Tax Regulations in Chihuahua, Mexico

Introduction

Tax matters are undoubtedly one of the subjects that most affect people’s daily lives. However, they go unnoticed, either due to a lack of information or the dissimulation with which the rulers design the laws to collect contributions (if you want to know more about this subject, I invite you to consult Contributions Contemplated in Mexico), and taxpayers do not see how their assets are affected.

Given this, for my office beLegal abogados S.C. I started a series dedicated exclusively to tax matters with the entry «Pro-Taxpayer Series: Generalities of Federal Tax Matters in Mexico» (see the version in Spanish), where I analyzed the details of this matter in the federal jurisdiction, as this area is the most well-known and common in our country.

However, with our country’s population growth and the emergence of regionalisms in the federative entities, the legal institutions of each state acquire greater relevance. Thus, the study of local or state contributions cannot be left behind since these could well spur investment in the state or stop it.

Due to this, I have decided to start a similar series, but on the tax law of the state of Chihuahua with this first entry, where I will address the state contributions —including its municipalities—, the tax authorities that exist, their powers and jurisdiction and, in general, everything related to the state tax area.

This is to inform Chihuahuans about the rights that assist them in the tax area and to anyone interested in relocating to our state or who is simply about to invest and wants to know what to expect in the tax arena, which is the one that is most taken into account by businessmen and investors when investing. I will carry out this study through various entries and post it here. Stay tuned.

List of Content

1) Applicable Regulations

Unlike federal laws on tax matters, in our state of Chihuahua, there are relatively few regulations that tax experts must study to defend taxpayers. This is because the main taxes in our state are grouped into regulatory bodies and not dispersed as in the federal sphere.

Of course, the above does not consider the regulations that regulate fiscal coordination between the state and its municipalities, the financial and budgetary accounting of public bodies in the state, and other provisions pertaining to budgetary law. That is, to an area of law not directly applicable to the individual taxpayer but to the authorities.

That is why, for this entry and subsequent ones, we must consider only those legal provisions directed to individuals as taxpayers. Provisions that are the following:

Chihuahua State Tax Code

Regulations of the Chihuahua State Tax Code

Tax Law of the State of Chihuahua (which groups together state taxes)

Municipal Code for the State of Chihuahua (which groups together municipal taxes)

State Duties Law of Chihuahua (which groups together all the duties contributions that state and municipal agencies can collect in the state of Chihuahua)

2) Mandatory Payment of Contributions

As in the federal sphere, the Chihuahua lawmakers clearly established that individuals and legal entities are obliged to contribute to public expenses in accordance with the respective tax laws. They also established that the provisions contained in the Tax Code of the State of Chihuahua shall apply in the absence of special tax laws.

A) Exemption From Paying Local Taxes

Notwithstanding the general rule above, in the state of Chihuahua, the following are exempt from paying taxes:

I.- Public and private charitable institutions and associations.

II.- Cooperative societies, under the tax provisions of our state.

III.- Other persons expressly indicated in the special tax provisions of the state of Chihuahua.

3) Authorities in Charge of Tax Collection

The collection of income that the Chihuahua state government and its municipalities have the right to collect shall be done through the Chihuahua State Treasury, the municipal treasuries of the municipalities of the state, and, where appropriate, by the entities authorized to collect income, which may be the following:

I.- Banking credit institutions.

II.- Shopping centers and other establishments.

In this regard, the Chihuahua State Treasury shall announce, through general rules, the banking credit institutions, shopping centers, and other establishments that specifically have said authorization.

4) Interpretation of Tax Regulations

In the interpretation and construction of tax regulations, the provisions referring to the object, subject, base, rate, quota, or tariff and payment period of contributions, as well as those establishing the infractions and sanctions, are strictly applied.

Notwithstanding the previous and without contradicting the nature of tax law, the application of tax provisions considered as ‘instrumental’, that is, those that regulate the obligations of taxpayers (declarations, withholdings, payments, the duty to keep accounts, etc.) may be interpreted based on any method of legal interpretation (systematic, teleological, analogical, by majority of reason, etc.) and, in the absence of an express provision in the state’s tax legislation, the rules of common law in force in the state and of common federal law shall be applied supplementarily in the order indicated.

Thus, the taxpayer and the tax authority may make logical-legal arguments beyond the deductive and literal interpretation while exposing their arguments. See the following precedent: TAX LAWS. THE SYSTEMATIC INTERPRETATION OF ITS RULES DOES NOT CONTRAVENE THE PRINCIPLES OF STRICT INTERPRETATION, APPLICATION, AND LEGALITY THAT GOVERN SUCH MATTERS^[1].

5) Validity of State Tax Regulations

As the only rule in our state, the laws and other general tax provisions shall enter into force on the day following their publication in the Official State Gazette unless a later date is indicated therein.

6) Alienation for Tax Purposes

A widespread term used in common (civil) and tax law is the legal institution of alienation. However, for tax purposes, the term must be clarified. In this sense, for tax legislation, alienation must be understood as:

I.- Any transfer of property carried out per the provisions of state or federal legislation, even if the transferor reserves ownership of the alienated property.

II.- Allocations, even when they are made in favor of the creditor.

III.- Capital contributions to a company or association.

IV.- That which is carried out through financial leasing.

V.- The one carried out through the trust contract agreement in the following cases:

A) In the act in which the trustor appoints or undertakes to appoint a trustee other than himself, provided that he does not have the right to reacquire the assets from the trustee.

B) In the act in which the trustor loses the right to reacquire the assets from the trustee if such right had been reserved.

VI.- The transfer of the rights held over the assets assigned to the trust at any of the following times:

A) In the act in which the designated trustee assigns his rights or gives instructions to the trustee to transfer ownership of the assets to a third party. In these cases, it shall be considered that the trustee acquires the assets at the act of his appointment and that he transfers them at the time of assigning his rights or giving such instructions.

B) In the act in which the trustor assigns his rights, even if these include a statement that the assets are transferred in his favor.

VII.- The transfer of ownership of a tangible asset or the right to acquire it that is carried out through the alienation of negotiable instruments or the transfer of the rights that represent it.

In any case, this shall not apply to shares or corporate interests.

VIII.- The transfer of credit rights related to the supply of goods, services or both through a financial factoring contract at the time of the execution of said contract, except when they are transferred through factoring with a collection mandate or with delegated collection, cases in which it’s not considered that there is an alienation of assets. In the case of the transfer of credit rights by individuals, it shall be regarded as an alienation until the moment the corresponding credits are collected.

IX.- That which is carried out through a merger or spin-off of companies.

A) Alienation Within the State of Chihuahua

For tax purposes within the state of Chihuahua, the sale is considered to be carried out there, among other cases, if the asset is located in said territory when it is sent to the acquirer and when there is no shipment. The transfer is also made in the state when the delivery of the alienated good is completed.

When, following the provisions of the previous paragraph, there is alienation, the acquirer is considered the owner of the assets for compliance with the tax obligations that would have been generated within the state with said act.

B) Alienations in Installment

Alienations with deferred or partial payment shall be considered when they are carried out with clients considered to be the general public, and more than 35% of the price is deferred after the sixth month, and the agreed term exceeds 12 months.

Transactions carried out with the general public are considered when their expenditure is not intended to be deducted for the purposes of the Income Tax Law or credited for the purposes of the Value Added Tax Law.

7)- Special Tax Definitions

Like the term alienation, the tax area practically redefines some legal concepts for public and economic necessity reasons. Hence, the taxpayer must be familiar with them, even if they may have a vague notion of the term derived from other regulations. That is why, from now on, I will define those terms that the state tax authority uses most frequently in tax provisions within Chihuahua. Let’s see.

A) Social Security Expenditures

For the purposes of the tax laws in the state of Chihuahua, social security expenditures in favor of workers shall be considered, as long as they are granted in a general manner, those made by those obliged to pay contributions, when their purpose is to satisfy contingencies of said workers or their present or future needs, as well as granting benefits in favor of them, aimed at their physical, social, economic or cultural improvement, which allows them to improve their quality of life and that of their family.

B) Financial Lease

For tax purposes, financial leasing is the contract by which one person undertakes to grant another person the temporary use or enjoyment of tangible assets for a mandatory period, with the latter being obliged to settle, in partial payments as consideration, a determined amount of money or determinable that covers the acquisition value of the goods, the financial charges and other accessories and to adopt at the expiration of the contract any of the terminal options established by the General Law of Credit Titles and Operations.

In any case, in financial leasing operations, the respective contract must be concluded in writing and expressly state the value of the asset that is the object of the operation and the agreed interest rate or the mechanics to determine it.

C) Business Activities

For tax purposes, the following shall be considered business activities:

I.- Commercial ones are those that, pursuant to the federal laws, have that character and are not included in the following legal hypotheses.

II.- Industrial ones, understood as the extraction, conservation, or transformation of raw materials, finishing products, and production of satisfiers.

III.- Agricultural activities, which include the sowing, cultivation, harvesting, and the first sale of the products thus obtained, provided that they have not been subject to industrial transformation.

IV.- Livestock farming consists of breeding and fattening cattle, poultry, and other livestock, including their first sale, provided that they have not been subject to industrial transformation.

V.- Fishing, which includes the breeding, cultivation, promotion, and care of the reproduction of all types of marine and freshwater species, including aquaculture, as well as the capture and extraction of the same, including the first disposal of those products, even when they have not been subject to industrial transformation.

VI.- Forestry is the cultivation of forests or mountains, as well as the breeding, conservation, restoration, promotion, and use of their vegetation, including the first sale of their products, provided that they have not been subject to industrial transformation.

D) Enterprise

In tax terms, an enterprise is considered the individual or legal entity that carries out the activities referred to in the previous section, either directly, through a trust, or third parties. Concomitant with this concept, the establishment shall be understood as any place of business in which the aforementioned business activities are carried out, partially or totally.

E) Joint Venture Agreement

For the sole purposes of applying state tax provisions, a joint venture agreement shall be understood as the group of people who carry out business activities due to the conclusion of a contract and provided that they, by legal provision or of the agreement itself, participate in the profits or losses derived from said activity. In these cases, the joint venture shall have a legal personality for tax law when it carries out the aforementioned business activities in Chihuahua.

On the other hand, the joint venture shall comply with tax obligations in the terms and under the same provisions established in the tax laws. For these purposes, the member shall be considered directly responsible for all the obligations borne by the enterprise.

Likewise, the partner shall represent the joint association and its members before the tax authorities in acts with tax consequences derived from the business activities carried out through said joint association.

Finally, the joint venture shall be identified with a name or company name, followed by the legend A. en P. or, failing that, the name of the partner, followed by the aforementioned acronyms.

8) Tax Domicile

One of the most popular concepts in the tax field is the tax domicile, where taxpayers may be required to comply with their tax obligations. A concept that for the state of Chihuahua, the lawmakers regulated the following rules:

A) Tax Domicile of Individuals

In the case of natural persons, tax domicile means:

I.- When carrying out business activities, the location where the main business seat is located within the state of Chihuahua.

II.- When they do not carry out business activities, the premises they use within the state to perform their acts or activities are subject to contributions or uses.

III.- If no location within the state is available for the development of their activities or they are carried out on public roads, the tax domicile shall be their home if it’s located within the state of Chihuahua.

On the other hand, individuals are considered to have not established their homes in the state when they temporarily inhabit properties for tourist purposes.

Finally, as long as the individuals have not stated any of the addresses indicated above or have not been located there, the address that they have indicated to the financial institutions or the savings and loan cooperative societies shall be considered their tax domicile when they use their services.

B) Tax Domicile of Legal Entities

In the case of legal entities, the following shall be considered as tax domicile:

I.- The location where its central administration is located, if it’s located in the state of Chihuahua.

II.- The location where they carry out their activities if the central administration is outside Chihuahua. In any case, when there are two or more establishments within the state, the location for such purposes shall be the one designated, and if it has not been designated, any of said locations.

In this last case, it is considered that a legal entity has established in the state the central administration of the business or its headquarters of effective management when the place where the person or persons who take or execute the actions is located in its territory control, direction, operation or administration decisions of the legal entity and the activities it carries out.

Finally, when taxpayers have not designated a tax domicile and are obliged to do so, have designated a place other than the one to which they correspond, or have stated a fictitious domicile, the tax authorities may carry out proceedings in any place where they carry out their activities or in the place that is considered their domicile without distinction.

9) Residents in the State of Chihuahua

For compliance with tax obligations in our state, the following are considered residents of the territory of Chihuahua:

A) Individuals

When you do the following:

I.- Carry out activities for which they must pay contributions and have established their home in Chihuahua. However, when the natural persons in question simultaneously have a home in another state, they shall be considered residents in Chihuahua if the main source of benefits for carrying out the activities that generate their tax obligations is located there.

For the above purposes, your main source of benefits shall be considered to be located in the state of Chihuahua when any of the following legal hypotheses happen:

A) When more than 50% of the total income obtained by the individual in the calendar year has a source of wealth in Chihuahua.

B) When they have the main center of their professional activities in Chihuahua.

B) Legal Entities

These taxpayers shall be considered residents of the state of Chihuahua when:

I.- They have established within the state of Chihuahua the main administration of the business or its effective management headquarters, the latter being understood as the place where the company’s decisions are made on a day-to-day basis.

10) Income for Services

When the income in goods or services is received for the provision of a service, the value of the consideration shall be considered as the value in the national currency of the goods or services received on the date of receipt according to the quotations or values in the market, or the absence of both, the appraisal value.

If, on the occasion of the provision of a service, goods are provided, or their temporary use or enjoyment is granted to the borrower, the total amount of the consideration agreed to by the borrower shall be considered as income for the service or as the value of the service, provided that they are goods that are usually provided or their use or enjoyment is granted with the service in question.

In cases where the agreed consideration is paid by electronic funds transfer in the provision of services, even when the person receiving the deposit does not express their agreement, it shall be considered effectively collected for the amount transferred at the time said transfer is made.

11) Tax Appraisals

Unless otherwise expressly provided, appraisals carried out for tax purposes shall be valid for 1 year from the date on which they are issued.

In any case, the tax authorities, if applicable, and through the procedure established by the Treasury Department of the State of Chihuahua through rules—which to date have not yet been issued—may request the performance of a second appraisal. The value determined in said second appraisal shall prevail.

On the other hand, in cases in which, after the appraisal has been carried out, permanent improvements are made to the property in question, or if said property suffers obvious damage, deterioration, or depreciation for any other reason, the values recorded in the said appraisal shall be void, even if the 1-year general validity period has not elapsed.

Moreover, when the appraisals refer to a date before the date on which they are carried out, the following procedure shall apply:

I.- The property’s value shall be determined when the appraisal is carried out.

II.- The amount obtained following the previous point shall be divided by the factor obtained by dividing the National Consumer Price Index of the month immediately before the month in which the appraisal is carried out by the index of the month to which it refers.

III.- The result obtained in accordance with the previous point shall be the value of the property on the date to which the appraisal refers. In any case, the appraiser may adjust this value when reasons justify it, which must be expressly indicated in the appraisal.

A) Authorized to Issue Appraisals

The following appraisers must carry out tax appraisals for the state of Chihuahua:

I.- Those authorized by the Chihuahua State Cadastre Directorate, the Institute for Administration and Appraisal of National Assets and Credit Institutions.

II.- Public brokers with current registration with the Federal Ministry of Economy.

III.- Companies dedicated to purchasing, selling, and auctioning assets.

IV.- Appraisers registered with the Chihuahua State Treasury with a professional appraiser license issued by the Ministry of Public Education.

12) Contributions’ Accrual

Contributions are accrued when the legal or factual situations provided for in tax legislation occur and are determined under the provisions in force when they arise. For the purposes of their determination, the rules on procedure issued subsequently are applicable.

On the other hand, and unless otherwise expressly provided, or when the authority exercises verification powers, it shall be up to those obliged to pay to determine the contributions to their charge, which must be paid together with their accessories, within 5 business days following the time of their accrual.

By Omar Gómez

Mexican Tax, Administrative and Constitutional Attorney

Partner

Contact me at omar.gomez@belegalabogados.mx

^[1] Thesis: 3a./J. 18/91. Former Third Chamber of the Mexican Supreme Court of Justice. Eighth Judicial Epoch. Binding Precedent. Digital Registration: 207014.