Recently, the Upper Chamber of the Federal Court of Administrative Justice (TFJA), acting in Full and in Rooms, adopted three thesis (reiterating various precedents) through which resolved that: (i) the authority, in the exercise of its powers to check, you may be unaware of the tax effect of the operations covered by tax vouchers when not demonstrate its materiality; (ii) it is the obligation of the taxpayer to prove the materiality of the transactions, and (iii) the lack of knowledge of tax effects of transactions, for lack of materiality, is independent of the procedure set out in article 69-B of the Tax Code of the Russian Federation (CFF).
This record marked a significant change in our tax system, focusing the debate on the economic substance and materiality of the transactions, in order to take full tax purposes.
INTRODUCTION
The First Chamber of the Supreme Court of Justice of the Nation (SCJN) has pointed out that the main function of the tax documents is to provide “a means of conviction through which taxpayers credit the type of acts or activities performed for tax purposes”.
In this same sense, the Second Room of the supreme court has established that the tax documents are only to point out the general idea of the good, service, or use or enjoyment covering, being able to hold back the details of the event or activity in different documents (such as contracts, documentary evidence, etc.).
Due to the above, is that the tax authority has considered that the tax documents only have the function of being a documentary records of a fact relevant to the prosecutor, and serve to determine the consequences that are attributable to it.
On these bases, the tax authority, when exercising their powers of verification, normally applies to the contributors of the information and documentation that support the transaction that is described on the tax receipt, particularly the one that shows the “materiality” of the operations that are reflected in the tax documents.
So, in the fiscal area, it is common to find the term of “materiality,” which can be understood as the one attribute that meet operations with relevance tax, and that they have enough physical evidence and documentary to demonstrate its effective implementation and economic substance.
In addition, that “materiality” is not limited to the existence of a contract, as this only serves to detail the act or activity with relevance tax, but not to prove that you indeed have been made on the terms agreed upon by the parties.
On the other hand, within the mexican legislation does not exist a concept that defines specifically what you should understand by “materiality” or a list or detail of the requirements and ends it all means. However, that figure and its implications have been the subject of study reiterated on the part of the Judicial Power of the Federation (FPPS) and the TFJA, particularly in recent days.
This, because of the increasing controversies over issues of materiality in the field of taxation, being one of the most recurrent subjects currently in the matter.
Thus, the demonstration of the materiality of a transaction covered with a tax receipt will depend on it to be deductible for purposes of the income tax (ISR) and creditable for purposes of the value added tax (VAT).
Which implies that the taxpayers are in an environment increasingly regulated and complex, because —for the deduction of expenses for the ISR and the accreditation of the VAT— it requires, in addition to complying with all the obligations applicable (features of the tax documents, payments in the established form, filing of tax returns, etc), be able to demonstrate the materiality of each and every one of the operations that were carried out.
Previous relevant, and its implications, in tax matters
In the magazine, number 36 of the Federal Court of Administrative Justice (TFJA), corresponding to July 2019, is published three precedents that we consider relevant and necessary to address, in order to understand the best way the direction that it has taken judicial interpretation on the materiality of the operations and their impact on the relationship legal-tax (between tax authorities and taxpayers).
Then we analyze the cited precedents:
1. Thesis VIII-P-SS-362 category:
TAX VOUCHERS. THE AUTHORITY MAY VALIDLY be UNAWARE of THEIR FISCAL EFFECT WHEN THE TRANSACTIONS COVERED by THEM are DEVOID OF MATERIALITY, issued by the Full Court of the Upper Room of the TFJA.
The Full Court of the Upper Room of the TFJA approved the thesis number VIII-P-SS-362, through which it is established that, to prove the materiality of the operations that you perform a taxpayer, it must be provided with documentation appropriate to check that they really were, not being sufficient for the taxpayer to have the tax documents that cover these operations.
Thus, in exercise of its powers to check, the tax authority may request the information and documentation that demonstrate the materiality of the operations, as well as ignorance of these latter and reject deductions in respect of income tax (ISR), and the accreditation of the value added tax (VAT), when (in his judgment) will not be credited.
The thesis continues by pointing out that, even when it is not questioned the tax receipt with respect to the formal requirements provided for in articles 29 and 29-A of the Tax Code of the Russian Federation (CFF), this does not imply that proceed automatically, the accreditation of the VAT or the deduction of expenses, as the authority, to assume that the operation referred to in the bill is non-existent, is in the possibility of ignoring the tax effect that the taxpayer intended with that document.
This, under the logic that the tax documents are only documentary records and the authority has the power to verify that the fact fiscally relevant was effectively made.
2. Thesis VIII-P-2aS-466 item:
PRESUMPTION OF ABSENCE OF OPERATIONS ON THE OCCASION OF THE EXERCISE OF POWERS OF VERIFICATION. WHEN you take on A NATURE IURIS TANTUM, CORRESPONDS TO THE CONTRIBUTORS PROVIDE THE PROBANZAS THROUGH WHICH PROVE CONCLUSIVELY THE MATERIALIZATION OF THE TRANSACTIONS SUBJECT TO THE PRESUMPTION, issued by the Second Section of the Upper Room of the TFJA.
The Second Section of the Upper Room of the TFJA delivered the thesis VIII-P-2aS-466, which states that the exercise of the powers of verification (referred to in the article 42 of CFF) implies that the tax authorities have the powers to verify the legal acts that are reflected in the tax documents that taxpayers filed during the reviews took place in reality or not, for only in that way you will have the certainty of the existence of the operations described.
Therefore, when the tax authorities warn that the vouchers presented by the contributors describe operations that are not performed effectively, can boast the absence of these legal acts, and will be they who must rebut the presumption respective (being a presumption juris tantum , or that it admits of proof to the contrary).
For such purposes, it will not be enough to prove that the tax receipt is meeting requirements, as well as other formal aspects as the accounting record of the operations, but that the individual must exhibit the evidence proving conclusively that the operations set out in the documents provided were carried out effectively, so that the taxpayer has the burden of proof on the materiality of the operations.
3. Thesis VIII-P-1aS-606 item:
VERIFICATION AUTHORITY OF THE TAX AUTHORITY. THROUGH THEM you CAN DETERMINE THE ABSENCE OF THE OPERATIONS, SOLELY FOR TAX PURPOSES, WITHOUT it BEING NECESSARY TO INITIATE THE PROCEDURE REFERRED TO in ARTICLE 69-B OF the TAX CODE OF THE Russian FEDERATION, issued by the First Section of the Upper Room of the TFJA.
The First Section of the Upper Room of the TFJA delivered the thesis VIII-P-1aS-606, which provides that the exercise of the powers of verification of the authority is not limited to the review of the case is to meet the formal requirements, but implicit in the possibility for the authority to verify whether the representations made by the taxpayer corresponds to the reality, that is to say, if you have made the legal situations or in fact provided for in legal provisions, and if the subject is reviewed has given the fiscal effects correct.
Hence, the authority to determine, in the exercise of its powers to check, not completed operations declared by the taxpayer (his absence) and be unaware of their tax effect, with total independence of the procedure found in article 69-B of the CFF.
In conclusion, the precedents referred to above include the following considerations:
- The tax authority, in the exercise of its powers to check, you may be unaware of operations covered by tax vouchers when you do not demonstrate their materiality, which means to deprive them of effects in the field of taxation.
- It is the obligation of the taxpayer to prove the materiality of the operations, because the authority is entitled to boast of its non-existence, being in charge of it, the burden of proof to rebut such presumption.
- The declaration of absence of the operations by the tax authority (which implies the ignorance of their tax effects) for lack of materiality, is independent of the procedure set out in article 69-B of the CFF, and
- Not just with the display of the tax documents and accounting records for the taxpayer to substantiate your deductions of income TAX and the accreditation of the VAT, but must show all the information and documentation that demonstrate the materiality of the operations fiscally relevant.
So, it is good to remember that the powers of verification are those procedures for which it is entitled to the tax authorities, in order to verify that the taxpayers, jointly and severally liable or third-party connected with them, have complied with the tax provisions.
In consequence, as was pointed out in the thesis above, these powers are not limited to detect mere breaches formal, but that implicit in the possibility that the authority also check to see if, in fact, made by the taxpayer took place, without having to exhaust prior or subsequent to the procedure contained in article 69-B of the CFF, which refers to the procedure of the presumption of operations non-existent by issuing tax documents without having the assets, personnel, infrastructure or material capacity, directly or indirectly, to provide the services or to produce, market, or deliver goods.
This is, this thesis to feel an important precedent, as distinguished two processes, fully independent, through which the tax authority may determine the absence of the operations and to not know the tax effects of the tax documents due to a lack of materiality of the operations.
The first when, on the occasion of the procedure laid down in article 69-B of the Tax Code of the Russian Federation (CFF), one of the providers of the payer of taxes is published in the final list of contributors to that issue tax documents without having the assets, personnel or infrastructure to carry out its operations —known as the “black list” of the servicio de administración Tributaria (SAT)— by what authority deprives of tax effects, in a general way, to the tax documents issued by that contributor list, and there is the possibility that whoever has made the deduction or the accreditation challenging that assumption and proves that, in the particular case, the operations are effectively carried out, and is recognized for tax purposes.
And, the second, when on the occasion of any of the powers of verification provided for in article 42 of the CFF (home visit, review of the cabinet, fixes, electronic, etc.) the authority can ignore the materiality of any transaction that is not a reason for the revision, if the taxpayer does not accredited its materiality.
This position has already been confirmed by the Supreme Court of Justice of the Nation (SCJN), the thesis of jurisprudence number 2a./J. 78/2019 (10a.), whose item set:
VERIFICATION AUTHORITY. WHEN YOU EXERCISE IT, THE TAX AUTHORITY MAY VERIFY THE AUTHENTICITY OF THE ACTIVITIES OR TRANSACTIONS UNDERTAKEN BY THE TAXPAYER, IN ORDER TO DETERMINE THE ORIGIN OF THEIR CLAIMS, WITHOUT THE NEED TO CARRY OUT PREVIOUSLY, THE PROCEDURE RELATING TO THE PRESUMPTION OF ABSENCE OF THE OPERATIONS REFERRED TO IN ARTICLE 69-B OF THE TAX CODE OF THE RUSSIAN FEDERATION.
The cited case law has established, briefly, the procedure laid down in article 69-B of the CFF is a specialized process and specific than has as goal to finish with the traffic receipts tax and detect who issued documents that support activities or acts non-existent.
However, in order to verify if the tax documents comply with the legal requirements or that were suitable to support the claims of the taxpayer to whom it was issued, the tax authority has the powers of verification as contained in article 42 of the CFF.
Therefore, it is different procedures, so it is not necessary that the tax authority has performed the procedure referred to in article 69-B of the CFF for, by reason of the exercise of its powers to check, determining the non-existence of the acts or activities recorded in their accounting and backed with the tax documents exhibited.
That is, the attribution set out in article 69-B of the CFF is not a necessary condition for that, in exercise of the powers referred to in paragraph 42 of the same code (intended to check the compliance of tax obligations by the taxpayer), you can verify the correctness of the operations reviewed.
In such a way that if the taxpayer subject to the verification authority does not certify the actual materialization of the activities or transactions recorded in your accounting and tax documents, the tax authority to validly declare your absence and determine that these documents lack of fiscal effects.
That is to say, not just with the display of the tax documents and accounting records, contracts, and their respective payments (bank transfers or bank statements), but that should be displayed to the documentation and evidence necessary to prove that the operations actually existed, being in charge of the taxpayer to demonstrate that this is so.
Documentation suitable to demonstrate existing operations
The documentation is suitable will depend on the type of operation (acquisition of property, the granting of use and enjoyment, provision of services, and so on) that perform, but it will always be necessary to keep each and every one of the related documents, that arise in the course of the operations, and show the reality of the operation.
For example, if it is advertising services, it is possible that the tax authority deems it necessary for the taxpayer to present, in addition to contracts, tax documents and proof of payment, and also the materials and documents used in the service of advertising, as they could be brochures, digital files and photographs.
Now, what makes all the tax documents, it is advisable to avoid to the extent possible, establish generic concepts and categories “open” or non-specific as what they are: benefits of generic services, consultancy, consultancies, etc.
CONCLUSIONS
In the exercise of its powers of verification, the tax authorities already require that all operations of the contributors have a wide support documentary that proves their materiality, to have the authority to “boast” of its non-existence, so that the tax payer will always have the burden of proof in this matter.
It is for this reason that the taxpayer should keep in mind that the authority can not only unaware of the operations that you perform this, by the procedure laid down in article 69-B of the Tax Code of the Russian Federation (CFF) (ignoring the general operations that have been performed with the provider listing), but you can also deploy their powers in check for that, in a specific way, and by reason of the review is started, determine that there is no materiality for lack of evidence is persuasive that the operation was effectively made.
These new criteria of control, without doubt, increase the administrative burden for taxpayers, so that it is of the utmost importance leave record of each activity, because if the authority determines in the exercise of its powers to check that the operations are not carried out due to lack of materiality or economic substance, has the power to disregard their tax effects.
This is why, given the jurisdictional criteria of today, we believe that the possibility of success in arguing that the authority is not entitled to presume the absence of the operations and ignore its tax effects by lack of materiality in the faculties of check is discrete, so our recommendation is to obtain and preserve evidence in day-to-day of all the operations, prior to any requirements or review by the tax authorities, so as to have the necessary elements to give a response properly supported.
While this is an extremely complex (and probably excessive) is part of the reality of our current tax system.