Relevant Criteria Regarding VAT in Mexico

Civil compensation is not a form of VAT payment.

A few months ago, in March 2023, when resolving the contradiction of criteria 413/2022, the Second Chamber of the Supreme Court of Justice of the Nation (List of Communications ((scjn.gob.mx)) ruled that based on the interpretation of articles 1, 1-B, 5, 17, and 18 of the Value Added Tax Law (LIVA), compensation, applicable in civil matters, is not a form of VAT payment, nor does it give rise to a request for a refund of the favorable balance or tax credit. Compensation only determines when the VAT obligation arises, but it does not generate its credit, as the VAT must have been effectively paid to the tax authority for that purpose.

Likewise, it was determined that, according to the provisions of tax laws, compensation only occurs in the relationships between taxpayers and the tax authority, not between taxpayers themselves, since Article 2192, section VIII, of the Federal Civil Code establishes that the offsetting of tax debts is not allowed. Therefore, civil compensation is a way of determining when the consideration for services rendered and the obligation to pay the tax are effectively understood as received, but it does not serve to pay the tax. In that sense, it should not be argued or considered that civil compensation is a form of VAT payment, as it would equate to confusing the moment when the obligation to pay the tax arises with the extinction or conclusion of that same obligation. In other words, it would be leaving it to the discretion of individuals providing independent services to extinguish the obligation to pay VAT through civil compensation, which, as mentioned earlier, is prohibited by the Federal Civil Code.

In this regard, it was resolved that the criterion to be upheld as jurisprudence is thesis number 2a./J. 19/2023 (11a.), under the heading “Value Added Tax. Civil Compensation is not a means of payment nor does it give rise to a request for a refund of the favorable balance or tax credit (Legislation in force in the 2019 and 2020 fiscal years),” published on Friday, May 12, 2023, in the Judicial Weekly of the Federation and, consequently, it is considered mandatory from Monday, May 15, 2023. Detail – Thesis – 2026404 (scjn.gob.mx), for all jurisdictional bodies in matters or controversies on this subject.

From the aforementioned criterion, it is understood that the judicial body considers that the primary or principal debt is the civil one, and that the tax is a fiscal debt that is not covered by compensation. Therefore, the taxpayer must pay the tax to the tax authority, without taking into account the transfer of the tax and, in some cases, the debtor owes the creditor a global or total debt that includes the tax. However, as mentioned, the jurisprudence already exists and is mandatory, so it is important to take it into account and, if necessary, avoid compensation transactions that credit or transfer VAT. Under the understanding that jurisprudence can be invoked and applied, the tax authority may reject refunds granted without exercising verification powers, in addition to making observations regarding the determinable VAT in monthly payments. Furthermore, if it were to deny the creditable VAT, it may also seek to reject income tax deductions related to said VAT.

No VAT crediting in liability capitalization.

Similarly, on May 12, 2023, the isolated thesis of the Tenth Collegiate Court in Administrative Matters of the First Circuit was published in the Judicial Weekly of the Federation, determining that for the admissibility of VAT crediting and refund of the favorable balance, the tax must be paid in cash, bank transfer, or check, which is also fulfilled when the tax is declared and paid to the tax authority, without authorizing the payment of the tax through the capitalization of liability or debts by issuing shares, as this is not authorized by Article 1-B of the LIVA. In this sense, if the intention is to cover the tax by issuing shares, it does not meet the requirements to be considered effectively paid, and therefore, the refund of the favorable balance that may be generated or its crediting does not apply. Thesis: I.10o.A.21 A (11a.) (scjn.gob.mx)

Regarding this, it is necessary to consider that the cited criterion is an isolated thesis and not jurisprudence, so while it is true that it is not a mandatory criterion, it also guides jurisdictional bodies in matters or controversies on the subject and they can apply it as long as there are no contrary mandatory criteria.

Kennya Ramirez
Tax and Legal Senior Consultant
ECOVIS Mexico
Mexico City
kennya.ramirez@ecovis.mx