In Mexico, it is well known that whoever intends to obtain in refund balances in favor of the Value Added Tax (VAT) he should be prepared to face an administrative distress and in some cases to be resigned or to lose it or to get it back in a different way different from an express refund by the authority, either a compensation or Credit against amounts future charges.

Balances in favor of VAT may occur due to various reasons.

Most common reasons could be that the main taxpayer activity is bound to the 0% rate and then all his taxable expenses generate him a recoverable VAT higher than his shiftable VAT, thus configuring the Credit balance.

Other common causes are when an investor, either national or foreign, makes a strong investment and although his activity is not submitted to be taxed at the rate of 0% it is clear that at the start of the project many of the flows are intended for taxable expenses at the general rate, and given that the project, in its initial state has no income or its income are lower than its Credit balances result in relevant quantities.

If we observe both situations, the businessman faces in both cases a severe problem from the flow derived from the practical impossibility of getting a refund in amounts which genuinely and legally belong to him and that for no reason should be withheld at the authority’s discretion.

Legal grounds to support the existence of the VAT Credit balances established in the law in the matter in its article 6 which sets forth:

“Article 6o. When the statement of payment results in a favorable balance, the taxpayer may credit it against the corresponding tax in the following months until it is exhausted, request its return or carry out its compensation against other taxes in the terms of article 23 of the fiscal code of the Federation. When the refund is requested, it must be on the total credit balance. In the event that the compensation is made and a balance of the balance is returned in favor, the taxpayer may request a refund, provided that it is on the total of said balance.

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The paragraph above The previous paragraph makes it clear that in order to recover the credit balances generated from VAT, the taxpayer may opt for three ways, request the refund, Credit it against amounts to be paid from later VAT or compensate it also in the future against any other kind of taxes resulting in charge. The last two shall be no matter of this document, however, in general, they pose no bigger complication when applying them. The true problem comes in the moment in which because of my activity I don’t know if I won’t have the possibility to credit it in the future and/or that in the meantime I won’t be able to compensate against other taxes having then as the only way to request for the refund of the amounts.

Legal grounds to request for the refund of the amounts for which the taxpayers are entitled to, is article 22 of the Fiscal Code of the Federation which states in reference the following in its part of interest:

“Article 22.- Tax authorities shall return the amounts unduly paid and those applying pursuant to the tax laws. ….

When in a refund request errors exist in the data contained in the same, the authority will require the taxpayer in writing and within a period of 10 days clarify said data, warning that if not done within that period, it will be considered Withdrawal of the corresponding refund request. In this case it will not be necessary to submit a new request

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Said requirement shall suspend the term provided to make the refund during the term elapsing between the following business day in which the notification becomes legally valid and the date in which the requirement is to be addressed.

When the refund is requested, this shall be performed within a term of forty days following the date in which the request was presented before de competent tax authority with all the information including, for the case of the deposit in account, the information of the institution member of the financial system and the account number for the taxpayer electronic transfers in said financial institution duly integrated pursuant to the Bank of Mexico provisions, as well as the other reports and documents noted by the Regulation of this Code. The fiscal authorities, to Verify the origin of the refund, may require from the taxpayer, in a term no longer than twenty days after the presentation of the application for refund, the information, reports or additional documents it considers as necessary and which are related to the same. For such purpose, the tax authorities shall require from the plaintiff to comply with the requirements within a term of twenty days, being warned that if fails to do so within said term, the corresponding request for refund shall be considered as dismissed. Tax authorities may only make a new requirement, within ten days following the date in which the first requirement is met, when refers information, reports or documents which have been supplied by the taxpayer to meet said requirement. For compliance of the second requirement, the taxpayer shall have a term of ten days, counted from the day following to that in which the notification of said requirement becomes valid, and the warning referred to in this paragraph shall be applicable. When the authority requires the aforementioned information, reports or documents from the taxpayer, the term elapsed between the date in which it had notified the requirement of the same and the date in which those are fully provided by the taxpayer, shall not be computed in the determination of the aforementioned terms for the refund.

From the above it follows:

  1. That it is the authority’s obligation to refund the amounts existing in favor of the taxpayers.
  2. That if errors exist in the refunds which are detected by the authority, this shall require the clarification for the same to be made in a maximum term of ten days or otherwise it will be considered as dismissed from the procedure.
  3. That the authority has a term of 40 days from which the return is submitted to carry out the refund.
  4. That to validate the origin of the return the authority must require the taxpayer in a maximum period of 20 days the information it considers necessary to perform the validation mentioned and in turn the taxpayer will have the same deadline to fully respond to the requirements.
  5. That the authority may make a second request within 10 days after the first has been completed, on what is shown by the taxpayer in the first request and he will have the same term to respond.
  6. These deadlines in which information is required by the authority and is complied with by the applicant, suspend the term of 40 days the authority has to perform the refund.

Theoretically, there seems to be no problem given that the authority has the obligation to return the amounts in my favor and if it has questions it asks me, I answer and I deposit what is appropriate.

Now, in the real life, the scenario is not that sweet, on the contrary.

Of course, there is no official document stating so, neither a public office accepting it openly, but it seems that the motto on behalf the central authority towards all the Local Administrations in the different federal entities of placing in the taxpayers road all the obstacles possible in order for this kind of refunds not to be made, for no reason, to the taxpayer.

And the problems actually start in item 4 of the 6 listed above. This is when the authority requires information from the taxpayer that, it discretionally considers as necessary to qualify the origin or not of the refund requested.

It is said that the problems start here whenever anyone who has seen the requirement from the authority, may agree that they are a minimum of a couple of requirements sheets to be complied with, some of those requirements do are related to the proceeding and others have nothing to do with that at all and, this despite the fact that the authority itself already has a large part of the information it requests in its database.

In the reality this should be simple, the authority has my invoices and if I support those with my account statements showing the deposits, there I can integrate my transferred VAT. Now, if I also attach the documents with which I support my credited VAT and I offer the same account statement demonstrating the debits there should be no more requirement to be made. Notwithstanding the above, they request documents with are at the edge of the origin or not from the request of credit balance. Within the ones I have seen are: contracts with clients and suppliers, notarial certificate of the society related to mergers of former years, photographs, logbooks, etc., etc., etc.…

In addition to the above, the list of questions includes many that are repetitive, for example, the tax domicile is requested up to two or three times and when in the logic of one to answer once is more than enough, if the authority does not see this reflected in the response letter as many times as it has asked, it considers the writing as incomplete and the worst of all is that the process is not rejected but settles a legend that resembles the following:

“…since the information request made to the taxpayer has not been fully complied with, there are no elements on this authority’s part to conclude the origin of the refund request presented, therefore the taxpayer is considered as having withdrawn his process and it is made known to him that he has the right to resubmit it, leaving the powers of this authority to validate the origin of the new application submitted…”

From the writing above, two core points arise:

  • It does not particularly specify the reason why the procedure is considered dismissed and consequently the verification of said omission by the applicant cannot be performed.
  • It does not deny the refund but it considers the proceeding as dismissed in order for this to be file the same again, thus avoiding appealing on behalf of the taxpayer, attacking the refusal of the authority.

And this is how based on the above, the refund proceedings can take years leaving the taxpayer in fully defenseless and with no access to his financial resources legally belonging to him.

What to do?

Unfortunately it is the only existing way, so the suggestion is that the one which provides shall have a balance in favor of the VAT and fails to visualize a agile mechanism for its recovery in a short-term (accreditation or compensation against other taxes in charge) having as a unique option to request that in refund, or to get good advice in order for the process to be the least tortuous possible.

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