Member Article

On June 7, 2005, a Decree amending, enacting and repealing various provisions of the VAT Law was published at the Mexican Federal Register. These amendments, to a large extent, merely renumber and relocate various provisions of the VAT Law, leaving their content unaltered. Nonetheless, it is quite important to underline that these amendments repeal any reference to “activities which fall outside the scope of this tax” in the provisions dealing with creditable VAT. In this regard, we must remember that, in general, according to the amendments to the VAT Law which entered into force early this year, creditable VAT is diminished by the ratio in which the goods that were the subject matter of transactions that generated such creditable VAT, are used in VAT exempt transactions or activities which fall outside the scope of the VAT. Thus, under this new amendment the creditable VAT will not be reduced or eliminated in those cases where taxpayers enter into activities which fall outside the scope of this tax. It is noteworthy that the inclusion of activities which fall outside the scope of the VAT into the mechanism to determine the amount of creditable VAT, rendered the VAT credit system unconstitutional, since such inclusion brings into the system elements which have no relation whatsoever with this tax. Thus, this issue of unconstitutionality of the VAT credit system is removed by this amendment. However, we must underline that despite this amendment, other issues of unconstitutionality of the VAT credit system remain unchanged. If you need additional information, please do not hesitate to contact our lawyers from our tax practice group.