04 / 16 / 25
The Mexican Supreme Court Reviews Virtual Returns Under IMMEX: Should VAT Be Paid Twice?
MEXICO CITY, MEXICO, April 16th, 2025 – The Mexican Supreme Court of Justice (SCJN, for its acronym in Spanish) is expected to rule on Contradiction of Criteria 8/2025, which seeks to determine whether a Mexican tax resident who ultimately acquires goods is required to withhold VAT, when the sale was carried out under the legal fiction of a virtual return of goods, pursuant to the General Foreign Trade Rules in connection with the Value Added Tax Law.
As of the closing date of this article, Contradiction of Criteria 8/2025 remains pending resolution by the Plenary of the Mexican Supreme Court of Justice (SCJN). This ruling will address a matter of great importance for the country and with significant economic implications for various companies with substantial investments in Mexico: determining the scope, for Value Added Tax (VAT) purposes, of the legal fiction of the “virtual return” of goods. Although the goods have not physically left the country, their export is assumed, a situation that is impacting companies operating under the Manufacturing, Maquiladora and Export Services Industry Program (IMMEX, for its acronym in Spanish). This legal fiction is established in the General Foreign Trade Rules.
Background
In 2006, the “Decree for the Promotion of the Manufacturing, Maquiladora, and Export Services Industry” was published in the Official Gazette of the Federation (DOF, for its acronym in Spanish), with the objective of allowing companies with an IMMEX Program authorization to temporarily import goods into Mexico for the purpose of carrying out manufacturing or transformation processes and subsequently returning them abroad.
Initially, these goods were temporarily imported into Mexico for processing, transformation, or repair through maquila or manufacturing operations, with the expectation that they would be returned abroad once these processes were completed and then permanently imported back into the country in compliance with Article 108 of the Customs Law (LA, for its acronym in Spanish). This process followed by the goods is commonly referred to as a “U-turn.”
However, in order to avoid the “U-turn,” the General Foreign Trade Rules (RGCE, for its acronym in Spanish) provided IMMEX companies with a simplified process: the final product, initially imported temporarily, could be transferred to a company in Mexico for permanent importation—without the goods physically leaving the country. For this, V5-coded customs entries are used, which serve to “simulate” the export of the goods by the transferring company, while simultaneously supporting the permanent importation by the receiving company in Mexico.
In other words, a legal fiction was established to assume that goods, which are later permanently imported into the country, had been exported—even though their physical delivery occurred within national territory.
Problem Statement
This situation creates an issue regarding the Value Added Tax (VAT) because, on one hand, the tax resident company in Mexico that imports the final product is obligated to pay VAT on importation, in accordance with Articles 1, Section IV, and 24 of the Value Added Tax Law (LIVA, for its acronym in Spanish). On the other hand, the same company must withhold VAT on behalf of the foreign party when the sale—the physical delivery of the goods—occurs within national territory, as stipulated in Articles 1-A, Section III, and 10 of the LIVA.
In summary, based on the General Foreign Trade Rules (RGCE) and the applicable fiscal provisions of the LIVA, the same entity—whether an individual or a legal person, and a tax resident in Mexico—will have to pay VAT twice for the same product:
- Due to its permanent importation.
- Due to the withholding associated with the physical delivery occurring within national territory.
Current Context
At present, the Contradiction of Criteria 8/2025 is pending resolution by the Plenary of the Mexican Supreme Court of Justice (SCJN). This matter seeks to determine whether it is appropriate for a Mexican tax resident—who ultimately acquires the goods—to withhold VAT when the sale was carried out under the legal fiction of a virtual return of goods, as established in the General Foreign Trade Rules (RGCE) in relation to the Value Added Tax Law (LIVA).
The conflicting rulings in Contradiction of Criteria 8/2025 are:
- Contradiction of Criteria 38/2023, issued by the Regional Administrative Court for the Central-North Region.
- The ruling issued by the Collegiate Court for Criminal and Administrative Matters of the Fourteenth Circuit.
In Contradiction of Criteria 38/2023, the Regional Administrative Court for the Central-North Region holds that the purchaser of the goods is not obligated to withhold VAT, as the transaction does not qualify as a domestic sale under the legal fiction established by the RGCE. The Court argues that the administrative facilitation must be interpreted harmoniously within the broader legal framework, particularly between the applicable provisions of the Customs Law (LA) and the Value Added Tax Law (LIVA).
In contrast, the Collegiate Court for Criminal and Administrative Matters of the Fourteenth Circuit, in resolving fiscal review appeal 63/2023, concluded that the purchaser of the final product is indeed required to withhold VAT for the sale of goods by a non-resident, since the sale is deemed to have taken place in Mexican territory. Additionally, the purchaser must also pay VAT for the definitive importation. In the Court’s view, these are two independent transactions.
It is important to note that the VAT obligations fall on two different taxpayers: the first being the party that pays VAT for the definitive import, and the second being the foreign resident who sells the goods. Nevertheless, the purchaser of the goods in question acts as a jointly liable party and must withhold the corresponding VAT.
Conclusion
In my opinion, the criterion that should prevail is the one issued by the Regional Administrative Court for the Central-North Region when resolving Contradiction of Criteria 38/2023, as I agree with the reasoning that the legal fiction established under the General Foreign Trade Rules (RGCE) must be interpreted fully and harmoniously within the applicable legal framework, that is, in accordance with both the Customs Law (LA) and the Value Added Tax Law (LIVA).
Indeed, the legal fiction of the virtual return abroad of goods temporarily imported under a V5 customs declaration must have legal effects not only in foreign trade matters, but also under the LIVA. This ensures that the fulfillment of taxpayers’ tax obligations is not distorted and, more critically, prevents the same individual or legal entity from paying VAT twice for the same goods at the same stage of the production and/or distribution chain.
This is because the purpose of the administrative simplification established in the RGCE is to presume that the goods temporarily imported into national territory have been “returned” abroad and are no longer in Mexico, thereby avoiding an illegal stay under the terms of Article 108, penultimate paragraph, of the LA.
Therefore, if the goods are deemed to have been returned abroad, their sale must also be considered as taking place outside national territory—even if the physical delivery occurs within Mexico. This understanding must be recognized not only for foreign trade purposes but must also extend to the entire tax system, particularly to the LIVA, in order to prevent distortions in tax compliance to the detriment of taxpayers.
It must not be forgotten that VAT is a consumption tax ultimately borne by the final consumer in the production and distribution chain. The purchaser of the goods fulfills their obligation when they pay VAT upon definitive import. Since these goods will eventually be sold in Mexico, it would be excessive to also require the same purchaser to withhold VAT on the sale merely because the goods were physically delivered within the country.
In summary, I believe it is not legally sound to assign only partial legal effects to a legal fiction. If in this case the fiction is to treat the goods as having been returned abroad, we must also assume that the sale occurred from abroad, since the goods are legally understood not to be in national territory. Accordingly, the tax consequences, including VAT matters, must be assessed based on this legal fiction.
The full article was made in collaboration with Lexlatin, and you can find the original article in Spanish here: https://lexlatin.com/opinion/scjn-analiza-retorno-virtual-operaciones-immex-pago-doble-iva
All the information placed in this article and the rights of distribution belongs to @Lexlatin.
More News
Related Practice
Tax Controversy