In resolving a contradiction of criterion, the Second Chamber of the Supreme Court of Justice (the “Chamber”) ruled that the civil offsetting of debts between individuals cannot be considered as a form of payment of Value Added Tax (“VAT”).

The Chamber argued that the civil offsetting of debts only constitutes a method of extinction of non-tax obligations, which serves to determine the moment of VAT accrual.

Thus, if a taxpayer pays an invoice via offsetting, it will not be understood that the corresponding VAT has been paid and is therefore creditable.

Therefore, in light of this new criterion, the taxpayer who pays a debt via offsetting, apparently, in order to be able to credit the corresponding VAT, must pay the same in cash to its supplier, so that the latter may pay it to the tax authorities.

This criterion is very unfortunate and confuses the taxpayer, who, for VAT purposes, is the one who renders the service or sells the asset, and consequently issues the invoice, therefore, it should be its obligation, upon having satisfied the payment of its invoice via offsetting, to pay the VAT generated to the tax authorities.

Based on the above, we recommend reviewing the offsetting transactions carried out in recent years in order to analyze the validity of VAT crediting, if any, that may have taken place.

Lastly, it is important to remember that, since this is a case law, this criterion will be binding for all courts in the country.

Should you have questions or require additional information regarding this communication, please contact info@rapa.mx.