Dear Clients and Friends,
A Section IV was added to Artilce 1-A, first paragraph, of the Value Added Tax Law (“VATL”), which came into force on January 1, 2020, and provides the following:
“Article 1-A.- Taxpayers that fall within the following cases are obligated to make a withholding of the tax that is transferred to them:
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IV. They are entities or individuals with entrepreneurial activities, which receive services through which personnel is put at the disposition of the contracting party or of one of its related parties, that perform their functions in the premises of the contracting party or of one of its related parties, or even outside of those premises, whether they are under the direction, supervision, coordination or dependence of the contracting party or not, regardless of the denomination that is given to the contractual relantionship. In this case the withholding will be made for 6% of the value of the consideration effectively paid.
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It is our opinion that from the interpretation of such provision, the following is understood:
- An entity or individual with entrepreneurial activities (contracting party) must request a contractor to put at its disposition personnel for it to perform functions in the premises of the contracting party or of one of its related parties, or even outside of those premises.
- A contractor puts at the disposition of the contracting party, the personnel that the contracting party requested for it to perform functions in the premises of the contracting party or of one of its related parties, or even outside of those premises.For these purposes, it is irrelevant if the personnel is or not under the direction, supervision, coordination or dependence of the contracting party, as well as the denomination that is given to the contractual relantionship.Thus, for there to be a service rendering for which the contracting party is obligated to make a VAT withholding, it is necessary that the agreement has as a purpose to put personnel at the disposition of the contracting party or of one of its related parties.
Now, on January 31, 2020, the Tax Administration Service (“TAS”) published in its webpage, in an anticipaded manner, the normative criterion 46/IVA/N, under the title “6% withholding to the value added that is referred in Section IV of Article 1 of the VAT Law”, as a part of the Modification to Annex 7 of the First Resolution of Amendments to the Miscellaneous Tax Resolution for 2020, Compilation of Normative Criteria, where the following is established:
- That for tax purposes, the services subject to withholding are all those in which personnel is put at the disposition of the contracting party or of one of its related parties, which is or is not under its direction, supervision, coordination or dependence, regardless of the denomination that is given to the contractual relationship.
- It adds that in order to understand this, it is considered that there will be a withholding when the functions of said personnel are taken advantage of in a direct manner by the contracting party or by one of its related parties, and that, contrarily, there will not be a withholding if the rendered services are taken advantage of directly by the contractor.
Notwistanding the fact that the requirement mentioned in the previous paragraph is not provided in Article 1-A, first paragraph, Section IV, of the VATL, we believe that such paragraph is unfortunate because it does not define what should be understood from “take advantage directly of the functions of the personnel”.
Derived from this lack of definition, it is our criterion that both the conctracting party and the contractor take advantage of the functions of the personnel in a direct manner, which is why we believe that such aspect does not contribute to clarify the content of the discussed provision.
Regardless of the foregoing, as mentioned at the beginning of this note, in order for their to exist a service rendering for which the contracting party is obligated to make a VAT withholding, it is necessary that the agreement has as a purpose to put personnel at the disposition of the contracting party or of one of its related parties.
Consequently, we do not agree with the response given by the General Legal Administration of the TAS to the case of transport of personnel referred in question 3 of the document FREQUENTLY ASKED QUESTIONS REGARDING ARTICLE 1-A, SECTION IV OF THE VALUE ADDED TAX LAW, where it states that in such case the 6% withholding should be made, because it implies that personnel is put at the disposition and their services are taken advantage of in a direct manner by the contracting party outside of its premises, regardless of the denomination given to the contractual relationship.
The reason for this is that the purpose of the agreement for transport of personnel is not that the contractor puts personnel at the disposition of the contracting party, but that a transport service is rendered, which implies that the contractor takes care of transporting personnel of the contracting party relying on recourses that are his own or of third parties, such as the vehicle, the gasoline, the insurance, the maintenance of the vehicle, the driver, etcetera, in order to comply with said service rendering, which does not imply that because there is a driver in charge of driving the vehicle it is understood that personnel is put at the disposition of the contracting party, because otherwise it would be impossible to comply with the purpose of the agreement.
Nevertheless, it is important to take into consideration that the TAS has a defined criterion to that respect, and even though we believe it is illegal, it will be the one applied to contracting parties while such criterion is not modified.
It is necessary to point out that if the VAT withholding is not made and covered when there is an obligation to do so, then the consideration paid will not be deductible for income tax purposes, and the VAT will not be creditable.
Because of the complexity of the provision, it will be necessary to analize case by case in order to determine if there is an obligation of the contracting party to withhold the corresponding VAT or not, derived from which, if there are doubts to this respect, we suggest that you reach out to your usual contact at the Firm.
Tax Consultancy and Litigation
Edmundo Hernández
[email protected]
Felipe Mendoza
[email protected]
Fernando Holguín
[email protected]
Arturo Bañuelos
[email protected]
Gabriel Márquez
[email protected]
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