Audit of the materiality of virtual operations.

Virtual transactions refer to all merchandise transfers that are carried out on paper without the physical presentation of goods at customs. This facilitates logistical procedures and reduces transportation costs for international shipments.

Virtual transactions are commonly carried out between companies that are part of the Manufacturing, Maquiladora, and Export Services Industry (IMMEX) program, which has promoted these operations to create more efficient and agile procedures. The automotive and electronics industries are the main beneficiaries of this model, but more and more sectors are adopting it.

There are other situations in which companies can carry out virtual transactions. For instance, Annex 22 of the current General Rules of Foreign Trade (RGCE) includes customs declaration codes specifically designed for certain merchandise transfers between certified companies, IMMEX participants, and other industries. These codes facilitate operations within Mexico’s legal and customs tax framework.

Customs declaration codes are used based on the specific objective of the transaction. Some examples include the following:

• • CODE G9 – Transfer of goods from a strategic bonded warehouse not adjacent to customs: This code is used for the virtual removal of goods that have entered the strategic bonded warehouse, allowing their final importation by residents within national territory.
  • CODE V1 – Transfer of goods (virtual temporary importation, tax warehouse, strategic bonded warehouse, virtual return, virtual export by national suppliers): Companies with an IMMEX program can transfer temporarily imported goods to other IMMEX companies, the automotive industry, or entities authorized to operate in a strategic bonded warehouse. This code is also used for sales from foreign residents to IMMEX companies and for the return of goods between companies within the same program.
  • CODE V2 – Transfer of Goods Imported with a Customs Account (Virtual Export and Import): This code is used for the transfer of goods between companies with an IMMEX or ECEX program, as well as for the transfer of machinery and equipment under a customs account.
  • CODE V5 – Transfer of Goods from Certified Companies (Virtual Return for Definitive Import): This code is used for the return of temporarily imported goods or those resulting from the manufacturing, transformation, or repair process, transferred by a company with an IMMEX Program for definitive import by resident companies in the country. It is also used for the return and temporary import of transferred goods.
  • CODE V6 – Transfer of Goods Subject to Quotas (Definitive Import and Virtual Return): Used for the definitive import or virtual return of goods subject to quotas that were temporarily imported by IMMEX companies and transferred to resident companies in the national territory.
  • CODE V7 – Transfers in the Sugar Sector (Virtual Export and Virtual Temporary Import): Used for the sale of inputs from the sugar sector by national suppliers registered with the Ministry of Economy (SE) to companies with an IMMEX program.
  • CODE V9 – Transfers of goods by donation (definitive import and virtual return): It is used for the definitive import and virtual return of waste, machinery, or obsolete equipment donated by IMMEX companies.
  • CODE VD – Various Virtual Transfers: This code is used for the virtual export of goods for their subsequent temporary importation by companies that have operated with a customs account and later obtain authorization to operate under the IMMEX program

The V1 customs declaration codes are the most frequent and common in virtual operations. Virtual imports and exports are commonly used by the following entities: Companies with the IMMEX program.

• • Companies in the automotive industry.
  • Those who have authorization to allocate goods to the Strategic Bonded Warehouse (RFE).
  • Residents abroad.
  • ECEX companies (Export Trading Companies).
  • National suppliers of domestically produced or definitively imported goods

Companies under the IMMEX program must return the goods through a customs declaration or definitively return them within six months following the transfer.

This requirement does not apply if the goods are received by companies that are Authorized Economic Operators (OEA) or by those with national suppliers, as established by law.

To validate virtual transfers, the tax authority considers the following information and documentation:

• • That the transfers are included in the inventory control of Annex 24.
  • That there is evidence proving that the transfer operation was carried out, for which the CFDI (Digital Tax Receipt) meeting the requirements established by the Federal Tax Code (CFF) must be presented.
  • That there are elements proving the physical transfer of the goods. The following can be presented: payments for the transportation method used, expenses incurred during the transfer, transfer documents, records or controls of the physical departure of the goods from the transferring company’s warehouse or its subcontractors, or the document confirming the delivery of the goods to the recipient.
  • The process of manufacturing, transformation, or repair carried out before the transfer, if applicable.

If the authority does not consider the virtual operation valid as a result of the exercise of verification powers, the following consequences may apply:

1. 1. The goods described in the customs declaration will be considered not returned or not exported.
   2. The company with the IMMEX program or the person authorized to allocate goods to the Strategic Bonded Warehouse regime that made the transfer will be responsible for the payment of contributions and their accessories for the goods that, under this paragraph, are not considered returned.

The elements that must be ensured in the procedure for virtual operations are:

• • Timeframes: Ensure that the deadlines for returning goods abroad or changing their customs regime are not exceeded.
  • Values: Ensure that the values in the virtual import and export customs declarations are the same unless an additional value has been added.
  • Regulations and non-tariff restrictions: Ensure compliance with the established regulations.
  • Procedural requirements for operation: Ensure that the company is not removed from the Importers’ Registry, not subject to suspension or cancellation causes, not having its certified company registration canceled (if applicable), and not suspended from the IMMEX program, among other requirements.

In recent years, the Central and Decentralized Units of the General Administration of Foreign Trade Auditing of the Tax Administration Service have initiated various foreign trade audit procedures, focusing on the review of virtual operations. The purpose of these audits is to detect, through field visits, desk reviews, and cross-checks, any discrepancies in the documentation and information provided. This ensures that transfers are not improperly validated, that deadlines for presenting and processing customs declarations or for returning goods abroad or changing their customs regime have not been exceeded, that applicable non-tariff regulations and restrictions have been complied with, and to identify companies that simulate virtual operations.To refute any discrepancies, the tax authority requires taxpayers to prove the materiality of their operations.

Proving the materiality of operations is somewhat complex since tax laws do not define what “materiality” means or specify the appropriate documentation that must be presented. As a result, taxpayers, through legal defense mechanisms, have sought judicial protection against the arbitrariness with which tax authorities often act.

For this reason, various legal precedents have emerged to support taxpayers against such arbitrariness. For example, Article 59, Section IX, subsections a), b), and c) of the Federal Tax Code grants tax authorities the power to presume that goods a taxpayer claims to have exported were actually sold within the national territory and not exported. This presumption arises if, upon request from tax authorities, the taxpayer fails to provide documentation or information proving the material existence of the acquisition of the goods in question or, where applicable, of the raw materials and installed capacity needed to manufacture or process the goods claimed to be exported. This requirement persists despite the absence of a clear legal definition of what constitutes materialization.

As a result of the above, the Federal Court of Administrative Justice has issued legal thesis VIII-P-1aS-472, which states that the presumption made by the tax authority allows for rebuttal evidence. Therefore, the taxpayer can disprove the authority’s presumptions by presenting various documents, including but not limited to:

• • Invoices issued by the supplier for the goods acquired by the taxpayer, along with the corresponding payment receipts, such as, among others, bank electronic transfers from the taxpayer’s account to the supplier’s account, as well as accounting records.
  • Export Declaration.
  • Waybill
  • Packing List.
  • Warehouse Inbound and Outbound Records.
  • Bill of Lading.
  • Among other key elements.

The above, considering that with these documents, the taxpayer can demonstrate the means by which the goods were transported abroad or the conditions of the physical delivery.

Various Circuit Collegiate Courts have also expressed opinions regarding the materiality of operations. For example:

The Eighteenth Collegiate Court in Administrative Matters of the First Circuit has established that, although tax provisions do not specify the elements that constitute materiality, Article 83 of the Federal Code of Civil Procedures recognizes the ontological principle of evidence, according to which ordinary facts are presumed, and extraordinary facts must be proven. Therefore, when the tax authority questions the materiality of the operations carried out by the taxpayer, it cannot demand evidence that is not consistent with the nature of the operation under review or that is disproportionate, not adhering to reasonable and objective parameters regarding the means of proof required, depending on the goods or services covered by the tax receipts. This burden of proof cannot impose impossible extremes, and elements of proof that can reasonably demonstrate the materiality of the questioned operation must be accepted.

This Honorable Collegiate Court has established through legal thesis I.18o.A.11 A (11a.), that since there is no specific legal requirement to prove the materiality of the operations under verification, it is feasible to demonstrate it with a set of indirect evidence if their correlation generates the conviction of the service provided or the goods acquired. Therefore, if Digital Tax Receipts (CFDI) are suitable for documenting the operation detailed therein, and considering that taxpayers conduct commercial operations as commonly permitted in the market, then private documents issued in practice to support these transactions should be considered, even if only as evidence. This circumstance does not authorize the complete disregard of their demonstrative value, especially when civil, commercial, or tax law does not impose a particular formality on them. In this way, the judicial body can consider the materiality of the operations carried out by the taxpayer as proven when the documents submitted, which record the commercial acts, can sufficiently demonstrate the completion of the questioned operations through their correlation.

From the above, it is clear that since there is no specific legal requirement to prove the materiality of the operations under verification, it is feasible to demonstrate it with a set of indirect evidence if their correlation generates the conviction of the service rendered or the goods acquired, such as in the case of Digital Tax Receipts (CFDI). Therefore, the tax authority cannot demand evidence that is not consistent with the nature of the operation being verified or that is disproportionate, as it must adhere to reasonable and objective parameters when determining the means of proof required.

At ST STRATEGO, we are specialists in Legal, Tax, and Foreign Trade matters. We implement innovative strategies that ensure the effective resolution of various auditing procedures, thanks to our extensive experience in both the public and private sectors.

Contact us to learn more about our expertise, solutions, and success stories.