1 TAX ADMINISTRATION SERVICE MEXICO La presente información se encuentra clasificada como reservada de conformidad con el artículo 14, fracción II de la Ley Federal de Transparencia y Acceso a la Información Pública Gubernamental, en correlación con el artículo 69 del Código Fiscal de la Federación. September 2009 Assessing the Risk of Value Added Tax Refunds
2 GENERAL OBJECTIVE General Objective of the Center for Intelligence in Tax and Customs (CITA): To generate knowledge in order to detect risky profiles and conducts in the areas of tax and customs, with a view to raising taxpayers compliance levels and ensuring a more efficient use of the organization s resources. The ultimate objective of the CITA is to be the brains behind the SAT s service and control operations.
3 CITA: SPECIFIC OBJECTIVES Specific Objectives of the CITA: Provide knowledge to the SAT s operational areas for purposes of implementing service and control strategies. Information is disperse Standardize procedures and operational criteria. Procedures need to be standardized Increase the effectiveness of the programming of service and control activities. Window of opportunity for the organization Increase transparency in decision making. Currently there is discretion
4 PORTFOLIO OF RISK MODELS, Portfolio of risk models based on type of process and stage of development 1. Taxpayer Services Taxpayer Register Taxpayer assistance programs Communication of legal interpretations Communication with taxpayers Excise tax stamps Authorization of tax invoices Supervision of foreign exchange houses and cash transfer operators Transfer Pricing Topics Refunds and Compensations (offsets) Physical persons Legal persons (Audit Dept.) Legal persons (Large Taxpayer Department) Services Monitoring and Preventive Control Control and ex post Internal support Needs risk model Risk model being defined Risk model being built Risk Model Operating Monitoring and preventive for third parties La presente información se encuentra clasificada como reservada de conformidad con el artículo 14, fracción II de la Ley Federal Not yet de decided if model needed or not
5 Portfolio of risk models based on type of process and stage of development Topics Services 2. Control of Compliance with Basic Tax Obligations Primary Obligations Secondary Obligations 3. Tax Audit Audit of compliance with domestic taxes Domestic taxes, Physical persons Domestic taxes, Legal persons (Audit Dept.) Domestic taxes, Legal persons (Large Taxpayer Department) Audit of financial sector Audit of holding companies Audit of external trade taxes, Audit Department (ACITCE) Audit of external trade taxes, Large Taxpayer Department 4. Customs Determination of need for inspection of goods in the import and export process (entry and exit) Identification of high risk shipments prior to their arrival into the country PORTFOLIO OF RISK MODELS, Monitoring and Preventive Control Control and ex post Internal support Needs risk model Risk model being defined Risk model being built Risk Model Operating Monitoring and preventive for third parties La presente información se encuentra clasificada como reservada de conformidad con el artículo 14, fracción II de la Ley Federal Not yet de decided if model needed or not
6 Portfolio of risk models based on type of process and stage of development 5. Collection enforcement Classification of stock of arrears Risk according to entity that generates arrears Taxpayer Solvency 6. Defense of the fisc Administrative appeals Court appeals Special cases 7. Penal cases Penal cases 8. Internal support operations Taxpayer notices Topics Verification of domicile Services PORTFOLIO OF RISK MODELS, Monitoring and Preventive Control Control and ex post Internal support measure s Needs risk model Risk model being defined Risk model being built Risk Model Operating Monitoring and preventive for third parties Not yet decided if model needed or not
7 PORTFOLIO OF RISK MODELS, Portfolio of risk models based on type of process and stage of development Verification of consistency with economic activity Verification of tax invoices Information requirements Financial institutions Drawing on institutional data bases Drawing on external data bases On-site visits Verification of origin 9. Third parties Registered CPA s Customs brokers Topics Internal operations (Performance evaluation) Services Monitoring and Preventive Control Needs risk model Control and ex post Risk model being defined Risk model being built Risk Model Operating La presente información se encuentra clasificada como reservada de conformidad con el artículo 14, fracción II de la Ley Federal Not yet decided if model needed or not Internal support measure s Monitoring and preventive for third parties
8 VAT REFUNDS AND BALANCES VAT credit/debit balances and refunds These are the balances that taxpayers have the right to ask for, due to the fulfillment of the duty to comply with a specific tax, because: They derive from the implementation of fiscal laws The amount of taxes paid was incorrect Mandatory imposition from the authorities
9 REFUND PROCESSING TIMES Compared to other tax administrations, Mexico is in a competitive position. The VAT were issued in 24.5 days, slightly under the 25-day statutory period. Source: Data from OECD, January, 2009
10 RESOURCES ARE INSUFFICIENT Because resources are insufficient, SAT is implementing: An Internet Refund system A Risk Management Model scheme This will allow us to be more efficient and effective, and will help us to save time in the refunding process, as well as in detecting potential frauds.
11 ADVANTAGES OF A RISK MANAGEMENT MODEL Knowledge of taxpayers Fewer mistakes compared to when information is manually provided by the taxpayer Speed up file integration time and improve the decision making process Workload reduction Improvement of the fraud detection process through a deeper analysis Greater focus on taxpayers returns with atypical behavior Decision making policy becomes institutional Standardization of criteria
12 General characteristics of VAT Refund Risk Models Model for medium and small taxpayers is based on a combination of data mining and business rules. Model for large taxpayers is based on a combination of an econometric model and business rules.
13 VAT Refund Risk Model for Medium and Small Taxpayers (Modevo Model)
14 OBJECTIVE PURPOSE OF THE MODEL To determine the risk of a VAT Refund claim using a Model based on past trends/behavior, to facilitate the issuance of VAT Refund claims by Firms of up to Mex$50,000 (or around USD 3,700).* * VAT Refunds are requested on a monthly basis.
15 BACKGROUND Refunds Composition in % (All Taxes) VAT Refunds Composition (in %) Quantity Amount VAT Income Tax Others Quantity Amount <= $ 50,000 > $ 50,000 Large Work Load and Low Amount at Risk!!
16 MODEL DESIGN HISTORICAL DATA BASES VAT REFUNDS July/2003 Dec/2007* REFUNDS AUDITS PAYMENT AND RETURNS ETL Total Observations 973,494 Data Mining (13 variables were chosen out of more than 100) Outcome Risk Model for VAT Refunds * Currently being updated with observations up to June 2009.
17 HOW DOES IT WORK? FIRM REQUESTS A VAT REFUND RISK MODEL REVIEW GENERAL REVIEW/ PROCESSING PRE-AUTHORIZED MEETS CRITERIA: YES ADDITIONAL BASIC (FORMAL) RULES MEETS CRITERIA: NO REFUND PAYMENT
18 INITIAL RESULTS Model Implementation in Selected Local Offices (12) Number of claims TOTAL Amount (Million Mex$) PRE-AUTHORIZED Number of claims % MODEL FORECAST Amount (Million Mex$) % Number of claims % FOR REVIEW Amount (Million Mex$) % Total 4, , , MODEL FORECAST FINAL RESULT PRE-AUTHORIZED FOR REVIEW AUTHORIZED Total Number 1, % 1,254 74% Note: Considers only those refund claims which had already been processed at the time. It is important to mention that 95% of the cases that are initially pre-authorized and then go into Review, fall into at least one of the twelve formal categories for rejection.
19 INITIAL RESULTS Model Implementation in Selected Local Offices (12) WITHOUT THE MODEL Average Working Days for VAT Refund Issuance WITH THE MODEL Average Working Days for VAT Refund Issuance % Reduction Total Currently, the Model is applied in all Local Offices (66 around the country. In addition, we are considering: a) Raising the limit of the VAT Refund claims presented by Firms to be processed through the model. b) Extending the model to individuals requesting VAT refunds.
20 VAT Refund Risk Model for Large Taxpayers (MORSA model)
21 OBJECTIVES OF MORSA MODEL To quantify the risk associated to a VAT credit balance requested by a Corporate taxpayer, in a return procedure or in a credit/debit balance notification generated after The system is based on: - Measuring taxpayers noncompliance levels based on 33 business rules - 3 risk ratings related to a predictive model based on observed risk trends and patterns - 3 business policy criteria
22 WORKFLOW GUIDELINES VAT REFUND APPLICATIONS FROM CORPORATE TAXPAYERS Refunds Electronic Appendices Initial Balance Credit Electronic Appendices Balances with remainders Suppliers Appendix (3 1/2 disk) -NO RISK- APPROVE COMPLIES MORSA VAT AUDIT -RISK- EVALUATE DECISION MAKING ACCORDING TO ESTABLISHED PARAMETERS. FISCAL CONTROL IF NEEDED. DOES NOT COMPLY F3241 REFUND ISSUED/ CREDIT BALANCE APPROVED
23 SCOPE OF THE PILOT TEST Scope: Evaluate all the requests of Corporate VAT credit balances or returns received since September 21, 2009 and afterwards. Tax returns must date from fiscal year 2004 and subsequent years.
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