After analyzing the tax refunds in the entry Tax Refund and Undue Payments in Mexico, tax offset (compensación in Spanish) is undoubtedly another legal institution accountants most frequently use in favor of their clients. Therefore, it’s pertinent to briefly write a few lines about it to be consistent with the analysis of the Federal Tax Code that I started in Series for the taxpayer Pro-Taxpayer Series. Generalities of Federal Tax Law in Mexico.
An entry that will be carried out based on current legislation, that is, the Federal Tax Code, the Regulations of the Federal Tax Code, and the Tax Miscellany for the Fiscal Year 2024 (at the time of the translation), as well as the experience that practice in this matter has given me. So, in any case, this humble entry does not constitute an essay or article of an academic nature but rather a simple summary of what is contemplated in said regulations. Perhaps, in the future, and in a format that deserves it, I will elaborate on this institution.
Without further ado, let’s get started:
List of Contents
- 1) Tax Offset Characteristics
- 2) Limited Tax Offsetting
- 3) Tax Offsetting Notice
- 4) Consequences of Inadmissibility of the Tax Offsetting
- 5) Tax Offsetting Prohibition
- 6) Offsetting Ex Officio
- 7) Tax Offsetting For the Exercise of Verification Powers
- Request
- Application and Procedure
1) Tax Offset Characteristics
Although this institution is of special importance in tax matters, it must be said that its origin dates back to common or civil law. In this case, that which is regulated by articles 2185 to 2205 of the Federal Civil Code. However, through binding precedents and interpretations, lawmakers and the tax courts have concluded that tax offset in tax matters is understood differently. See, as an example, the following precedent: VALUE ADDED TAX. CIVIL OFFSET IS NOT A MEANS FOR ITS PAYMENT, NOR CAN IT GIVE RISE TO A REQUEST FOR A BALANCE IN FAVOR OR CREDIT[1].
However, some similarities between both areas of law converge in this institution and are the following:
I.- The offset is updated when two people, in this case the taxpayer and the treasury, meet the status of debtors and creditors reciprocally.
II.- The effect of the offset is to extinguish by operation of law the debts owed between both parties, up to the amount that is the lesser.
III.- The offset is not applicable unless both debts consist of an amount of money.
IV.- Also, for tax offsetting, it’s required that the debts be equally liquid and payable.
2) Limited Tax Offsetting
As of the Income Law of 2019 and subsequent adjustments to the Federal Tax Code, the once universal tax offsetting was eliminated from our tax system, governing, of course, for those operations carried out under the protection of the previous regulations. This figure, in essence, consisted of taxpayers extinguishing their tax obligations with the balances in favor generated in compliance with the same or different tax.
However, currently taxpayers obliged to pay by declaration may only choose to offset the amounts in their favor against those they are obliged to pay for their own debt, provided that both derive from the same tax, including its accessories. For this purpose, it shall be sufficient to offset said amounts updated following that seen in 14) Update of Contributions from the month in which the payment of the undue amount was made or the declaration containing the balance in favor was submitted until the offset was made.
3) Tax Offsetting Notice
Taxpayers who submit the tax offset notice must accompany the documents established by the Tax Administration Service through general rules. These rules will also establish the deadlines for submitting the aforementioned notice. However, this shall not apply to taxes incurred due to importation or those for a specific purpose.
Taxpayers who have exercised this option and who, in any case, had a remainder after the tax offsetting has been made may request its refund.
Finally, it’s relevant to mention that according to rule 2.3.10 of the Miscellaneous Tax Resolution for the 2024 Fiscal Year, the obligation to submit the compensation notice shall be deemed fulfilled when taxpayers submit their provisional, definitive, or annual payment declarations through the ‘Declarations and Payments Service’ referred to in sections 2.8.1 and 2.8.3 of the resolution; in which there is a balance due to their own debt, and they choose to pay it by offsetting amounts in their favor, stated in provisional, definitive or annual payment declarations corresponding to the same tax.
4) Consequences of Inadmissibility of the Tax Offsetting
If the tax offsetting has been made and is not applicable, surcharges shall be imposed in accordance with the terms set forth in H) Surcharges For Late Payment on the amounts improperly compensated, updated by the period elapsed from the month in which the improper compensation was made until the month in which payment of the amount of the improperly made compensation is made.
5) Tax Offsetting Prohibition
Amounts whose refund has been requested or when the obligation to return them has expired, or amounts that have been transferred in accordance with tax laws, expressly and separately or included in the price, may not be offset when the person seeking to make the offsetting does not have the right to obtain their refund.
6) Offsetting Ex Officio
The tax authorities may offset ex officio the amounts that taxpayers are entitled to receive from the tax authorities for any reason, even if the refund has been requested or not against the amounts that taxpayers are obliged to pay for their own debts or for withholding from third parties when these have become final for any reason.
Offsetting may also be applied against tax liabilities whose payment has been authorized in installments; in this last case, offsetting must be carried out on the outstanding balance at the time of said offsetting. The tax authorities shall personally notify the taxpayer of the resolution determining the offsetting.
On the other hand, in accordance with rule 2.3.9 of the current Miscellaneous Tax Resolution, the tax authority, when offsetting ex officio the amounts that taxpayers are entitled to receive from the tax authorities for any reason against tax liabilities authorized to be paid in installments, shall do so in the following cases:
I.- When the guarantee for the tax interest has not been granted, disappears, or is insufficient, in cases where it has not been waived without the taxpayer providing a new guarantee or extending the insufficient one.
II.- When the taxpayer has one or two installments due and not paid on the date on which the offset is made or the deadline for making the deferred payment has expired and it’s not made.
In addition, the offset shall be up to the amount of the amounts that the taxpayer is entitled to receive from the tax authorities for any reason or for the updated balance of the tax credits authorized to be paid in installments to the taxpayer when this is lower.
Finally, when the taxpayer has firm tax liabilities against him, the tax authority may automatically offset the amounts that the taxpayer is entitled to receive for any reason, derived from the balances in his favor determined in the declaration that are appropriate and apply them up to the updated balance of the firm tax liabilities.
7) Tax Offsetting For the Exercise of Verification Powers
Taxpayers subject to the exercise of the verification powers of the tax authority, specifically verification and office visits, may choose to correct their tax situation by applying the amounts they are entitled to receive from the tax authorities for any reason against the omitted contributions and their accessories. The above, provided that the taxpayer submits the application in accordance with the procedure and requirements established by the Tax Administration Service.
Request
In any case, the application referred to in the previous paragraph may be submitted from the business day following the one in which the notification of the observation letter takes effect or after the last partial report is drawn up and up to within 20 business days after the end of the period referred to in article 48, sections VI or VII of the Federal Tax Code, as appropriate, or, where appropriate, the final report of the home visit is drawn up.
Also, in the request for an account, the taxpayer may comment on one or more facts or omissions identified in the exercise of verification powers, for which the taxpayer must indicate the amounts and items for which they request the correction of their tax situation through applying this power.
In order to determine the amounts that the taxpayer requests to be applied, the tax authority to which the request is submitted may request the data, reports, or additional documents that it considers necessary within 25 business days following the date on which the corresponding request is submitted. It is important to clarify that the tax authorities shall not be deemed to have initiated the exercise of their verification powers when they request the data, reports, or additional documents in question.
For such purposes, the taxpayer must comply with said request within a maximum period of 20 business days counted from the business day following the one in which the notification of the request indicated in the previous paragraph takes effect so that no request for an extension to present the requested information and documentation shall be admissible and, in the event of not complying in its entirety with the request, the request shall be deemed to have been withdrawn.
On the other hand, the previous request shall not apply to those amounts previously denied in return or when the obligation to return them has expired. Nor shall it apply to those amounts that the taxpayer has the right to receive when they derive from a resolution issued in an administrative appeal or from a judgment issued by a jurisdictional body. Likewise, in the case of remaining balances in favor of the Value Added Tax that have been previously credited.
Application and Procedure
The tax authority to which the application for the application of credit balances is submitted shall summon the taxpayer, his legal representative and, in the case of legal entities, its governing bodies within 25 business days after the application for tax correction is submitted if no additional information or documentation is required, or within 20 business days after the corresponding requirement is met, in order for the taxpayer to come to its offices in order to inform him of the amount to be applied.
For such purposes, the authority shall draw up a detailed report recording the corresponding amount. In any case, the taxpayer must state within 10 business days after the report is drawn up whether or not he accepts the determination of the authority to correct his tax situation by applying the aforementioned facility. Finally, if the taxpayer does not make a statement in this regard, it shall be understood that he does not accept the proposal.
On the other hand, in the resolution determining the omitted contributions and their accessories issued in accordance with article 50 of the Federal Tax Code, the authority that exercised the verification powers shall inform the taxpayer of the amount of the self-correction by means of the application of the facility provided for in the previous paragraphs. For such purposes, the corresponding amount shall be applied to all items for which the taxpayer requested a correction.
If the amount that can be applied is insufficient to cover the entire amount for which the taxpayer was corrected, the taxpayer must pay the remaining amount within thirty days following the day in which the notification of the resolution determining the tax credits took effect, in accordance with article 65 of the Federal Tax Code.
Finally, the option to offset and correct the taxpayer’s tax situation by exercising the tax authority’s verification powers, as well as the submission of the corresponding application, shall not be considered a collection process that interrupts the statutes of limitations of the obligation to repay in terms of articles 22 and 146 of the Federal Tax Code. Likewise, the application submitted by the taxpayer to correct his tax situation does not constitute an instance, so the acts issued by the tax authority cannot be challenged by taxpayers.
By Omar Gómez
Mexican Tax, Administrative and Constitutional Attorney
Partner
Contact me at. [email protected]
[1] Thesis: 2a./J. 19/2023 (11a.) Second Chamber of the Mexican Supreme Court of Justice. Eleventh Judicial Epoch. Binding Precedent. Digital Registration: 2026404.