued by the Congress of the State of Chihuahua.

A similar path occurs with a federal contribution for improvement called the Improvement Contribution for Public Works of Hydraulic Infrastructure contemplated in the Federal Income Law for the Fiscal Year of 2024, which does, at least for this contribution for improvement, it’s contemplated obtaining an income for tax fiscal year.

Finally, regarding state contributions, neither the Finance Law of the State of Chihuahua nor the Income Law for the State of Chihuahua for Fiscal Year 2024 contemplates a contribution of this nature.

By Omar Gómez

Mexican Tax, Constitutional and Administrative Attorney

Partner at beLegal Abogados S.C

Abogados en Ciudad Juárez, Chihuahua, México

Visit www.belegalabogados.mx for more information regarding our legal practice.

^[1] Margáin Manautou, Emilio. Introducción al Estudio del Derecho Tributario Mexicano. Eighth Edition. Universidad Autónoma de San Luis Potosí. México, 1985. Page 253.

^[2] Arrioja Vizaíno, Adolfo. Derecho Fiscal. Themis. 21a Electronic version. México, D.F. Page 354.

^[3] Article 31.- The obligations of Mexicans are: […]

IV.- Contribute to public expenses, both of the Federation, as well as of the States, of Mexico City and of the Municipality in which they reside, in the proportional and equitable manner provided by law.

^[4] See, for example, the following judicial criterion: INCOME TAX, FOREIGNERS MAY BE THE CAUSE OF THE. Second Chamber of the Supreme Court of Justice of the Nation. Fifth Judicial Epoch. Not Binding Precedent. Digital Registration: 327153.

^[5] Flores Zavala, Ernesto. Elementos de las Finanzas Públicas Mexicanas Porrúa.Twenty-fourth edition. Mexico, D.F. 1982. Page 35.

^[6] Op. Cit. Page 836.

^[7] Benvenuto Griziotti. Principios de Ciencia de las Finanzas. Sixth Edition. Roque Depalma Editor. Buenos Aires, Argentina. 1959. Page 133.

^[8] Margáin Manautou, Emilio. Op Cit. Page 116.

^[9] Title: P./J. 2/98. Plenary Session of the Mexican Supreme Court of Justice. Ninth Judicial Epoch. Binding Precedent. Digital Registration: 196934.

^[10] Title: P. XIX/95. Plenary Session of the Mexican Supreme Court of Justice. Ninth Judicial Epoch. Not Binding Precedent. Digital Registration: 200359.

^[11] García Cázares, Gustavo. Derecho de la Seguridad Social. Fifth Edition. Editorial Porrúa. Ciudad de México. 2018. Page 103.

^[12] Margáin Manautou, Emilio. Op. Cit. Page 121.

^[13] Vizcaíno Arrioja, Adolfo. Op. Cit. Page 898.