Amendments to Mexico's VAT Law will significantly increase the costs for business taxpayers. Cesar De la Parra and Ignacio Mosquera of Chevez, Ruiz, Zamarripa y Cia explain the changes.
A bill of tax amendments submitted by the Executive Branch and approved by the Mexican Congress included changes to Article 5-I of the Value Added Tax Law (VAT Law), regarding the creditable VAT of fixed assets or expenses incurred in preoperative periods (i.e. before generating VAT income on its activities).
Under Article 5-I as it now applies, taxpayers may credit VAT paid on the purchase of fixed assets and/or on expenses incurred in a preoperative period.
Prior to the amendment, which will have effect from January 1 2017, taxpayers were allowed to request the refund of monthly favourable balances of VAT and, in general terms, in a 40-day period the taxpayer would receive the VAT refund. However, the government said this VAT crediting system was making it difficult for tax authorities to verify that fixed assets and/or expenses incurred in a preoperative period would eventually give rise to activities subject to VAT.
Under the changes made to the VAT Law, and according to the explanatory memorandum accompanying the legislation, if the taxpayer's activities do not result in a VAT, then the credit against the tax will be disallowed, and therefore the economic burden of the tax will be borne by the taxpayer as the final consumer.
The VAT amendment
From January 1 2017, the VAT associated with the purchase of fixed assets and preoperative expenses may be credited under one of the following two options:
The taxpayer may request the related refund to be delayed until the first month in which it performs activities that are subject to VAT (an inflation adjustment is allowed); or Request the VAT refund in each month in which the preoperative expenses or purchase of fixed assets are incurred, according to a forecast of the activities subject to VAT and provided that the taxpayer submits certain information. It is important to mention that the provision defines the term "preoperative period" as the period of time in which the expenses and purchase of fixed assets are incurred, prior to the beginning of any activities by the taxpayer involving the sale of the goods, provision of services or leasing of the goods.
The VAT Law also defines that the preoperative period may have a maximum duration of one year from the date of the first VAT refund request, unless the...