Mexico's government withheld hundreds of millions of dollars in tax refunds owed to Procter & Gamble, Unilever, and Colgate combined as it sought to coax them and other multinationals to pay more income tax locally, according to people close to the talks.
After luring foreign companies with corporate tax breaks for years, Mexico moved to boost its tax take as oil output has slumped, encouraged by an Organisation for Economic Co-Operation and Development crackdown on profit-shifting to low-tax countries.
Mexico's tax authority SAT held back more than US$384 million in value-added tax (VAT) from the three companies while it was probing them and nearly 270 others for possible tax avoidance after President Enrique Peña Nieto took office in late 2012, people familiar with tax negotiations say. While local business chambers have complained about refund delays, Reuters has obtained information about refunds being linked to corporate tax negotiations only in the case of the three consumer goods companies.
Unilever reached a deal last year to pay more income tax in Mexico, three people familiar with the negotiations said. One said the firm has since received about US$131 million in VAT it was owed. Procter & Gamble and Colgate have not reached deals, sources say.
Four former SAT officials and 10 other people close to the negotiations say tax authorities are using the withheld refunds as a bargaining chip to pressure firms into declaring more revenue in Mexico.
"You negotiate because your money is stuck there," said a person close to the talks between SAT and one of the firms. "It's the best leverage in the world."
Four tax attorneys and two accountants interviewed by Reuters said linking VAT refunds to income tax deals amounted to violating Mexico's constitution.
"They don't have the right to condition your returns or blackmail you," said Rodrigo Muñoz, a Mexico City tax attorney and former President of the Mexican Academy of Tax Law.
The constitution, as interpreted by the courts, only allows government actions expressly authorized by law and says taxation must be proportionate. Mexican law requires that authorities refund any amount due and treat taxpayers in the least "onerous" way possible.
One accountant, however, said the tax authorities operated in a gray area and were not necessarily doing anything illegal.
The tax office denies it has withheld VAT refunds to pressure firms.
"Absolutely not," said SAT planning director Adrián Guarneros in an interview. "We realized there was a series of inconsistencies in some refunds and we decided to be more careful, more scrupulous in the reviews."
VAT refunds were growing unsustainably, five times faster than the pace of VAT collection between 2010 and 2012, he added.
P&G, Colgate and Unilever declined to comment on VAT refunds and income tax matters in Mexico.
However, Unilever pointed to its tax principles, which state that the firm aims to pay tax based on where value is created and does not use contrived tax structures to avoid levies.
TAX LEVERAGE
Cathy Schultz, vice president for tax policy at the U.S.- based National Foreign Trade Council trade group, said its members have complained about the practice in Mexico.
"It's a strong-arm tactic...almost like political extortion" she said.
Heather Lowe, director of U.S. based think tank Global Financial Integrity, said, however, nations were justified in putting pressure on firms that shift profits offshore.
The government is "essentially saying 'we think you owe us this and we are setting it off against the debt that you say we owe you."
Mexico has the lowest tax take in the OECD and the top 132 foreign firms pay less than 1.5 percent in corporate tax as a percentage of gross income in Mexico, according to a SAT presentation seen by Reuters. Tax experts say the percentage of net income would be a better gauge of levies owed, but Reuters could not obtain that information.
Tax office data shows VAT refunds fell 13 percent last year, but rose by a third in real terms year-on-year in the first half of 2015 after lawmakers ordered the tax office to devise new rules to speed up the tax refunds.
A broad income tax avoidance review announced in January 2014 focused on corporate structures that shift profits from Mexican manufacturing or sales to offshore units.
The campaign was inspired by the OECD's review of rules on how multinationals are taxed, following reports that firms such as Apple and Google have used complex structures to cut their tax bills.
Mexico reached three agreements as part of the probe, the tax authority said in February, including a US$65 million deal with the world's no. 2 toy maker Hasbro.
Agreements have proven elusive for others. P&G, the world's top household products maker has sought, without success, refunds of at least 4.2 billion Mexican pesos (US$249.2 million) in VAT, two sources said.
Colgate, which is under review by SAT over transfer pricing, has legally challenged the rejection of a 40 million peso (US$2.39 million) refund it sought for February 2013, one source said.
VAT is levied every time value is added during a good's production or when it is sold, unlike sales tax, which only applies to the final purchase. In Mexico, VAT refunds are due, for example, when firms export goods or produce zero-rated items such as food and medicine.
Companies can request VAT owed every month and should receive it within 40 days, under the tax code. However, the whole process can stretch to just over a year because the tax office can ask for additional information and perform a so-called mini-audit, which can last up to 180 working days.
Some other Latin American countries take longer than Mexico to process VAT refunds. KPMG rated Mexico as "efficient" in a 2014 survey, saying it granted refunds to established businesses in 29 to 56 days, compared with over 56 days in Brazil. But tax experts say withholding the refunds as a pressure tactic is unique to Mexico and that refunds slowed markedly under Peña Nieto.