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Intellectual property in mexico

A. Introduction. Mexico has pushed towards an effective national legal system for the protection of intangible rights and, through the years, has adapted its legislation to the international treaties that govern intellectual property worldwide and regionally. The proximity and close trade relationship with the United States and other commercial partners, has caused the Mexican government to reformulate and ensure adequate enforcement aiming to attract foreign investment and capital. In recent years, emerging technologies such as non-fungible tokens, artificial intelligence and the metaverse, have raised questions about ownership and protection of IP in the digital environment and posed new challenges for intellectual property law in Mexico and worldwide. As one of the largest economies in the world and a multicultural country, it is important that Mexico remains at the forefront in terms of intellectual property regulation and enforcement, and it has strived to maintain this position. B. IP Framework in Mexico. The free trade Agreement between Mexico, the United States and Canada, T-MEC or USMCA, resulted in the enactment of new legislation on intellectual property in Mexico. This includes the Mexican Federal Law for the Protection of Industrial Property (LFPPI) of 2020, and the amendments to the Mexican Federal Copyright Law (LFDA) with a special focus on the protection of intellectual property in the digital environment. The LFPPI is innovative as it has introduced new forms of protection for industrial property. Non-traditional trademarks, such as trade dress, smell, and sound marks, provide new alternatives of protection for individuals and companies. The “secondary meaning” doctrine widely developed in the United States came into existence in Mexico. Unlike the previous law, an otherwise unprotectable trademark may now obtain registration if it has acquired distinctiveness. A trademark that has been registered or applied-for in bad faith is subject to annulment or refusal. This amendment has intended to deter squatters from seeking registration of trademarks owned by third parties overseas. For many years, letters of consent were rejected by the examiners with the excuse of avoiding consumer confusion. With the current law a consent is sufficient for two confusingly similar or even identical marks to coexist in Mexican market. With the purpose of fostering the use of registered trademarks and to remove marks that could block the registration of new marks in which use is intended, a declaration of use must be submitted after the third anniversary of a trademark registration. As to the LFDA, new provisions protecting IP rights in the digital environment came into effect. One example is the adoption of a notice and takedown system which allows the holder of a copyright to remove infringing content from digital platforms. The amendments also provide a safe harbor for the internet service providers that comply with such system. Additionally, criminal sanctions are provided to prosecute those individuals eluding or circumventing technological protection measures of copyrighted material. Few Examples of the Influence of International Treaties When Mexico became a party to the Nice Agreement concerning the International Classification of Goods and Services, a massive reclassification of the identification and scope of the existing registrations was carried out. Over the years, the Mexican IP authorities have worked on a complementary list to include certain goods or services not expressly mentioned in the international classification. Another international treaty that has impacted the Mexican IP legal framework is the Madrid Protocol, which came into effect in 2013. Mexico’s adherence to the Madrid Protocol made sense in a globalized world in which more individuals and companies seek to invest and protect its IP rights in Mexico. While Mexican nationals seldom use the Madrid Protocol and incoming applications greatly outnumber outgoing filings, it is still an interesting tool that should be promoted and utilized. After Mexico’s adhesion to the Madrid Protocol, other Latin American countries such as Colombia and Chile have decided to join. Furthermore, as a member of the Lisbon Agreement and the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), Mexico is bound to establish minimum standards for the protection and enforcement of intellectual property, including appellations of origin. In that regard, Mexico has signed various bilateral and regional free trade agreements that include provisions related to the protection of this IP form, which result in the possibility of enjoying legal protection in foreign countries for the products encompassed by appellations of origin in different sectors and prevent unauthorized uses or misappropriations. C. IP Enforcement in Mexico. There is a relative concern on the observance of IP rights. Counterfeiting is a major problem in Mexico that harms not only our intellectual property framework but our economy. Intellectual property legislation has been modernized to dissuade infringing behavior and ensure enforcement of IP rights both in the physical world and the digital environment. Mexico has two robust authorities to protect and enforce trademarks, patents, and copyrighted works: the Mexican Institute of Industrial Property (IMPI) created in 1993, and the National Institute of Copyright (INDAUTOR) created in 1996. Both institutes have had an important evolution in terms of modernizing their interaction with the IP system’s users through technological platforms and tools. A public and up-to-date consultation database and the possibility of making e-filings, secures remote and effective access to facilitate the protection and defense of intangible assets. Additional digitization actions have been implemented since the pandemic in order to promote a culture of rights’ acknowledgement and provide users with legal certainty and transparency. Further, the LFPPI granted new faculties for IMPI to quantify damages and lost profits through a simplified proceeding that used to take several years to conclude in the past. This amendment reduces the time and effort required to obtain a compensation, by empowering IMPI to address claims for damages. If implemented correctly, this system is certainly a huge step to ensure full and effective compensation for IP rights holders. D. Mexican own agenda in the IP field. But Mexico has not only focused on the protection of rights from abroad. As a country with vast cultural richness and diversity, Mexico’s public policy has focused on the protection and safeguard of its cultural assets, such as traditional knowledge and expressions. Special attention has been placed on the rights of indigenous and other communities with the enactment on January 17, 2022, of the Federal Law for the Protection of the Cultural Heritage of Indigenous and Afro-Mexican People and Communities. We have also seen a rise in the recognition of goods protected by appellations of origin, highly relevant in Mexico, beyond the well-known Tequila and Mezcal. Distilled spirits such as Raicilla, Sotol and Bacanora have seen a boom in commercialization and consumer preference. Mexican products with appellations of origin have grown exponentially and have drawn the attention of foreign investors and celebrities. The recognition and protection of these appellations of origin are important for preserving traditional knowledge, promoting sustainable production practices, and ensuring quality. As these and other traditional spirits gain popularity both domestically and globally, its adequate legal protection is crucial to guarantee their continued success and recognition as unique products of Mexico, tackle unfair competition and prevent health risks that might arise if the production and quality control regulations are not followed strictly. Other actions have been put in place regarding the use of IP on advertising material, such as the prohibition of displaying certain designs on child-focused advertising for the sale of high sugar levels products. The current federal government has focused its efforts on a socially focused agenda, in which social programs seem to have more importance than innovation. However, regardless of this change in political determinations, Mexico remains with a robust intellectual property system that ensures the proper protection and enforcement of IP rights, both for nationals and foreigners. E. Technology and IP Evolution. Intellectual property laws must evolve at the pace of a globalized world submerged in a rapidly growing technology that demands legal systems to be harmonized with the parameters of business and human innovation. Some current forms of IP shall be revisited, while new manners of protecting intangible rights must come to life. Unconventional artistic creations and state of the art inventions, such as artworks created with artificial intelligence (AI) and patents with living matter, are just a few examples on how IP has evolved to conform to new standards and realities. Likewise, publicity rights in the digital world, brands in the metaverse, copyright associated to NFTs, are becoming more and more frequent and attractive. Social and technological progress demands room for discussion on how intellectual property interacts with new or modernized forms of intangible assets. Also, as the metaverse and other digital worlds become increasingly important, Mexico will likely continue to play an active role in the international community to ensure that intellectual property rights are protected in this virtual environment. By adequately securing protection of trademarks, copyrights, and inventions with the relevant authorities, right holders can establish ownership over their own creations and make use of the available legal remedies against infringers. Now, new technologies and AI have not only posed challenges for the IP sector, but they have also played a decisive role and facilitated the monitoring and enforcement of IP rights in the digital environment. A few examples are watermarks and blockchain technology linked to intangible assets which have helped to avoid unauthorized use and prevent alterations of original works. The Mexican public sector has benefited from these technological developments. In fact, recently IMPI has implemented advanced AI in trademark clearance searches through a tool called MARCIA which uses AI technology to conduct comprehensive figurative searches by analyzing the elements of a logo and comparing it with existing marks, which helps to determine if such logo could potentially be similar or overlap with another existing design. Overall, the use of AI in Mexico is a positive development that ultimately has improved the existing tools and has provided a more accurate, efficient, and reliable system for trademark registration and protection. F. Conclusion Mexico has made an effort to implement international treaties with focus on its own social and cultural realities, without losing sight of the importance of promoting innovation and technological development. With a solid legal framework and an effective enforcement system in place, Mexico can thrive safely in the new digital era while safeguarding its cultural heritage and unique products and attracting more domestic and foreign investment. In situations that generate technological challenges for IP legislation and practice, there is a need to assure a solid and up-to-dated intellectual property protection and enforcement system. Although there is still much left to do in terms of research and development in Mexico, the current IP legal framework includes high standards of protection. Consolidating a top-notch and active surveillance and enforcement system, on the other hand, remains a pending issue. As we witness the emergence of disrupting technologies such as AI, NFT’s, and the metaverse, we are experiencing a monumental and inevitable transformation in the production, consumption, and exploitation of digital content. Mexico’s legal framework must take a proactive stance in safeguarding the interests of both creators and users, bearing in mind that the virtual world is as real as the physical one, and thus a safe environment where IP rights enjoy solid legal protection must be guaranteed. Gloria Niembro

Thoughts on the criterion of the mexican supreme court of justice which will complicate commercial transactions by hindering the offsetting of amounts for purposes of the value added tax (vat).

The fact that parties participating in commercial transactions offset amounts payable between them constitutes a common practice today. In Mexico, this practice has been carried out in respect of the amount of commercial transactions, as well as VAT related thereto. This situation by no means implied the non-payment of the referred tax but the offsetting thereof, considering that the offsetting is a legal mean to extinguish obligations, evidently with the remittance of the applicable taxes to the federal treasury once the corresponding calculation is made in accordance with the VAT Law. This commercial practice obviously facilitated the way in which this type of transactions were carried out thus making them more efficient, as a result of avoiding unnecessary cash flows between the parties of the same. Nevertheless, the Mexican tax authorities questioned such practice and derived from certain means of defense, a Division of the Mexican Supreme Court issued a court precedent due to criterion contradiction, which unfortunately restricts the offsetting previously referred to for tax purposes.[1] In view of all of the above, in this article we will analyze the implications of the determination of the Division of the Mexican Supreme Court in respect of the restriction to treat the offsetting as a means to extinguish obligations for tax purposes and, therefore, that the tax payable between private parties is not actually paid in order that the latter may be considered for purposes of the credit thereof against the payable tax. Commercial Transactions It is widely known in Mexico that in several commercial transactions, the parties decide to offset any amounts payable between them for purposes of facilitating the management of their activities. In fact, let’s think of a relationship in which a supermarket acquires any of its products from its suppliers (essential items or any other) and, in turn, such supermarket renders services to its supplies for which it is entitled to collect a consideration, such as the placement of the product in the corresponding shelves or the leasing of spaces within the supermarket. Thus, instead of liquidating on the one hand, the cash amounts applicable to the acquisition of the goods, and on the other, collect the cash amounts derived from the rendering of the services, it has become a common practice to proceed to the offsetting of the amounts up to the lowest amount and, in this manner, only cover the differences between the parties. The above assertion due to the fact that federal common law recognizes as a form of extinction of the generated obligations, the extinction thereof through the legal device of an offsetting. Within the aforementioned commercial practice, the parties involved in the transaction have also opted to treat VAT as collected and paid so that in the related transactions there is the less possible flow of funds. Actually, from a business administration standpoint, it is useless to liquidate a transaction with flows of both parties since there is no reason for the funds to be deposited between them for purposes of liquidating the transactions that might have generated amounts to be offset. Tax standpoint, position of the tax authorities and Court criteria From a tax standpoint, the aforementioned transactions should be treated as transparent transactions for Mexican tax purposes because the applicable movements are recorded in the taxpayer’s books of account and, in addition, considering that in accordance with the legal provisions (article 1, 1-B of the related law) due to the fact that as a general rule VAT is triggered through cashflows, it is necessary that it has been collected so that it generates the applicable consequences. In this respect, the VAT Law provides that, among others, it is deemed that a consideration on any transaction is actually collected at the time in which the creditor’s interest is satisfied by means of any form of extinction of the transactions that give rise to the consideration. It should be reiterated that, as previously commented, in accordance with Mexican federal civil law, the offset is a legal form to extinguish an obligation. Despite the fact that the above circumstances should be clear, the problem with the tax authorities was in respect of the VAT credit and the party that finally had the obligation to remit it to the Federal Treasury in the event of a payable difference. A tax credit is a concept that allows the recognition of the tax that is passed on to a taxpayer and, once certain requirements are met and after the payment thereof, there is the opportunity to face such tax against that payable by the taxpayer in order to remit to the federal treasury either the payable difference in the event that such amount is greater, or request a refund or credit the applicable VAT balance when creditable VAT is greater than payable VAT. In fact, VAT is deemed an indirect tax which, due to the nature thereof, is passed on and intends to impact the final consumer of goods and services; in view of the foregoing, such tax is afforded the nature of a creditable tax in the chain of operations. This implies that the tax may have repercussions in each stage and the final consumer will be the payer thereof. Thus, VAT in Mexico is a tax payable on a monthly basis which, as previously commented, is calculated by the taxpayer considering two elements, the tax payable as a result of its activities (output VAT), less the creditable VAT (input VAT), which corresponds to the tax that is passed on to the taxpayer generally by its suppliers or providers of services in accordance with the procedure set forth in the related law. Therefore, in order for a taxpayer to determine its payable or creditable tax applicable to any given month, it should consider the tax on the transactions it carries out during such month, as well as that which was passed on in order to carry out its activities that is actually paid during the same period, in accordance with the procedure previously referred to. In the case of the commercial practice mentioned in preceding paragraphs, this should not represent a problem because in order to be entitled to treat VAT as a creditable tax, the parties in a commercial transaction, should have previously complied with the related obligation; that is to say, to conclude the commercial transaction and that the VAT payable as a result thereof is also extinct, that is, liquidated or paid. Thus, when assessing VAT applicable to the period, only those transactions that are already concluded are considered and, as a result thereof, the taxpayer may credit the tax for purposes of determining whether there is any amount payable to the Mexican Federal Treasury. Notwithstanding the above, the problem arose at the time of applying verbatim the provisions of article 5 of the VAT Law, which provides that in order for the tax to be creditable, it should be actually paid, based on which the Mexican tax authorities have been denying the refunds of credit balances that were generated when the creditable tax was greater that the payable tax (output VAT), asserting that an offset does not imply that the tax may be treated as actually paid when having been offset. In other words, the argument of the authorities seemed simple and with no grounds other than the strict grammatical wording of the provision and not an interpretation in accordance with the nature of the tax and harmonious with the remaining articles that integrate the law. In view of the rejection of the credit balance refund applications, a series of means of defense were filed, which usually were resolved favorably for the private parties; however, a Circuit integrated by several Collegiate Tribunals, which is part of the Mexican Judiciary Power, sustained the same criterion of the authorities to the effect that in order to treat VAT as creditable, it was necessary that it be actually paid, as a result of which an offset should not be considered for purposes of complying with the VAT credit requirements.[2] Consequently, due to the criteria contradiction with other tribunals, such contradiction was contested so that the Maximum body of justice of Mexico ruled in respect of the correct criterion that should prevail in this type of matters. Criterion of the Supreme Court of Mexico Recently, the Second Division of the Supreme Court of Justice of Mexico resolved the court precedent contradiction previously referred to, which sustains that the civil offset is not a mean for the payment of VAT and, also, that it cannot give rise to a credit balance application or credit. It should be noted that at the time we wrote this article, we were only aware of a draft of the decision that resolved the criterion contradiction, but the wording of the applicable court precedent is not yet known. The above circumstance implies that once the final wording of the court precedent that will derive from the resolution of the Second Division is known, all the courts in Mexico will be obliged to adapt the criterion set forth therein, that is to say, that the offset is not a mean to consider that the tax that is passed on to a taxpayer is paid and that, as a consequence thereof, that it is not creditable. In addition, in a very similar sense, the Superior Division of the Federal Tribunal of Administrative Justice, in line with the above, also issued a court precedent (it only obliges the Divisions of first instance of the cited tribunal) which provides that the concept of an offset, applicable within the civil scope, does not give rise to the credit because, in order to do so, it is necessary to prove that the tax has actually been paid in the related month, that is, that is has been remitted to the Federal Treasury. We consider that the wording of the court precedent issued by the Superior Division is not entirely in congruence with the credit mechanism of the tax because, as previously commented, for purposes of determining the obligation to pay this tax in the applicable month, two elements should be considered, to wit, the payable (output VAT) and the creditable VAT (input VAT); and not necessarily in every case there will exist an obligation to remit or pay the tax to the federal treasury due to the fact that frequently there might exist credit balances to be recovered or credited in subsequent months. In addition, in our opinion, the criterion adopted in the aforementioned court precedents is congruous with the nature of the commercial or mercantile transaction carried out by taxpayers and will only imply an additional administrative burden, with no reason to justify it. In fact, there is no reason to justify the intention to establish that in a commercial transaction VAT should be paid through the delivery of cash to the creditor because this would imply that the accounting systems and records should be updated with the costs derived as a result thereof. In addition, it seems that not even under this scenario, the tax authorities may be satisfied since they might claim that they have no certainty to the effect that the applicable amounts paid in cash exclusively correspond to VAT and, therefore, deny the credit. It should be noted that this criterion has already been sustained by the tax authorities in the past and has given rise to means of defense that by that time were resolved favorably for the taxpayer. In view of the foregoing, in first instance, it may seem that the only feasible solution in accordance with the current court precedents, is that all transactions be liquidated by means of transfers and with no possibility of an offset, because we consider that only in this manner the tax authorities would not be in a position to question the credit of the tax by the taxpayer. On the other hand, there is currently a discussion in several legal forums on whether the court precedent issued by the Second Division of the Supreme Court of Justice of the Nation may have retroactive effects, that is to say, whether it may be applied to situations that took place in the past, such as those cases in which the tax authorities might have refunded a credit balance, considering that the offset was in fact a mean to consider that VAT was actually paid. The above circumstance due to the fact that the Amparo Law, which governs the obligatory nature of court precedents, provides that under no circumstances the latter will have retroactive effects to the detriment of any person. It is worth mentioning that the court precedent set forth herein analyzes a requirement that should be met in order to treat VAT as actually paid and, therefore, a creditable tax. In this respect, despite that there is a provision that governs the requirements that should be met in order for the tax to be creditable, the truth is that there is an interpretation on the scope of such provision; therefore, in our opinion, the authorities will be considering this criterion on all the refund procedures and, maybe, in the audits that are carried out. Further, it should also be borne in mind that the Superior Division of the Federal Tribunal of Administrative Justice, which is a tribunal that in first instance solves any controversy on tax matters, issued a court precedent with terms very similar to those of the Court in accordance with the comments set forth herein, which will also be mandatory for the divisions that integrate it, and that there is no restriction in the law in respect of the application thereof, as is the case of the Amparo Law. What to do? Derived from the serious problem that is to come related to the court precedents previously referred to, it would be advisable to bear the following aspects in mind: Analyze within the books and systems of the company whether it would be feasible that VAT passed on be paid by means of a transfer or reflect it in any manner from which it can be clearly inferred that the tax is actually paid and, as a consequence thereof, prevent the position that the authorities may take against the taxpayers, such as denying the refund of the credit balance. Verify whether, operationally, is it feasible that the transactions that are carried out are fully paid by means of a transfer or a personal check to credit the account of the recipient. Have evidence of clear book records of the form in which the transaction was paid, as well as the applicable VAT. In the event that a refund application of any VAT credit balance is filed, confirm that the related application is sustained with documentary evidence that allows to verify the existence of the transaction and the payment of VAT to the creditor. As far as possible, and particularly in respect of transactions with significant amounts such as the acquisition of inventories, try to obtain evidence to the effect that the supplier or the contracting party determined and made the payments of VAT applicable to the related month. In our opinion, it would be advisable to take the above points into consideration in order to be in a better position with the tax authorities for purposes of obtaining the refund of credit balances of taxpayers and avoid acts of nuisance and possible lawsuits. Finally, we consider that it would also be important to be aware of the meetings held by several business bodies in Mexico with the tax authorities to discuss the problem, because, as previously commented, the matter may be so relevant for the transactions in the country that it may have an administrative solution or give rise to a reform of the provisions that govern the VAT credit. In summary The fact that parties participating in commercial transactions offset amounts payable between them constitutes a common practice today, by both the amount of the transactions, and VAT payable as a result thereof. The Mexican tax authorities questioned such practice and derived from certain lawsuits the Second Division of the Mexican Supreme Court issued a court precedent due to criterion contradiction which, unfortunately restricts the offsetting for tax purposes. Further, the Superior Division of the Federal Tribunal of Administrative Justice issued a court precedent which provides that the concept of an offset, applicable within the civil scope, does not give rise to the credit because, in order to do so, it is necessary to prove that the tax has actually been paid in the related month. Derived from the serious problem that is to come related to the court precedent previously mentioned, it is important to take into consideration the aspects set forth in this article, particularly the need to record in the systems of companies, VAT that is passed on and paid by means of transfers or personal checks, and in the case of transactions with significant amounts, try to obtain evidence to the effect that the suppliers or contracting parties determined and made the payments of VAT applicable to the related month. [1] A court precedent due to a criterion contradiction is generated when a superior body elucidates dissenting criteria sustained between the divisions of the Mexican Supreme Court or between Collegiate Circuit Tribunals. Depending on the dissenting criteria, the contradiction will be solved by the Full Seating of the Mexican Supreme Court, the Divisions of the Mexican Supreme Court, or the Regional Full Seating Divisions. [2] In Mexico, as a general rule, the Judicial Power is integrated by Circuits or Jurisdictions, so that the tribunals of one circuit resolve the matters of the governed parties of the corresponding circumscription.  

Digital assets and wealth management

Over the last couple of years, digital assets presence has grown exponentially – mainly due to their rise during the COVID-19 pandemic – and regular investors and common individuals consider that this new type of assets are no longer a far-fetched idea and must be taken into consideration as important assets in which investors can set their eyes into, and more importantly, their money.   In this article, we will give a general overview of digital assets, their uses and considerations when part of wealth management structures, how are they regulated and their trends going into 2023, but first, we need to understand what digital assets are and where did they come from.   What are digital assets? Digital assets are any type of data or content that exist in digital form and can be stored, accessed or transferred electronically. This definition includes anything from digital documents, audible content, images, movies and any other digital data in circulation or stored in digital appliances, such as computers, laptops, tablets, data storage devices and anything else that may exist.   So far, with this broad definition of “digital assets”, it would be difficult to think that digital assets could be considered as an important investment instrument, however, this changed with the introduction of blockchain.   A blockchain is a decentralized “distributed ledger” formed by linking together individual blocks of transaction data that is securely linked together via cryptographic hashes, that is, algorithms used to verify the validity of data in order to secure information. A hash converts any input of arbitrary length into an encrypted output of a fixed length, thus, regardless of the original amount of data or file size involved, the created hash will always have the same size. This complex process is done “manually” by users in a process called “mining” and is used to secure information contained in a blockchain, as each block header contains the previous block’s hash and, as such, users can verify that the blockchain have not been altered. This is enhanced by the fact that once a block has been “closed” it cannot be altered.   The introduction of blockchain revolutionized the digital asset market. As users were now able to verify the validity of digital assets and verify that they have not been altered, users started to create different types of digital assets that could be commercialized, such as:   Cryptocurrencies: cryptocurrencies are digital currencies that use cryptography designed to work as a medium of exchange, store of value and unit of account. This type of currencies are not backed by a physical asset (such as gold) or reliant to any central authority (such as central banks or governments). As they rely on blockchain, the cryptocurrency verification relies exclusively on the users of the blockchain environment, eliminating the need of any intermediary and, more importantly, of the intermediary fees usually charged by the banks and financial institutions standard financial transactions. The most famous example of this type of digital asset is Bitcoin.   Non-Fungible Tokens or NFTs: Non-Fungible Tokens or NFTs, as they are more commonly identified, is a digital asset that represents ownership or proof of authenticity for a unique item or piece of content. NFTs are called “non fungible” because, unlike cryptocurrencies like Bitcoin, they are unique digital identifiers that cannot be copied, substituted, subdivided or interchangeable on a one-to-one basis. The introduction of blockchain allowed the monetization of NFTs, allowing its owners to transfer the ownership of their NFTs, and thus opening a market for the purchase and sale NFTs. This digital asset gained popularity during the COVID-19 pandemic, due to the sale of digital art NFTs at high prices, for instance, in 2021 an NFT, "Everydays: the First 5000 Days", by the artist Beeple, sold for about 69.3 million dollars at a public auction.   Image of "Everydays: the First 5000 Days", a digital work of art created by the artist "Beeple", which is considered as the most expensive NFT ever sold at a public auction.   Security Tokens: digital assets issued on a blockchain platform that meet the definition of security or financial investment (such as stocks or bonds), pursuant to the regulation of any given country. Security tokens are mostly unregulated around the word but are considered as securities or financial investments due to broad interpretations of the law. This form of digital assets is normally associated with tokenized versions of real word assets, such as real estate, stocks and bonds.   Trading Digital Assets Unlike normal assets which are usually traded via financial institutions or traditional intermediaries, digital assets seek to eliminate the need to use any type of intermediaries (such as brokerage firms, exchanges or banks), and most importantly, to eliminate any intermediary fees originated thereof. This is what is commonly known as Decentralized Finance or DeFi.   DeFi is based in the use of smart contracts formalized via the blockchain in order to eliminate the need of any third-party to validate and carry out any transaction. Smart contracts are self-executing contracts with the terms of the agreement directly written into code that are validated in a blockchain through the mining process previously described (thus, the blockchain replaces the intermediary functions). Smart contracts allow for the automatic execution of contractual terms when predefined conditions are met. Due to the complex nature of this process, only blockchain specific platforms, such as Ethereum, support smart contracts.   Although the fact that no intermediary is needed can seem attractive to investors, it is important to take into account that the lack of a regulated intermediary and the use of blockchain can have its drawbacks, as all transactions registered on a blockchain cannot be altered, DeFi transactions are final and cannot be reverted and may be subject to hacking.   As any other financial instrument, investing in digital assets depends on the risk aversion of any particular investor. The main reasons as to why someone would be looking to invest in digital assets would be the following:   Diversification of the investment portfolio; High investment return, associated with the high risk of the investment; Belief on the new blockchain technology; Loss of confidence in the traditional monetary system.   What are the risks of trading with Digital Assets? Even though investing in digital assets seems like a good investment due to their high return, there are several risks that an investor must consider before investing their money into digital assets:   Digital assets value is highly volatile. During the last couple of years, the value of cryptocurrencies such as Bitcoin and Ethereum have reached important highs only for their value to plumber a few weeks later. The lack of involvement of traditional players such as stock exchanges and financial institutions also means that digital assets are traded 24/7, fomenting this volatility. As most digital assets are not backed up by a physical asset (with the exception of security tokens), the value of digital assets do not represent the real market value of the asset itself, as the price is mainly based on speculation. As owner of a digital asset, it could prove to be difficult to assign a value to the asset itself, as there is no consensus on a valuation method. The market of digital assets is not mature when compared to traditional financial markets, and while the digital asset market has grown substantially over the past years, it is much smaller than traditional financial markets. Due to the lack of regulation, digital assets are not regulated or backed up by any government. This is an important risk to be considered, as digital assets platforms are not overseen and are not subject to the minimum control that banks, and other financial institutions are subject to. This has led to the closure of several platforms without any way of backing the investors’ money. Digital assets transactions are final due to the nature of blockchain, that means that transactions cannot be undone in the event of an error. Digital asset markets are still susceptible to various security risks, including hacking, fraud and smart contract vulnerabilities which can hinder market maturity.   Where is all of this going? Due to the boom of digital assets during the COVID-19 Pandemic, especially the trading of cryptocurrencies such as Bitcoin, several governments have sought to introduce new legislation in order to regulate the trading of digital assets.   Although some countries have already started, we should not expect to have a very robust regulation on the short term, as a more robust legislation needs time in order to assess the technological and technical aspects of digital assets trading.   Rather than regulating all types of digital assets, the governments will seek to identify which digital assets should be considered as securities regulated under the current laws. This should impose some level of surveillance over certain type of companies that trade certain digital assets on a regular basis and is something that players in the digital asset market should be on the look in the next couple of years.   Digital Assets in Wealth Management To consider the impact of digital assets in wealth management, it is important to take into account that investors and the public in general are always on the look for new investment opportunities and, as digital assets are here to stay, wealth managers, investors and the public in general looking to manage their money through investments are interested in participating in this new market and not be left behind.   Although a popular topic right now, investments in digital assets, and therefore, planning for purposes of wealth management around these, should be done with caution due to the volatility of the market. It is important to consider the risk tolerance of beneficiaries and the potential impact of price fluctuations on the overall value of the estate.   When families create a wealth management structure for a long term, they should look out for legal risks and uncertainties that may arise due to the lack of regulation of digital assets. For instance, in some countries (such as Mexico), financial institutions cannot buy, sell or in any way trade with digital assets. Said prohibition can be considered as a barrier for trusted financial institutions to provide their clients with wealth management services that include digital assets.   Moreover, ownership, management and transfer of digital assets via traditional legal institutions may prove difficult due to the lack of modernization of applicable laws. For instance, legal title of tokenized assets may be difficult to prove under current laws, for example, in certain countries, the transfer of real estate must follow certain formalities, thus making it impossible to acquire digital tokens that represent rights over a real estate property.   Regarding the transfer of digital assets through succession, it can be a complex process due to the unique characteristics of digital assets and the decentralized nature of blockchain technology. Digital assets are accessed using private keys, therefore ensuring that the intended beneficiary has access to the private keys while maintaining their security can be challenging. Therefore, when considering the transfer of digital assets through succession, it is recommended to include in the will or transfer agreement, the keys to access ownership over such assets, without exposing such keys or sensitive information to unauthorized parties. Certain technological knowledge to handle digital assets is strongly recommended, therefore consider providing beneficiaries with guidance on management of digital assets or appoint a trusted expert to assist.   Tax implications associated with digital assets may vary depending on the jurisdiction. Inheritance taxes, capital gains taxes, and other tax obligations should be considered as part of the estate planning process. Additionally, the volatile nature of digital assets can make it difficult to determine their value at the time of a testator’s death and may be subject to various tax implications which should be considered during the transfer process.   As the legal framework around the world continues to catch up with these issues, management of certain digital assets could prove difficult. Therefore, advice of legal and tax experts is necessary to understand applicable regulations and the risks that may arise from the investment and transfer of digital assets in estate planning.

Digital assets and wealth management

The Influence of the Three-Circle Model of the Family Business System in Today’s Wealth Management in Mexico Over the last couple of years, digital assets presence has grown exponentially – mainly due to their rise during the COVID-19 pandemic – and regular investors and common individuals consider that this new type of assets are no longer a far-fetched idea and must be taken into consideration as important assets in which investors can set their eyes into, and more importantly, their money. In this article, we will give a general overview of digital assets, their uses and considerations when part of wealth management structures, how are they regulated and their trends going into 2023, but first, we need to understand what digital assets are and where did they come from.   What are digital assets? Digital assets are any type of data or content that exist in digital form and can be stored, accessed or transferred electronically. This definition includes anything from digital documents, audible content, images, movies and any other digital data in circulation or stored in digital appliances, such as computers, laptops, tablets, data storage devices and anything else that may exist. So far, with this broad definition of “digital assets”, it would be difficult to think that digital assets could be considered as an important investment instrument, however, this changed with the introduction of blockchain. A blockchain is a decentralized “distributed ledger” formed by linking together individual blocks of transaction data that is securely linked together via cryptographic hashes, that is, algorithms used to verify the validity of data in order to secure information. A hash converts any input of arbitrary length into an encrypted output of a fixed length, thus, regardless of the original amount of data or file size involved, the created hash will always have the same size. This complex process is done “manually” by users in a process called “mining” and is used to secure information contained in a blockchain, as each block header contains the previous block’s hash and, as such, users can verify that the blockchain have not been altered. This is enhanced by the fact that once a block has been “closed” it cannot be altered. The introduction of blockchain revolutionized the digital asset market. As users were now able to verify the validity of digital assets and verify that they have not been altered, users started to create different types of digital assets that could be commercialized, such as: Cryptocurrencies: cryptocurrencies are digital currencies that use cryptography designed to work as a medium of exchange, store of value and unit of account. This type of currencies are not backed by a physical asset (such as gold) or reliant to any central authority (such as central banks or governments). As they rely on blockchain, the cryptocurrency verification relies exclusively on the users of the blockchain environment, eliminating the need of any intermediary and, more importantly, of the intermediary fees usually charged by the banks and financial institutions standard financial transactions. The most famous example of this type of digital asset is Bitcoin. Non-Fungible Tokens or NFTs: Non-Fungible Tokens or NFTs, as they are more commonly identified, is a digital asset that represents ownership or proof of authenticity for a unique item or piece of content. NFTs are called “non fungible” because, unlike cryptocurrencies like Bitcoin, they are unique digital identifiers that cannot be copied, substituted, subdivided or interchangeable on a one-to-one basis. The introduction of blockchain allowed the monetization of NFTs, allowing its owners to transfer the ownership of their NFTs, and thus opening a market for the purchase and sale NFTs. This digital asset gained popularity during the COVID-19 pandemic, due to the sale of digital art NFTs at high prices, for instance, in 2021 an NFT, "Everydays: the First 5000 Days", by the artist Beeple, sold for about 69.3 million dollars at a public auction. Image of "Everydays: the First 5000 Days", a digital work of art created by the artist "Beeple", which is considered as the most expensive NFT ever sold at a public auction. Security Tokens: digital assets issued on a blockchain platform that meet the definition of security or financial investment (such as stocks or bonds), pursuant to the regulation of any given country. Security tokens are mostly unregulated around the word but are considered as securities or financial investments due to broad interpretations of the law. This form of digital assets is normally associated with tokenized versions of real word assets, such as real estate, stocks and bonds.   Trading Digital Assets Unlike normal assets which are usually traded via financial institutions or traditional intermediaries, digital assets seek to eliminate the need to use any type of intermediaries (such as brokerage firms, exchanges or banks), and most importantly, to eliminate any intermediary fees originated thereof. This is what is commonly known as Decentralized Finance or DeFi. DeFi is based in the use of smart contracts formalized via the blockchain in order to eliminate the need of any third-party to validate and carry out any transaction. Smart contracts are self-executing contracts with the terms of the agreement directly written into code that are validated in a blockchain through the mining process previously described (thus, the blockchain replaces the intermediary functions). Smart contracts allow for the automatic execution of contractual terms when predefined conditions are met. Due to the complex nature of this process, only blockchain specific platforms, such as Ethereum, support smart contracts. Although the fact that no intermediary is needed can seem attractive to investors, it is important to take into account that the lack of a regulated intermediary and the use of blockchain can have its drawbacks, as all transactions registered on a blockchain cannot be altered, DeFi transactions are final and cannot be reverted and may be subject to hacking. As any other financial instrument, investing in digital assets depends on the risk aversion of any particular investor. The main reasons as to why someone would be looking to invest in digital assets would be the following: Diversification of the investment portfolio; High investment return, associated with the high risk of the investment; Belief on the new blockchain technology; Loss of confidence in the traditional monetary system.   What are the risks of trading with Digital Assets? Even though investing in digital assets seems like a good investment due to their high return, there are several risks that an investor must consider before investing their money into digital assets: Digital assets value is highly volatile. During the last couple of years, the value of cryptocurrencies such as Bitcoin and Ethereum have reached important highs only for their value to plumber a few weeks later. The lack of involvement of traditional players such as stock exchanges and financial institutions also means that digital assets are traded 24/7, fomenting this volatility. As most digital assets are not backed up by a physical asset (with the exception of security tokens), the value of digital assets do not represent the real market value of the asset itself, as the price is mainly based on speculation. As owner of a digital asset, it could prove to be difficult to assign a value to the asset itself, as there is no consensus on a valuation method. The market of digital assets is not mature when compared to traditional financial markets, and while the digital asset market has grown substantially over the past years, it is much smaller than traditional financial markets. Due to the lack of regulation, digital assets are not regulated or backed up by any government. This is an important risk to be considered, as digital assets platforms are not overseen and are not subject to the minimum control that banks, and other financial institutions are subject to. This has led to the closure of several platforms without any way of backing the investors’ money. Digital assets transactions are final due to the nature of blockchain, that means that transactions cannot be undone in the event of an error. Digital asset markets are still susceptible to various security risks, including hacking, fraud and smart contract vulnerabilities which can hinder market maturity.   Where is all of this going? Due to the boom of digital assets during the COVID-19 Pandemic, especially the trading of cryptocurrencies such as Bitcoin, several governments have sought to introduce new legislation in order to regulate the trading of digital assets. Although some countries have already started, we should not expect to have a very robust regulation on the short term, as a more robust legislation needs time in order to assess the technological and technical aspects of digital assets trading. Rather than regulating all types of digital assets, the governments will seek to identify which digital assets should be considered as securities regulated under the current laws. This should impose some level of surveillance over certain type of companies that trade certain digital assets on a regular basis and is something that players in the digital asset market should be on the look in the next couple of years.   Digital Assets in Wealth Management To consider the impact of digital assets in wealth management, it is important to take into account that investors and the public in general are always on the look for new investment opportunities and, as digital assets are here to stay, wealth managers, investors and the public in general looking to manage their money through investments are interested in participating in this new market and not be left behind. Although a popular topic right now, investments in digital assets, and therefore, planning for purposes of wealth management around these, should be done with caution due to the volatility of the market. It is important to consider the risk tolerance of beneficiaries and the potential impact of price fluctuations on the overall value of the estate. When families create a wealth management structure for a long term, they should look out for legal risks and uncertainties that may arise due to the lack of regulation of digital assets. For instance, in some countries (such as Mexico), financial institutions cannot buy, sell or in any way trade with digital assets. Said prohibition can be considered as a barrier for trusted financial institutions to provide their clients with wealth management services that include digital assets. Moreover, ownership, management and transfer of digital assets via traditional legal institutions may prove difficult due to the lack of modernization of applicable laws. For instance, legal title of tokenized assets may be difficult to prove under current laws, for example, in certain countries, the transfer of real estate must follow certain formalities, thus making it impossible to acquire digital tokens that represent rights over a real estate property. Regarding the transfer of digital assets through succession, it can be a complex process due to the unique characteristics of digital assets and the decentralized nature of blockchain technology. Digital assets are accessed using private keys, therefore ensuring that the intended beneficiary has access to the private keys while maintaining their security can be challenging. Therefore, when considering the transfer of digital assets through succession, it is recommended to include in the will or transfer agreement, the keys to access ownership over such assets, without exposing such keys or sensitive information to unauthorized parties. Certain technological knowledge to handle digital assets is strongly recommended, therefore consider providing beneficiaries with guidance on management of digital assets or appoint a trusted expert to assist. Tax implications associated with digital assets may vary depending on the jurisdiction. Inheritance taxes, capital gains taxes, and other tax obligations should be considered as part of the estate planning process. Additionally, the volatile nature of digital assets can make it difficult to determine their value at the time of a testator’s death and may be subject to various tax implications which should be considered during the transfer process. As the legal framework around the world continues to catch up with these issues, management of certain digital assets could prove difficult. Therefore, advice of legal and tax experts is necessary to understand applicable regulations and the risks that may arise from the investment and transfer of digital assets in estate planning. Co-authors: Alfredo Sanchez Ana Sofia Rios Jimena Gonzales de Cossio Isabel Nuñez

Tax in mexico

Thoughts on the criterion of the Mexican Supreme Court of Justice which will complicate commercial transactions by hindering the offsetting of amounts for purposes of the Value Added Tax (VAT). The fact that parties participating in commercial transactions offset amounts payable between them constitutes a common practice today. In Mexico, this practice has been carried out in respect of the amount of commercial transactions, as well as VAT related thereto. This situation by no means implied the non-payment of the referred tax but the offsetting thereof, considering that the offsetting is a legal mean to extinguish obligations, evidently with the remittance of the applicable taxes to the federal treasury once the corresponding calculation is made in accordance with the VAT Law. This commercial practice obviously facilitated the way in which this type of transactions were carried out thus making them more efficient, as a result of avoiding unnecessary cash flows between the parties of the same. Nevertheless, the Mexican tax authorities questioned such practice and derived from certain means of defense, a Division of the Mexican Supreme Court issued a court precedent due to criterion contradiction, which unfortunately restricts the offsetting previously referred to for tax purposes.[1] In view of all of the above, in this article we will analyze the implications of the determination of the Division of the Mexican Supreme Court in respect of the restriction to treat the offsetting as a means to extinguish obligations for tax purposes and, therefore, that the tax payable between private parties is not actually paid in order that the latter may be considered for purposes of the credit thereof against the payable tax.   Commercial Transactions It is widely known in Mexico that in several commercial transactions, the parties decide to offset any amounts payable between them for purposes of facilitating the management of their activities. In fact, let’s think of a relationship in which a supermarket acquires any of its products from its suppliers (essential items or any other) and, in turn, such supermarket renders services to its supplies for which it is entitled to collect a consideration, such as the placement of the product in the corresponding shelves or the leasing of spaces within the supermarket. Thus, instead of liquidating on the one hand, the cash amounts applicable to the acquisition of the goods, and on the other, collect the cash amounts derived from the rendering of the services, it has become a common practice to proceed to the offsetting of the amounts up to the lowest amount and, in this manner, only cover the differences between the parties. The above assertion due to the fact that federal common law recognizes as a form of extinction of the generated obligations, the extinction thereof through the legal device of an offsetting. Within the aforementioned commercial practice, the parties involved in the transaction have also opted to treat VAT as collected and paid so that in the related transactions there is the less possible flow of funds. Actually, from a business administration standpoint, it is useless to liquidate a transaction with flows of both parties since there is no reason for the funds to be deposited between them for purposes of liquidating the transactions that might have generated amounts to be offset.   Tax standpoint, position of the tax authorities and Court criteria From a tax standpoint, the aforementioned transactions should be treated as transparent transactions for Mexican tax purposes because the applicable movements are recorded in the taxpayer’s books of account and, in addition, considering that in accordance with the legal provisions (article 1, 1-B of the related law) due to the fact that as a general rule VAT is triggered through cashflows, it is necessary that it has been collected so that it generates the applicable consequences. In this respect, the VAT Law provides that, among others, it is deemed that a consideration on any transaction is actually collected at the time in which the creditor’s interest is satisfied by means of any form of extinction of the transactions that give rise to the consideration. It should be reiterated that, as previously commented, in accordance with Mexican federal civil law, the offset is a legal form to extinguish an obligation. Despite the fact that the above circumstances should be clear, the problem with the tax authorities was in respect of the VAT credit and the party that finally had the obligation to remit it to the Federal Treasury in the event of a payable difference. A tax credit is a concept that allows the recognition of the tax that is passed on to a taxpayer and, once certain requirements are met and after the payment thereof, there is the opportunity to face such tax against that payable by the taxpayer in order to remit to the federal treasury either the payable difference in the event that such amount is greater, or request a refund or credit the applicable VAT balance when creditable VAT is greater than payable VAT. In fact, VAT is deemed an indirect tax which, due to the nature thereof, is passed on and intends to impact the final consumer of goods and services; in view of the foregoing, such tax is afforded the nature of a creditable tax in the chain of operations. This implies that the tax may have repercussions in each stage and the final consumer will be the payer thereof. Thus, VAT in Mexico is a tax payable on a monthly basis which, as previously commented, is calculated by the taxpayer considering two elements, the tax payable as a result of its activities (output VAT), less the creditable VAT (input VAT), which corresponds to the tax that is passed on to the taxpayer generally by its suppliers or providers of services in accordance with the procedure set forth in the related law. Therefore, in order for a taxpayer to determine its payable or creditable tax applicable to any given month, it should consider the tax on the transactions it carries out during such month, as well as that which was passed on in order to carry out its activities that is actually paid during the same period, in accordance with the procedure previously referred to. In the case of the commercial practice mentioned in preceding paragraphs, this should not represent a problem because in order to be entitled to treat VAT as a creditable tax, the parties in a commercial transaction, should have previously complied with the related obligation; that is to say, to conclude the commercial transaction and that the VAT payable as a result thereof is also extinct, that is, liquidated or paid. Thus, when assessing VAT applicable to the period, only those transactions that are already concluded are considered and, as a result thereof, the taxpayer may credit the tax for purposes of determining whether there is any amount payable to the Mexican Federal Treasury. Notwithstanding the above, the problem arose at the time of applying verbatim the provisions of article 5 of the VAT Law, which provides that in order for the tax to be creditable, it should be actually paid, based on which the Mexican tax authorities have been denying the refunds of credit balances that were generated when the creditable tax was greater that the payable tax (output VAT), asserting that an offset does not imply that the tax may be treated as actually paid when having been offset. In other words, the argument of the authorities seemed simple and with no grounds other than the strict grammatical wording of the provision and not an interpretation in accordance with the nature of the tax and harmonious with the remaining articles that integrate the law. In view of the rejection of the credit balance refund applications, a series of means of defense were filed, which usually were resolved favorably for the private parties; however, a Circuit integrated by several Collegiate Tribunals, which is part of the Mexican Judiciary Power, sustained the same criterion of the authorities to the effect that in order to treat VAT as creditable, it was necessary that it be actually paid, as a result of which an offset should not be considered for purposes of complying with the VAT credit requirements.[2] Consequently, due to the criteria contradiction with other tribunals, such contradiction was contested so that the Maximum body of justice of Mexico ruled in respect of the correct criterion that should prevail in this type of matters.   Criterion of the Supreme Court of Mexico Recently, the Second Division of the Supreme Court of Justice of Mexico resolved the court precedent contradiction previously referred to, which sustains that the civil offset is not a mean for the payment of VAT and, also, that it cannot give rise to a credit balance application or credit. It should be noted that at the time we wrote this article, we were only aware of a draft of the decision that resolved the criterion contradiction, but the wording of the applicable court precedent is not yet known. The above circumstance implies that once the final wording of the court precedent that will derive from the resolution of the Second Division is known, all the courts in Mexico will be obliged to adapt the criterion set forth therein, that is to say, that the offset is not a mean to consider that the tax that is passed on to a taxpayer is paid and that, as a consequence thereof, that it is not creditable. In addition, in a very similar sense, the Superior Division of the Federal Tribunal of Administrative Justice, in line with the above, also issued a court precedent (it only obliges the Divisions of first instance of the cited tribunal) which provides that the concept of an offset, applicable within the civil scope, does not give rise to the credit because, in order to do so, it is necessary to prove that the tax has actually been paid in the related month, that is, that is has been remitted to the Federal Treasury. We consider that the wording of the court precedent issued by the Superior Division is not entirely in congruence with the credit mechanism of the tax because, as previously commented, for purposes of determining the obligation to pay this tax in the applicable month, two elements should be considered, to wit, the payable (output VAT) and the creditable VAT (input VAT); and not necessarily in every case there will exist an obligation to remit or pay the tax to the federal treasury due to the fact that frequently there might exist credit balances to be recovered or credited in subsequent months. In addition, in our opinion, the criterion adopted in the aforementioned court precedents is congruous with the nature of the commercial or mercantile transaction carried out by taxpayers and will only imply an additional administrative burden, with no reason to justify it. In fact, there is no reason to justify the intention to establish that in a commercial transaction VAT should be paid through the delivery of cash to the creditor because this would imply that the accounting systems and records should be updated with the costs derived as a result thereof. In addition, it seems that not even under this scenario, the tax authorities may be satisfied since they might claim that they have no certainty to the effect that the applicable amounts paid in cash exclusively correspond to VAT and, therefore, deny the credit. It should be noted that this criterion has already been sustained by the tax authorities in the past and has given rise to means of defense that by that time were resolved favorably for the taxpayer. In view of the foregoing, in first instance, it may seem that the only feasible solution in accordance with the current court precedents, is that all transactions be liquidated by means of transfers and with no possibility of an offset, because we consider that only in this manner the tax authorities would not be in a position to question the credit of the tax by the taxpayer. On the other hand, there is currently a discussion in several legal forums on whether the court precedent issued by the Second Division of the Supreme Court of Justice of the Nation may have retroactive effects, that is to say, whether it may be applied to situations that took place in the past, such as those cases in which the tax authorities might have refunded a credit balance, considering that the offset was in fact a mean to consider that VAT was actually paid. The above circumstance due to the fact that the Amparo Law, which governs the obligatory nature of court precedents, provides that under no circumstances the latter will have retroactive effects to the detriment of any person. It is worth mentioning that the court precedent set forth herein analyzes a requirement that should be met in order to treat VAT as actually paid and, therefore, a creditable tax. In this respect, despite that there is a provision that governs the requirements that should be met in order for the tax to be creditable, the truth is that there is an interpretation on the scope of such provision; therefore, in our opinion, the authorities will be considering this criterion on all the refund procedures and, maybe, in the audits that are carried out. Further, it should also be borne in mind that the Superior Division of the Federal Tribunal of Administrative Justice, which is a tribunal that in first instance solves any controversy on tax matters, issued a court precedent with terms very similar to those of the Court in accordance with the comments set forth herein, which will also be mandatory for the divisions that integrate it, and that there is no restriction in the law in respect of the application thereof, as is the case of the Amparo Law.   What to do? Derived from the serious problem that is to come related to the court precedents previously referred to, it would be advisable to bear the following aspects in mind: Analyze within the books and systems of the company whether it would be feasible that VAT passed on be paid by means of a transfer or reflect it in any manner from which it can be clearly inferred that the tax is actually paid and, as a consequence thereof, prevent the position that the authorities may take against the taxpayers, such as denying the refund of the credit balance. Verify whether, operationally, is it feasible that the transactions that are carried out are fully paid by means of a transfer or a personal check to credit the account of the recipient. Have evidence of clear book records of the form in which the transaction was paid, as well as the applicable VAT. In the event that a refund application of any VAT credit balance is filed, confirm that the related application is sustained with documentary evidence that allows to verify the existence of the transaction and the payment of VAT to the creditor. As far as possible, and particularly in respect of transactions with significant amounts such as the acquisition of inventories, try to obtain evidence to the effect that the supplier or the contracting party determined and made the payments of VAT applicable to the related month. In our opinion, it would be advisable to take the above points into consideration in order to be in a better position with the tax authorities for purposes of obtaining the refund of credit balances of taxpayers and avoid acts of nuisance and possible lawsuits. Finally, we consider that it would also be important to be aware of the meetings held by several business bodies in Mexico with the tax authorities to discuss the problem, because, as previously commented, the matter may be so relevant for the transactions in the country that it may have an administrative solution or give rise to a reform of the provisions that govern the VAT credit.   In summary The fact that parties participating in commercial transactions offset amounts payable between them constitutes a common practice today, by both the amount of the transactions, and VAT payable as a result thereof. The Mexican tax authorities questioned such practice and derived from certain lawsuits the Second Division of the Mexican Supreme Court issued a court precedent due to criterion contradiction which, unfortunately restricts the offsetting for tax purposes. Further, the Superior Division of the Federal Tribunal of Administrative Justice issued a court precedent which provides that the concept of an offset, applicable within the civil scope, does not give rise to the credit because, in order to do so, it is necessary to prove that the tax has actually been paid in the related month. Derived from the serious problem that is to come related to the court precedent previously mentioned, it is important to take into consideration the aspects set forth in this article, particularly the need to record in the systems of companies, VAT that is passed on and paid by means of transfers or personal checks, and in the case of transactions with significant amounts, try to obtain evidence to the effect that the suppliers or contracting parties determined and made the payments of VAT applicable to the related month. Footnotes [1] A court precedent due to a criterion contradiction is generated when a superior body elucidates dissenting criteria sustained between the divisions of the Mexican Supreme Court or between Collegiate Circuit Tribunals. Depending on the dissenting criteria, the contradiction will be solved by the Full Seating of the Mexican Supreme Court, the Divisions of the Mexican Supreme Court, or the Regional Full Seating Divisions. [2] In Mexico, as a general rule, the Judicial Power is integrated by Circuits or Jurisdictions, so that the tribunals of one circuit resolve the matters of the governed parties of the corresponding circumscription.   Authors: Pablo Corvera Claudio Cardenas

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