Generally, when a business performs a VAT activity (sale of goods, rendering services, lease of property, or import of goods or services), it must charge VAT on the price. Such VAT must be paid to the tax authorities. The customer (if it is also a business) can offset the VAT being charged vs. the VAT paid, or, in some cases, request a refund of that VAT. 

On the other hand, Mexican law permits debts to be offset against each other. However, the Supreme Court has ruled that where the offset includes the VAT amount, this is not to be treated as payment of the VAT by the customer.  This means that the “customer” cannot claim a refund or credit on such tax despite the offset. This is only possible when the customer pays such VAT through cash, as the offset does not extinguish the obligation to account and pay for the VAT.

The Supreme Court's decision will have a binding effect once it is published. The tax authorities will apply it to deny credit for VAT in customer VAT returns through the exercise of their verification powers, or where applicable to deny customer claims for refund of the VAT.

The interpretation made by the Supreme Court of Justice refers to the Value Added Tax Law in force for the fiscal years 2019 and 2020, however, its effects will carry forward to subsequent fiscal years.

Authored by: Arturo Tiburcio, Francisco Palmero, Alejandro Diener, and Paola González.