Tax effects of the compensation of value added tax

After the analysis carried out by the Supreme Court, it concluded that the compensation is decisive to identify the moment in which the obligation to pay Value Added Tax arises. However, debts are not offset when they are related to tax obligations, except in cases where this is permitted by law.

As a result of the foregoing, the situation, for the purposes of Value Added Tax, is that when said tax is pay by offsetting, it cannot be considered as creditable since it has not been effectively reported to the Public Treasury.

The resolution of the court brings a series of additional challenges for taxpayers, especially for those who, due to the nature of their operations, usually generate favorable Value Added Tax balances. Therefore, it is relevant to carry out an analysis of operations commonly referred to as "netting" to determine whether they qualify as compensation under article 2185 of the CCF. Also, to determine their impacts and any potential operational alternatives to mitigate the risks associated with this type of operation.

It is important to note that the SCJN only ruled on compensation as a method of settling the obligations, however, the analysis and arguments presented as part of the respective judgment could be applicable to other concepts in which no resources are delivered.

Finally, it is important to consider that, in January of this year, the Federal Court of Administrative Justice (TFJA) unanimously resolved the contradicting judgments 44/19-ERF-01-2/425/20-S2-07-04/YOTROS3/573/22-PL-05-01 holding that the compensation does not give rise to the accreditation of Value Added Tax. It is necessary to demonstrate that the tax was effectively paid in the relevant period.

As compensation is a common operation among taxpayers, this resolution brings a number of additional challenges for organizations. Therefore, close attention should be paid to the various transactions that companies enter into, especially those that regularly generate VAT balances.

At Mazars, our tax team can contribute by analysing the various transactions carried out by your company and carrying out any other activities required to ensure the correct compliance of your tax obligations.