Mexican VAT from cashless transactions considered non-deductible
In line with most common international standards, under Mexico’s Value Added Tax (VAT) law, VAT is an indirect tax (charged at 16% of the final price) that is collected through a system of partial payments by which taxable persons deduct from the VAT collected the amount of tax paid to other taxable persons on purchases made in the context of professional activities.
VAT is paid at every stage of business activity and registered businesses must show the VAT charged to customers on invoices, allowing them to know how much has been paid on the product or service (deductible if they are also subject). One of the main conditions for VAT to be deducted is that the price (including the amount invoiced on the concept of VAT) is actually paid in each period (i.e. month).
On August 12, 2022, a case law was issued by the Plenary of the Sixteenth Circuit (Aguascalientes) in tax matters (PC.XVI.A. J/4 A (11a.)), when resolving a contradiction of criterion between two Circuit Collegiate Courts, where it was concluded that the amount of VAT charged to them by other taxable persons, on purchases, must be paid in cash, in order to be deductible from the VAT collected.
This implies that if the amount invoiced under the obligation to pay VAT is removed by the taxpayer by other means (e.g. set-off or set-off), the amount invoiced to the taxpayer will not be deductible.
This case law stems from the analysis of the resolutions which have refused the reimbursement of VAT favorable to taxpayers, arising from transactions whose price (including VAT) has been paid by a centralized treasury (including cash polling and netting). Binding precedents have concluded that offsetting or offsetting is not permitted as a valid mode of payment for the deductibility of VAT charged to taxpayers.
The precedent is based on the consideration that, on the one hand, the VAT considers the price of commercial activities as actually paid when the obligation is removed by a method (different from cash) authorized by civil law, but, on the other hand, On the other hand, VAT requires that the VAT charged to the taxpayer be paid through cash flow, in order to be deductible.
This means that the VAT paid will only be deductible for tax purposes when done through cash flow (regardless of whether the obligation to pay the price has been removed through another form). Establish a different method of payment for the price of purchases and VAT, notwithstanding that according to VAT, VAT must be included in the price and invoiced alongside it.
In our opinion, the criterion is incorrect and ignores the VAT deduction mechanism as well as the way in which common transactions between groups (such as multinational companies) are carried out. However, this precedent is very relevant, because it involves a significant risk for transactions (mainly between related parties or intra-group) in which there is no cash flow or, in the corresponding period, the agreed prices resulting day-to-day operations of corporations are not done. In such cases, businesses will not be allowed to deduct the VAT charged to them, resulting in double taxation.
This precedent goes against the international standard of neutrality of the VAT mechanism, which aims for taxation to be neutral regardless of the number of transactions involved. Consequently, this precedent implies double taxation of VAT, contrary to the main objective of the tax, which is that it should ultimately be borne by the final consumer and not by businesses.
Furthermore, the case law is inconsistent with the guidelines issued by the Mexican tax authority regarding the issuance of invoices, which in Mexico must be carried out through the systems of the tax administration and allows compensation to be represented as a means of valid payment.
It is important to mention that the mentioned jurisprudence is only binding for the authorities of this specific judicial circuit (Aguascalientes). It is not binding in the rest of the circuits or the Mexican Supreme Court of Justice. Moreover, according to the information available, this precedent has not yet been implemented in tax audits.
The precedent analyzed undoubtedly represents a structural change in the mechanics of VAT and the way in which it can be deducted, and clearly moves away from international standards. The Supreme Court of Justice of Mexico is expected to rule on this case and issue a definitive precedent that will be binding in Mexico.