As every year, on September 8, the President of Mexico, through the Ministry of Finance and Public Credit, presented to the Mexican Congress the Economic Package for fiscal year 2022. After a series of night sessions, in which legislators cast their votes on the draft laws and reforms, finally, on November 12, 2021, the following was published in the Official Gazette of the Federation (“DOF”), the Federal Income Law for the Fiscal Year 2022 (“LIF”).
In this regard, the LIF consists of the regulation par excellence, by which the Federal Government makes a projection of the revenues that will be received in the year 2022, derived from taxes, social security fees and contributions, contributions for improvements, duties, products, benefits, income from the sale of goods or rendering of services, among others. This Law contemplates the revenues to be received, by items and estimated amounts, with which the Federal Government intends to carry out its main activities and strategic projects during the following year, which are set forth in the Federal Expenditure Law.
Now, making a very brief analysis of the LIF, it can be observed that under the heading “Taxes”, all income that will be received from taxes paid by taxpayers, in any type of operation or derived from their economic activities, is contemplated; however, there is a concept that is not observed but that has been the object of financing since 2020 and 2021: the balances in favor of taxpayers, which without any legal basis and reason, are not returned by the SAT. Evidently, since this is an illegal source of financing or budget, the title of this article is presented as a criticism, since there is no way to justify that such amounts are used by the Federation to finance its activities.
Thus, during the fiscal years 2020 and 2021, as anticipated, in practice a new “budget” or non-express form of financing has been observed on the part of the Federation: the balances that taxpayers have in their favor through the mechanics of the law, derived from the payment of contributions. Indeed, during the aforementioned fiscal years, in the midst of the pandemic and with multiple economic crises in various industries, the Tax Administration Service (“SAT”) has had the luxury of financing itself with amounts that, by right, correspond to the taxpayers, affecting their liquidity and economy, not only because of the refusal of the refund, but also because this implies the need for the companies to go to jurisdictional instances to challenge the actions of the tax authority.
In order to understand more easily how the authority carries out its actions resulting in the aforementioned financing, the following explains how the tax refund procedure works, in accordance with article 22, seventh paragraph of the Federal Fiscal Code:
The taxpayer files a refund request, with the data and documents regarding the origin and source of the refund, expecting the SAT to return it within no more than forty (40) business days thereafter. The SAT will analyze the request and, in case of doubt, may issue a first request for information and documentation within twenty (20) days following the filing of the request, for which the taxpayer will have an equal period of time to respond. If the tax authority maintains any doubt or question regarding the documentation provided in response to the first request for information, it may issue a second request within ten (10) days following the receipt of the response to the first request for information; such second request must also be answered within ten (10) business days.
This implies that those forty (40) working days to make a refund could turn into approximately three and a half months, in case the SAT makes the two (2) requests for information, which I assure you is the premise that prevails in most of the refund procedures carried out by companies. In the vast majority of cases, the SAT issues the second request for information almost as a mere formality, that is, without even taking into account or evaluating the information provided in response to the first request for information, unnecessarily delaying and increasing the cost of the procedure and acting in violation of Article 22, seventh paragraph of the Federal Tax Code.
To the surprise of many taxpayers, in the 2020 and 2021 refund procedures, also the major premise has been to obtain as answers the following: (i) resolutions partially rejecting the refund of credit balances or, (ii) to consider the taxpayers as having withdrawn their refund requests, which will represent a waste of time for them, and to have them resubmit their request, according to the same deadlines explained above.
Desgraciadamente, la obtención de una resolución de devolución íntegra es tan rara últimamente que su recepción parecería una especie de premio para el contribuyente.
Having said the above, the financing and income that is not expressly contemplated in the LIF arises precisely from the first scenario, from the resolutions that determine to partially refund the taxpayers’ credit balances. By way of example, this means that, if the balance in favor is in the amount of $1,000.00 (One million pesos, 00/100 M.N.), the SAT resolves to return $850,000.00 (Eight hundred and fifty thousand pesos, 00/100 M.N.) and, the remaining $150,000.00 (One hundred and fifty thousand pesos, 00/100 M.N.), it will consider them as taxes that were effectively owed to the federal treasury, and therefore, its refund is not applicable.
In my experience, the most common argument used by the tax authorities to partially deny the refund of tax credits is the utopian concept of “materiality of the transactions”. A concept that does not find its definition in any tax provision, nor in any other matter, and that practically serves as the basis for most of the SAT resolutions in recent years, because in view of this loophole, it gives it the connotation that is most convenient for it.
Basically, the concept of “materiality of transactions” refers to the fact that any transaction carried out by taxpayers, such as the acquisition/disposal of an asset or the contracting/provision of a service for which they paid some consideration, must have documentary support that proves, in the event of a possible review, that the transactions covered by the tax vouchers issued by the taxpayers were not simulated. Hence, its meaning lends itself to multiple arbitrariness on the part of the authorities.
Thus, in a procedure for the refund of credit balances, taxpayers are obliged -according to the SAT- to prove the materiality of the transactions with their suppliers, despite the fact that Article 22, seventh paragraph of the Federal Tax Code does not provide the authority’s power to request it, The verification of the materiality of a transaction, in accordance with the tax provisions and jurisdictional precedents, is a matter of the procedure provided in the famous article 69-B of the Federal Tax Code, related to the dreaded “black lists” of the SAT, and in its case, of the verification powers of article 42 of the same law.
The refund procedure is not as such a verification power, but is a mere summary verification procedure, as stated in Article 22, seventh paragraph of the Federal Tax Code, in which only basic issues can be reviewed, which are expressly related to the validity of the refund and, in the event of seeking to go into more detail, the same article expressly states the rules and forms in which the verification powers -different from the verification procedure- will be exercised. Therefore, it is logical that the powers of verification and the power to verify the validity of the tax refund are very different matters.
But here is where the problem comes; the SAT makes a very broad and very unfortunate interpretation of the possibility given by the seventh paragraph of Article 22 of the Federal Tax Code to request data, reports or documents to verify the origin of the refund and gives it a Machiavellian twist, in which it argues that such power implies the need to review the materiality of the operations, because it is in such operations in which the right to request the refund of taxes is generated.
As absurd as it sounds, the statement is completely erroneous, since tax credit balances are obtained by taxpayers by the mere mechanics of the law. This means that the provisions of the tax laws establish the ways in which, by performing mere arithmetic operations of addition and subtraction, credit balances will be generated, recognizing the tax payments that the taxpayers themselves have already paid. It is precisely there, where the taxpayers’ right to request a refund arises and “takes shape” and not, on the contrary, as the tax authority states, in the fact of whether or not a transaction was actually carried out with the suppliers and the respective materiality is available.
Likewise, this argument is made by the tax authority accompanied by a simplistic statement in which it points out that, supposedly, the taxpayers did not provide supporting documentation related to the materiality of the services with the operations with certain suppliers. However, I assure you that throughout the fiscal year 2021 and 2020, within the refund procedures of balances in favor that we have attended, even though we know that the SAT does not have the authority to do so, with the intention of obtaining the refund in full, we provide all the documentation that proves the operations, such as photographs of the goods purchased or services rendered, invoices, payment vouchers, purchase orders, e-mails, contracts and even documentation of the suppliers’ personnel and the payment of the taxes of the suppliers or service providers of the taxpayers who are requesting the refund.
This is not enough, the tax authority limits itself to stating that no documentation is provided or that the documentation provided is not sufficient to prove the materiality of the transactions and, in some cases, it even takes the liberty of citing a series of documents that the taxpayers should have exhibited for each of their transactions, when the transactions in question are transactions carried out between private entities that may enter into their transactions even verbally, as provided for in the general theory of contracts.
My reading of the above is that the SAT is betting on the following: (i) taxpayers are unwilling to enter into litigation to request such refunds, due to the cost and time involved; or (ii) that the litigation is lost, in which case, the taxpayers would have been charged a much greater tax burden than they are legally entitled to, since by denying them the refund of their credit balances, the amount not refunded would be understood as a tax owed -without valid justification- to the tax authorities.
To address this situation, taxpayers may choose to file an appeal for revocation, which is resolved by another area of the SAT itself. However, notwithstanding the fact that, as evidence to the appeal for revocation, additional documentation is exhibited to accredit the operations, based on the observations of the resolution issued by the SAT in the refund procedure, the SAT usually does not resolve the appeal. And in the remote case that it does resolve it, the tendency is to issue a resolution that invariably confirms the denial of the refund, practically under the same arguments already stated.
Now, if such resolutions are challenged before the Federal Court of Administrative Justice in a federal administrative lawsuit, the tendency of the tax authority is to answer the lawsuit by asserting exactly the same arguments and claiming that no documentation was provided, expressly ignoring the information and documentation that, by the way, is supported by acknowledgments issued by the SAT’s own electronic system in favor of the taxpayers.
In this case, and taking into account the significant backlog in the Courts due to the COVID-19 pandemic, it is still unknown what will be the prevailing criteria of the judges and the manner in which these matters will be resolved.
This is how throughout the 2020 and 2021 fiscal years, a kind of financing by the tax authority has been seen; the budget that is not expressly recognized within the LIF, but that, undoubtedly, affects the economic operations of taxpayers. The tendency is that, for fiscal year 2022, this behavior of the SAT will continue to be reiterated, until the courts begin to issue clearer positions that could discourage this way of operating on the part of the federal tax authorities.
As an additional comment, the fact that the judgments begin to be resolved in favor of the taxpayers that are located in the previous assumption, will also imply that the tax authority will have to allocate more resources -coming from taxes-, to face the payment of updates and interest to taxpayers, due to the untimely payment of refunds that from the beginning corresponded to them. Rather than something positive, this implies allocating greater resources to something that could have been avoided from the beginning and was fully known by the authority itself, which is contrary to legality.
We hope this document will be useful.
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Luis Shahid Kanchi Gómez
