Under normal circumstances, a Mexico taxpayer may offset its output VAT liabilities against its input VAT liabilities. In the event that the input VAT is larger than the output VAT in any given month, the taxpayer would be allowed to recover the surplus balance, either by requesting a refund from the Tax Authority, or by offsetting such balance against other tax liabilities (eg, income tax or excise tax, amongst others). However, taxpayers are limited to obtain a credit only in the proportion in which they carry out VATable transactions. That is, if a taxpayer only undertakes business activities with the shifting of VAT to its own customers, all the input VAT will be creditable.
The VAT Law was amended as of 1 January 2017, in order to include new requirements and conditions for the crediting of VAT during preoperative periods. The amendments were introduced in order to mitigate previous practices in which taxpayers without business activities were unduly obtaining the VAT credit on the basis of a preoperative period.
For the purposes of the VAT Law, a preoperative period is one during which a taxpayer undertakes investment and expenses prior to the start of business activities for the sale of goods, lease of goods or rendering of services. For hydrocarbon exploration and extraction, the preoperative period would be limited to the phase related to the exploration, identification and quantification of deposits.
Below we include a high-level summary of the new options for claiming a VAT credit on preoperative periods:
• Taxpayers may credit their preoperative input VAT up to the date upon which they incur their first transactions subject to VAT (business transactions exempt from VAT would not be considered for the purposes of claiming a VAT credit).
• Taxpayers may request the refund of preoperative input VAT each month in which the preoperative expenses are incurred, provided that additional conditions are met. For these purposes, taxpayers shall have a forecast of the transactions that they will carry out upon conclusion of their preoperative period, identifying which transactions would be subject to VAT and those that would be VAT exempt. Moreover, taxpayers shall submit additional information along with their initial VAT refund request, including the following:
– Forecasts and description of expenses and investments to be carried out throughout the preoperative period. In order to demonstrate the above, taxpayers shall also attach property deeds, agreements, permits, licenses, registries, blueprints, among other documentation.
– Forecasts of output VAT to be triggered by the taxpayers, as well as an estimated proportion that such output VAT will represent from its input VAT.
– The funding mechanism used by taxpayers to carry out the preoperative expenses.
– An estimated date in which taxpayers will begin to carry out VATable transactions (eg, begins undertaking sales or rendering services).
In addition to the above, the VAT Law also includes a mechanism to determine whether or not there was an excess in the VAT credit/refund, which may be summarized as follows:
• On the expiry of 12 months from the end of the preoperative period, taxpayers shall compare their forecasts of the proportion that their output VAT represents from its preoperative input VAT against the actual output VAT triggered by the taxpayer. Based on the above, taxpayers shall adjust the credited amounts of VAT if the forecasts were inaccurate by more than 3%.
– If the actual output VAT was lower that forecasted, the taxpayers shall reimburse the recovered VAT in the same proportion.
– If the actual output VAT was greater than forecasted, the taxpayer may increase its credited VAT in the same proportion.
• In the event that taxpayers fail to carry out VATable transactions within a term of 12 months following the initial VAT refund, they shall reimburse the recovered preoperative input VAT. However, the taxpayer would remain entitled to obtain a new refund of such amounts once that they start business operation subject to VAT. Taxpayers dedicated to hydrocarbon exploration and extraction would be exempted from the above condition. Other taxpayers that foresee that their preoperative period would last more than 12 months may apply to the tax authority for an authorization in order to avoid a reimbursement of the refunded VAT.