To have elements of defense in the event of an audit it is important to prove that the accounting is in the virtual office.
Currently, several users of virtual offices have had issues with the tax authorities, especially with the fact that the authority considers that in this type of offices taxpayers do not have assets or the infrastructure to carry out their commercial activities; therefore, the SAT think these virtual offices cannot be considered domiciles for tax purposes.
This may happen in the registration process for a Federal Taxpayers’ Registry (RFC for its Spanish initials), in particular in everything concerning the domicile verification, as well as in the cases of taxpayers who are already registered with the SAT. The tax authorities, within their responsibilities, have conducted domicile verifications, requested certified copies or applied their review and enforcement powers. Lawyer Jesús Sánchez Valderrama from the firm PolancoSavã Abogados, S.C. analyzes this controversy.
A virtual office is a shared space that can be used during a specific number of hours. Those who use these virtual offices can also use the services of the office personnel, as well as the meeting rooms, a mailbox, assistants who answer the taxpayer’s phone calls, have access to the copy center, filing cabinets, etc. It all depends on the plan contracted, and the alternatives and options the provider may offer in this type of offices. Virtual offices are regularly rented to reduce operating costs.
However, there are taxpayers who have misused this type of facilities, renting them only to meet the requirement of having a domicile for tax purposes, so their digital seals remain valid; but, in fact, their activity is the sale of tax receipts. For this reason, the tax authority has focused its attention on this type of leasing.
Still, this does not mean that all users of this type of facilities are misusing them; on the contrary, this model of offices emerged to cover a business market that not always has enough resources to pay all the expenses involved in having an office (that is not shared.)
Now, in practice, the tax authority conducts the domicile verification process and, sometimes, it points out that the taxpayer is not available at its domicile, instead of mentioning that it does not have assets, personnel, infrastructure or material capacity to carry out its commercial activities, and renders the SAT certificates invalid. This is based on the provisions of article 17-H, section X, paragraph c) of the Federal Tax Code (CFF for its Spanish initials.)
The above-mentioned article stipulates that the cancellation of the digital seal certificates (CSD for its Spanish initials) that are necessary for the issue of the CFDI, is admissible only if one of the three assumptions provided for in that paragraph takes place, but not when a taxpayer does not have assets or the infrastructure to do business at the tax domicile.
The cancellation of the certificates is really damaging for taxpayers, because without them a taxpayer cannot issue a CFDI to its clients. Therefore, it cannot charge for the services provided or the goods sold, affecting its operation financially speaking.
For that reason, for those taxpayers that have been classified as non-available when they are in fact available, but their only “inconvenience” is that their domicile is a virtual office, there are some alternatives for their defense, which I mention as follows:
Bearing in mind that the tax authority bases on the assumption that the taxpayer is not available, the first step will be to prove to the authority or to the official body where the mean of defense is being filed, through a clarification, that the taxpayer is in fact available at the domicile specified. For such purposes, the taxpayer may attach the leasing agreement, mail with the domicile of the virtual office addressed to the taxpayer’s name, such as an account statement or, for example, a notarial certification whereby a notary public mentions that the taxpayer is available at that domicile; just to mention some pieces of evidence.
A very important aspect is to prove to the pertaining authority or official body that the place specified as tax domicile complies with the provisions of article 10 of the CFF.
Therefore, all individuals shall consider as tax domicile the location of their principal place of business or the establishment that they use to carry out their commercial activities, while all legal entities will have as tax domicile the place where the main administration of the business is carried out.
Now therefore, the tax provisions do not define the concepts “principal place of business” or “place where the main administration of the business is carried out.” However, the then Regional Chamber of Center III of the Federal Court of Administrative Justice issued judicial precedent number V-TASR-XI-1651, whereby it stipulated that in the case of legal entities we must understand as main administration of the business “the place where all decision making for running the business takes place, without demanding that the commercial or business activities for such business be conducted at the same place.” The above-mentioned judicial precedent reads as follows: TAX AUTHORITY. TO INVALIDATE A NOTICE FOR CHANGE OF TAX DOMICILE FILED BY A LEGAL ENTITY RESIDING IN THE COUNTRY, IT MUST BE PROVED THAT THE MAIN ADMINISTRATION OF THE BUSINESS IS NOT CONDUCTED AT THAT PLACE. You may consult this in the bulletin of the Federal Court of Tax and Administrative Justice; fifth epoch, year V, Num. 55, p. 213, V-TASR-XI-1651, judicial precedent dated July 2005.
This judicial precedent specifies that the domicile where the main decisions of the running business are made is the tax domicile if the legal representative of the company is available at the same place, if the headquarters of the board of administration are also located there, as well as the accounting books and records in the name of the corresponding taxpayer, which will include invoices issued by the taxpayer.
Our first suggestion is to request a second domicile verification, or to declare, in the alternative mean to be filed, that the legal representative is located at the tax domicile specified. That the decision making of the business is made at that place (minutes of the meeting held at that domicile can be attached.) Moreover, a very important aspect will be to demonstrate that the accounting records are located at the domicile of the virtual office; therefore, if the accounting records are not there we suggest that you rent a space to that end.
Furthermore, we must emphasize that, depending on the nature of the taxpayer’s activities, the taxpayer does necessarily need to have an administrative “office” to carry out its activities. For example: a taxpayer engaged in the construction industry will usually assign its assets at the facilities where the rendering of its services is carried out, besides, in some cases, it would not be even necessary for the taxpayer to own such assets, since it could rent them. In this sense, if the taxpayer falls within this assumption, it shall prove such circumstance to the tax authority.
Another aspect that we recommend to enforce is the fact that the authority’s actions are illegal, since the authority does not have the power to determine whether the taxpayer has the furniture, infrastructure or personnel needed to carry out its commercial activity or not through a domicile verification process.
We base the foregoing on the Jurisdictional Criterion 18/2018 issued by the Prodecon, approved on third ordinary session on 26/03/2018, which reads as follows: TAX DOMICILE. ITS VERIFICATION DOES NOT EMPOWER THE AUTHORITY TO DETERMINE WHETHER THE TAXPAYER HAS THE FURNITURE, INFRASTRUCTURE AND PERSONNEL NEEDED TO DEVELOP ITS COMMERCIAL ACTIVITY OR NOT, BUT ONLY TO VERIFY THAT THE DOMICILE COMPLIES WITH THE PROVISIONS OF ARTICLE 10 OF THE CFF.
Likewise, the Jurisdictional Criterion number 56/2018 issued by the Prodecon, approved on eight ordinary session on 28/09/2018, reads as follows: DIGITAL SEAL. ITS CANCELLATION BECAUSE THE TAXPAYER DOES NOT CARRY OUT ITS COMMERCIAL ACTIVITIES AT ITS TAX DOMICILE IS ILLEGAL.
These are some of the taxpayers’ defense options:
Complaint: It is filed with the Prodecon (Article 16 of the Organic Law of the Attorney General’s Office for Taxpayers’ Defense)
Request for clarification: It is filed at the SAT website (Art. 17-H of the CFF and rule 2.2.4. RMISC 2019)
Solicitud de aclaración Se presenta en el portal del SAT (Art. 17-H del CFF y regla 2.2.4. RMISC 2019)
There is no limit in the term; a taxpayer can file them whenever it receives a notice by a tax authority informing an action that the taxpayer may deem it is violating its rights.
Within a six-day term following the effective date of the notice of the ruling determining a violation related to the RFC – domicile. (Art. 33-A of the CFF)
Dentro del plazo de seis días siguientes aquel en que haya surtido efectos la notificación de la resolución en la cual se le determine una infracción relacionada al RFC – domicilio.
(Art. 33-A del CFF)
Advantage: The response time is shorter than in an Administrative-Law Proceeding or a Motion for Reconsideration.
Disadvantage: The tax authority may not share the Prodecon’s resolution and it does not have the obligation to comply with the resolution issued.
Advantage: The response time is shorter than in an Administrative-Law Proceeding or a Motion for Reconsideration.
Disadvantage: The authority may confirm its previous resolution.
In the event there is a request for clarification, and the resolution is not favorable for the taxpayer’s interests, the taxpayer may analyze the option of filing an Administrative-law Proceeding.
Finally, as in any matter of tax or administrative nature, it is important to analyze each particular case to design and implement the legal strategy to follow. Therefore, we suggest that you discuss it with your legal advisors.
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