FEDERAL COURT OF ADMINISTRATIVE JUSTICE

UPPER ROOM - SECOND SECTION ATTRACTION TRIAL:

15378/16-17-09-2/1484/18-S2-08-04.

 

ACTOR:

******** ********** ********** **** ******

 

REQUESTED AUTHORITY: ADMINISTRATOR

CENTRAL FOR DISPUTES INVOLVING LARGE TAXPAYERS IN THE TAX ADMINISTRATION SERVICE.

 

REPORTING JUDGE:

VÍCTOR MARTÍN ORDUÑA MUÑOZ

 

AGREEMENT SECRETARIAT:

ALIN PAULINA GUTIÉRREZ VERDEJA

 

Mexico City, 11 April 2019

 

 

IN VIEW OF resolving, the instruction of the contentious administrative trial to the mentioned item; and

 

RESULTING IN

 

 

1. In writing, submitted on 10 June 2016 to the Office of the Common Counsel for the Metropolitan Regional Chambers, the C. ***** ******* ** **** **********, in legal representation of ****************** ********** **** ** ***** filed a contentious-administrative lawsuit against the resolution contained in official letter number 900-09-2016-2276 of 28 March 2016, issued by the Central Administration of Large Taxpayers' Litigation of the Tax Administration Service, by which it resolved the appeal for revocation 240/15, filed against the different resolution contained in the official letter number 900-07-04-2015-55504 dated 19 October 2015, through which the International Control Administrator "4", determined a tax profit in the amount of

$3'082'309,114.00, for income tax corresponding to the fiscal year from January 1 to December 31, 2008.

 

The case was filed in the Ninth Regional Metropolitan Court, under case number 15378/16-17-09- 2.

 

2. By means of a writ of 14 June 2016, the Court took cognisance of the document presented at the Common Office of the Metropolitan Regional Chambers of this Court on 10 June 2016, by which the plaintiff filed the present nullity suit against the resolution contained in writ number 900-09-2016-2276 of 28 March 2016, issued by the Central Administration of Large Taxpayers' Litigation of the Tax Administration Service, specified in Result 1 of this ruling. The Examining Magistrate therefore admitted the claim, considering that the evidence contained in the corresponding chapter had been offered and exhibited, except for the documents identified with numbers 6 to 24, since the plaintiff did not exhibit them, and therefore requested it for this purpose, with the warning of the law in case of non-compliance.

 

Likewise, in relation to the expert evidence in matters of advertising, publicity and marketing, the Examining Magistrate requested the plaintiff to indicate the name and address of the expert appointed and to exhibit the duly signed questionnaire on the basis of which said evidence would be taken, with the warning of the law in case of non-compliance.

 

On the other hand, it requested the defendant authority to submit, at the latest at the time of answering the complaint, a certified copy of the administrative files from which the contested and appealed decisions were derived, with the warning of law in case of non-compliance.

 

Finally, the defendant authority was ordered to respond to the complaint within the time limit established by law for that purpose, with a warning of law in case of non-compliance.

 

3. By an order issued on 1 July 2016, the Presiding Judge of this Court was ordered to be informed that in this case the competence of the High Court was updated, by virtue of the amount of the case, in order to exercise its power of attraction.

 

4. On August 29, 2016, the Court took note of the briefs presented to the Office of the Common Counsel for the Regional Metropolitan Chambers on August 5 and 8, 2016, by which the plaintiff complied with the order of 14 June 2016, exhibiting in the first of them the evidence identified under numbers 6 to 13 and 16 to 25 of the corresponding chapter. It also indicated the name and address of the expert appointed and exhibited the questionnaire to be submitted in relation to the expert evidence on advertising, publicity and marketing; and in the second brief, he showed the documentaries identified with numbers 14 and 15 of the evidence chapter. By virtue of this, the warning decreed in the agreement of 14 June 2016 was left without effect, the evidence referred to being admitted.

 

On the other hand, in relation to the expert evidence in matters of propaganda, advertising, and marketing, the expert appointed by the plaintiff was the C. **** ****** ********* ***** and because he had submitted the questionnaire on which the evidence would be based, the defendant authority was requested to appoint an expert on its behalf, to indicate its address and, if necessary, to make any additions it considered relevant to the questionnaire submitted by the plaintiff, with the legal warning in the event of non-compliance.

 

Finally, the Examining Magistrate ordered that the pleadings be sent to the defendant authority so that it could express what it considered appropriate.

 

5. By agreement of 3 October 2016, official letter number 2aS-ATR-227/16 was filed with the Office of Common Pleas for the Metropolitan Regional Chambers of this Court on 27 September 2016, by which the Assistant Secretary for Agreements of the Second Section of the Superior Chamber of this Court informed that it exercised the power of attraction with respect to the present trial, indicating that once the investigation of the trial was closed, it should be referred to the aforementioned Second Section for resolution.

 

6. On October 18, 2016, the official letter presented at the Common Office of the Metropolitan Regional Chambers of this Court on the 13th of the same month and year, by means of which the defendant authority filed a claim against the order dated August 29, 2016, through which the expert evidence on advertising, propaganda and marketing offered by the plaintiff was admitted. The appeal was therefore deemed to have been lodged and an order was made that it be forwarded to the plaintiff so that she could make known what was legally required of her, within the period laid down by law for that purpose, stating that after that period had elapsed the proceedings would be referred to the Chamber for the corresponding decision.

 

By a different agreement dated 18 October 2016, the Examining Magistrate issued a report to the Office of the Common Counsel for the Metropolitan Regional Chambers on 6 October 2016, through which the defendant authority presented its response to the complaint. In this regard, it considered the complaint to have been answered and sent in person to the Secretary of Finance and Public Credit, in terms of Article 3, Section II, paragraphs a) and c), second paragraph of the Federal Law on Administrative Litigation Procedure.

 

It also considered the evidence offered in the corresponding chapter to be admitted, with the exception of the evidence consisting of the "Declaration of the Exercise of Legal Entities of General Regime F18", and therefore requested the defendant to submit it within five days, with the warning of the law in case of non-compliance.

 

Furthermore, since the defendant exhibited the administrative files from which the contested decision was issued, as well as the respondent, it considered that the requirement made in the order of 14 June 2016 had been fulfilled.

 

Similarly, the expert appointed by the defendant authority in the field of advertising, publicity and marketing was the C ***** ***** **** *********, so that the warning issued in the order of 29 August 2016 was not upheld and the questionnaire on which the expert evidence offered by the applicant was to be based was considered to have been extended.

 

Finally, the Examining Magistrate indicated that she reserved the right to grant a period of time for the parties to present their experts to prove that they met the requirements of the law, accept the position and protest their legal performance, since the appeal filed by the defendant authority against the order of August 29, 2016 was pending. The Court also reserved the right to transfer the defence to the plaintiff until such time as the authority complied with the request made in the order of merit or, where appropriate, the time limit for doing so.

 

8. On January 2, 2017, the Court heard the document presented at the Office of the Common Counsel for the Regional Metropolitan Chambers on November 11, 2016, by which the plaintiff defended the hearing given to it in relation to the complaint filed by the defendant, considering that these statements had been made.

 

9. By judgment of 2 January 2017, the Ninth Metropolitan Regional Chamber ruled that the defendant's appeal against the order of 29 August 2016 was admissible but unfounded, and therefore confirmed it in all its terms.

10. On January 5, 2017, since the appeal filed by the defendant against the order of August 29, 2016, which admitted the expert evidence on advertising, publicity and marketing offered by the plaintiff, was decided as unfounded, the parties were warned to present their experts within ten days, so that they could prove that they met the legal requirements, accept the position and protest their legal performance, with the corresponding legal warning.

 

11. By a different agreement dated January 5, 2017, the Office of the Common Counsel for the Metropolitan Regional Chambers of this Tribunal issued a document on November 4, 2016, by which the defendant authority complied with the requirement formulated in the order of October 18, 2016, exhibiting for such purpose the "Declaration of the Exercise of the Legal Entities of General Regime F18". In view of this, the request was deemed to have been complied with, the warning was rescinded, and the evidence was deemed to have been admitted, for which reason the plaintiff was ordered to be transferred so that she could make known what was necessary for her right.

 

12. On February 24, 2017, Mr. **** ****** ********* ***** appeared before the Ninth Regional Metropolitan Court as an expert in Communication Sciences, appointed by the plaintiff in relation to the expert evidence in matters of propaganda, advertising and marketing, for the purpose of accrediting that he complied with the legal requirements for accepting the position and protesting his legal performance.

Consequently, he was considered to have presented himself to the expert, accrediting that he met the corresponding requirements, accepting the position and protesting against his legal performance, for which reason he was granted a period of fifteen days to present his report, with the corresponding legal warning.

 

13. By means of an agreement dated 1 March 2017, the Office of the Common Expert for the Metropolitan Regional Chambers of this Court was notified on 27 February 2017, through which the defendant authority requested the replacement of the expert in matters of advertising and propaganda indicated in the case file and the new expert appointed by the C. ****** ***** ******. By virtue of this, the aforementioned person was taken as the authority's expert, requiring the defendant to present its expert within ten days to prove that it meets the legal requirements, accept the position and protest its legal performance, with the warning of the law in the event of non-compliance.

14. On April 5, 2017, it was informed of the brief presented at the Common Office of the Metropolitan Regional Chambers on March 21, 2017, by which the plaintiff requested the extension of the term granted to its expert to render his opinion, by virtue of the complexity of certain aspects and information related to the expert evidence in matters of propaganda, advertising and marketing. Therefore, it was granted a period of fifteen days for the effect that the expert rendered the respective report, reiterating that if it did not comply with the requirements in the form and within the time indicated, it would be considered only the report rendered within the period of law.

 

15. On May 2, 2017, Ms. ****** ***** ******, the expert appointed by the defendant, appeared before the Ninth Regional Metropolitan Court in relation to the expert evidence on advertising, publicity and marketing offered by the plaintiff, in order to prove that she met the corresponding requirements, accept the position and protest her legal performance. By virtue of this, the expert was deemed to have been presented for the aforementioned purposes, and was given a period of fifteen days to issue his report with a legal warning in the event of non-compliance.

 

16. By agreement of May 26, 2017, the Examining Magistrate took into account the briefs presented at the Common Office of the Metropolitan Regional Chambers of this Court on May 12 and 24, 2017, through which the experts of the parties rendered their expert reports on advertising, publicity and marketing, considering them as submitted, reserving themselves to consider and evaluate them at the appropriate procedural moment.

 

17. By agreement of 26 May 2017, since it was noted that the expert reports rendered by the parties' experts were not consistent, it was ordered that the head of the Experts' Unit of this Court be requested to assist the examining Chamber by providing the name and address of a professional who protested the position of third party expert in advertising, publicity and marketing.

 

18. By agreement of 16 June 2017, the Instructing Magistrate issued official letter number 2aS-ATR-149/17 of 29 May 2017, presented at the Common Office of the Metropolitan Regional Chambers of this Court on 6 June 2017, by which the Assistant Secretary for Agreements of the Second Section of the High Chamber of this Court requested to be informed of the procedural status of this nullity trial or, if appropriate, to refer it to the Second Section for the relevant legal effects. By virtue of this, it ordered that by means of an official letter to be sent to the Assistant Secretary of Agreements of the Second Section, it was made known to him that by means of the documents presented on May 12 and 24, 2017, the experts of the parties rendered their respective reports on matters of propaganda, publicity and marketing, which were not in accordance with each other. Therefore, it requested the head of the Experts Unit of this Court to assist the examining Chamber by providing the name and address of a professional who could act as a third expert; It was therefore unable to send the file to that court.

19. By agreement of August 8, 2017, the official letter number JGA-SA-UP-641/17, presented at the Common Office of the Metropolitan Regional Chambers of this Tribunal on July 11, 2017, through which the head of the Experts' Unit of the Auxiliary Secretariat of the Governing Body and Administration of this Tribunal, informed that the expert registered before this Jurisdictional Body in matters of foreign trade, Ing. Lic. ****** *********** ****** stated that she had knowledge of advertising, publicity and marketing and provided her curriculum vitae. By virtue of this, the expert was appointed to act as a third expert in this trial in matters of advertising, publicity and marketing, requiring her to appear before the Ninth Regional Metropolitan Court within ten days to accept and protest the position conferred, as well as to be given the questionnaires and other elements required to formulate her report. Finally, it was ordered that the parties be informed of the order of account for the corresponding legal effects.

 

20. On September 5, 2017, the C. ************ ****** ******, third expert, appeared before the Ninth Metropolitan Regional Chamber to prove that he met the corresponding requirements, to accept the position and to protest his legal performance. Therefore, he was considered to have been presented for the specified purposes, and was granted a period of fifteen days to submit his report.

 

21. By agreement of 11 October 2017, she was informed of the brief submitted to the Office of the Common Counsel for the Regional Metropolitan Chambers on 4 October 2017, by which the third expert in the field of propaganda, advertising and marketing requested an extension of the period allowed for the delivery of her opinion, on account of the complexity of the case. She was therefore given a single opportunity to submit her opinion within 15 days.

 

22. On January 3, 2018, the Court took note of the documents filed with the Office of the Common Counsel for the Metropolitan Regional Chambers of this Court on December 5, 2017, through which the third party expert in dispute: 1) requested the release of the expert in order to be able to collect his fees and 2) rendered his expert opinion in the area of advertising, publicity and marketing. Consequently, the necessary steps were ordered for her to collect the corresponding fees.

 

23. On April 30, 2018, the parties were granted the term of law to file pleadings. This right was exercised by both parties.

 

24. By means of a different agreement dated 30 April 2018, the investigation of the trial was declared closed, and it was ordered that the necessary steps be taken, by virtue of the fact that in the trial the exercise of the power of attraction of the High Court of this Court had been requested.

 

25. By agreement of April 30, 2018, it was ordered that the trial proceedings be sent to the Superior Chamber of this Court for their final resolution.

 

26. On June 1, 2018, the then President of the Second Section of the Superior Chamber, Judge Víctor Martín Orduña Muñoz, issued official letter number 17-9-2-24326/18 dated April 30, 2018, received by the Office of the Parties of the Superior Chamber on May 31, 2010. By virtue of this, she filed the trial in said Section and ordered that the proceedings be sent to her Office.

 

CONSIDERING

FIRST. This Second Section of the Superior Chamber of the Federal Court of Administrative Justice is competent to resolve the contentious-administrative lawsuit that is before us, in accordance with the provisions of Article 23, Section II of the Organic Law of the Federal Court of Fiscal and Administrative Justice, - in force before 18 July 2016 - in accordance with the provisions of the fifth transitional article, sixth paragraph, of the Decree issuing the General Law of the National Anti-Corruption System; the General Law on Administrative Responsibilities and the Organic Law of the Federal Court of Administrative Justice; and Article 48, paragraph I, subparagraph a) and paragraph II, subparagraph a) of the Federal Law on Contentious Administrative Proceedings, in force before 13 June 2016, in accordance with the Second Transitory Article of the Decree amending, adding and repealing several provisions of the aforementioned law - since this is a lawsuit with special characteristics by virtue of its amount, since the total value of the business is $3,082,309,114. 00.

 

The legal precepts referred to are as follows:

 

ORGANIC LAW OF THE FEDERAL COURT OF FISCAL AND ADMINISTRATIVE JUSTICE

 

"ARTICLE 23.- The powers of the Sections are the following: (…)

II. Resolving trials with special characteristics, in terms of the applicable provisions

 

(…)”

 

FEDERAL LAW ON CONTENTIOUS-ADMINISTRATIVE PROCEDURE

 

"The Plenary or the Sections of the Court may resolve trials with special characteristics.

 

I.             Trials with special characteristics are those in which

 

a) Due to their subject matter, concepts of challenge or amount are considered of interest and importance.

 

II.            For the exercise of the power of attraction, the following rules shall apply

 

a) The request, if any, made by the Regional Chambers, the Examining Magistrate or the authorities must be presented before the closure of the proceedings.

 

(…)”

SECOND: The existence of the challenged resolution, as well as of the originally appealed one, was duly evidenced in the proceedings, in accordance with the provisions of articles 46, section I of the Federal Law of Contentious Administrative Procedures; 129 and 202 of the Federal Code of Civil Procedures of supplementary application in the matter, in view of the presentation made by the plaintiff, together with the express acknowledgement made by the authority in that sense when answering the complaint.

 

THIRD. A first aspect that is important to highlight in this ruling is the fact that the resolution that is being challenged, that is, the resolution contained in official letter number 900-09-2016-2276 of 28 March 2016, issued by the Central Administration of Large Taxpayers of the Tax Administration Service, corresponds to the one who resolved the appeal for revocation and confirmed the various official letter number 900-07-04-2015-55504 dated October 19, 2015, through which the International Control Administrator "4 , determined a tax profit in the amount of $3'082'309,114. 00, for income tax corresponding to the fiscal year from January 1 to December 31, 2008. Therefore, it is necessary to specify the scope of the "open litigation" principle provided for in articles 1 and 50 of the Federal Law on Contentious Administrative Procedures, which literally provide the following:

FEDERAL LAW ON CONTENTIOUS-ADMINISTRATIVE PROCEDURE

 

"ARTICLE 1.

 

When the resolution of an administrative appeal does not satisfy the legal interest of the appellant, and the appellant disputes it in the federal administrative trial, it will be understood that the appellant simultaneously challenges the resolution appealed against in the part that continues to affect him, being able to assert concepts of challenge not raised in the appeal.

 

Likewise, when the resolution of an administrative appeal declares that it has not been filed or rejects it as inadmissible, provided that the competent Regional Chamber determines that the appeal is admissible, the contentious-administrative proceedings shall proceed against the resolution which is the subject of the appeal, and in any case may assert concepts of objection not raised in the appeal".

 

"ARTICLE 50.- (...)

 

In the case of judgments ruling on the legality of the decision given in an administrative appeal, if there is sufficient evidence to do so, the Court will rule on the legality of the decision appealed against, in so far as it does not satisfy the legal interest of the applicant. Acts of the administrative authorities which are not expressly challenged in the application may not be annulled or altered.

(…)

From the systematic interpretation of the transcribed precepts, it can be concluded that they institute what in judicial practice has been called the "principle of open litigation", which has its immediate precedent in the corresponding parts of articles 197 and 237 of the Federal Tax Code, in force until the entry into force of the Federal Law on Contentious Administrative Procedure.

 

Thus, the open Litis implies that, in the case of a challenge to the resolution that decided an administrative appeal, the act of the authority appealed against in the administrative headquarters is understood to be simultaneously controversial in the part that did not satisfy the legal interest of the plaintiff, which allows the plaintiff to reiterate in the concepts of challenge, the grievances that were exposed in the means of defence in the administrative headquarters, in addition to allowing the formulation of even new arguments.

 

For these reasons, and given that in the present contentious-administrative trial the resolution that resolves the appeal of revocation filed by the plaintiff is controlled, under the terms of the Federal Law of Contentious-Administrative Procedure it is appropriate to analyze the legality of the act of authority originally appealed against, in the framework of the concepts of contestation put forward by the plaintiff, whether they are reiterative of those put forward in the administrative instance, or novel, in accordance with the principles of congruence, exhaustiveness and greater benefit that govern the final judgments in the trial that we are dealing with.

 

Jurisprudence VI-J-2aS-6 issued by the Second Section of the Superior Chamber of this Court, published in the Magazine edited by this Court, number 11, Sixth Period, Year I, November 2008, page 78, is applicable, which is of the following literal tenor

CONTENTIOUS-ADMINISTRATIVE TRIAL. THE PRINCIPLE OF OPEN LITIGATION CONTAINED IN THE FEDERAL LAW OF CONTENTIOUS-ADMINISTRATIVE PROCEDURE, ALLOWS THE PLAINTIFF TO USE NOVEL OR REITERATIVE CONCEPTS OF ANNULMENT REFERRED TO THE RESOLUTION APPEALED AGAINST, WHICH MUST BE

STUDIED BY THE COURT. In accordance with the provisions of articles 1, second paragraph, and 50, penultimate paragraph, of the Federal Law of Contentious Administrative Procedure, published in the Official Gazette on December 1, 2005, in force as of January 1, 2006, the contentious administrative trial is based on the principle of "open litigation", according to which in the judgment of the Federal Court of Tax and Administrative Justice when the decision is challenged in an administrative appeal, not only must the grievances which seek to challenge the legality of the contested decision be resolved, but also those which challenge the contested decision, and the new arguments raised, which may include the reasoning relating to the contested decision, and those which seek to challenge the new decision, must be analysed; as well as those reasons or grounds that reproduce grievances raised in the administrative appeal against the original resolution. Therefore, all of these arguments, whether new or repetitive of the administrative body, constitute the concepts of annulment inherent in the tax complaint, which implies that they are used to combat both the contested decision and the contested decision in the part that affects the legal interest of the plaintiff, and therefore this Court is obliged to study them. (9)

 

FOURTH - Before studying the concepts of challenge put forward by the plaintiff, the Court considers it appropriate to specify that in this ruling only the exceptional arguments put forward by the authority at the time of answering the application, relating to the substance of the case, as well as the concepts of challenge put forward by the plaintiff in its application, will be transcribed in order to satisfy the principles of consistency and completeness in the judgments.

By analogy, the thesis of jurisprudence 2a./J. 58/2010, supported by the Second Chamber of the Supreme Court of Justice of the Nation, Ninth Period, published in the Semanario Judicial de la Federación y su Gaceta, Volume XXXI, May 2010, page 830:

 

CONCEPTS OF VIOLATION OR GRIEVANCE. TO COMPLY WITH THE PRINCIPLES OF CONGRUENCE AND COMPLETENESS IN THE AMPARO JUDGMENTS IS

IT WOULD BE UNNECESSARY TO TRANSCRIBE IT. Of the precepts that make up Chapter X "On Sentences", of the first title "General Rules", of the first book "On Amparo in General", of the Amparo Law, it is not noted as an obligation for the judge to transcribe the concepts of violation or, where appropriate, the grievances, in order to comply with the principles of consistency and completeness in the sentences, These principles are satisfied when it specifies the points under discussion, arising from the application for protection or the statement of grievances, studies them and responds to them, which must be linked to and correspond to the approaches to legality or constitutionality actually set out in the relevant specification, without introducing aspects other than those which make up the dispute. However, there is no prohibition against making such a transcript, and it is up to the judge to decide whether to do so, taking into account the special characteristics of the case, without detriment to the fact that, in order to satisfy the principles of completeness and consistency, the claims of legality or unconstitutionality that have been asserted are studied.

 

FIFTH - Prior to the study of the concepts of challenge, in order to contextualise the present case, it is necessary to specify the following background information, which is derived from the settlement decision:

 

1.            The petitioner is a company incorporated under Mexican law and belongs to the beer industry, as part of ***** ********** *********.

 

2.            The main activity of the acting company ******** ********** ********** **** ** **** is to distribute the beer it produces ********** ********** **** ** **** (now *************** ********** **** ** ****, also a 99.99% subsidiary of********** ********* ******** **** ** ****) and that the five main brands used in the products it distributes are "***********", "***", "******", "********", "** *****", among others.

 

 

3. Until January 2003, ********** ********** ************** ** ****, was the owner of the brands used in the beer distributed by the acting company.

 

4. In February 2003, ********** ********** ************** ** ****, was spun off, surviving in its capacity as a spun-off company, and the entity known as ************* **** ** *****, resident in Mexico, to which it transferred, among others, intangible assets such as brands, notices and trade names.

 

5. As a result, on 1 March 2003, the acting company and ********** ********** ********** **** ** ****, entered into a non-exclusive licence agreement with ********* **** **** ** **** to use and exploit intangible assets known as trademarks, commercial notices and other industrial property rights, and were obliged to pay royalties for the use of such industrial property in December of each year.

 

6.            On October 20, 2003, ********** ***************** **** ** **** (formerly ***** ********* **** ** ****) incorporated in Mexico a *** ************** **** ** ****, a company belonging to ***** ********** ********* and which on December 15, 2003, changed its tax domicile to Switzerland, cancelling from that moment its federal registry of taxpayers in Mexico.

 

7. On 18 December 2003, ********* **** ****** merged with *** ************** **** ** ****, an entity resident in Switzerland, the latter surviving, thereby holding the intangible assets such as brands, advertisements and trade names that were owned by ********* **** **** ** ****

 

8. Once *** ************** **** ** ****, acquired the ownership of the brands, notices and commercial names mentioned above, these were contributed to the Company **** *** ****, constituted on 17 June 2004, thus becoming a 100% shareholder of the latter.

 

9. As from 2004, the company *** *** ****, which is resident for tax purposes in Switzerland, began to benefit from the granting of the use and exploitation of the trademarks, commercial notices and other industrial property rights originally developed in Mexico by ********** ********** ********** **** ** ****, with the related parties resident in Mexico being obliged to pay this consideration in their capacity as marketers of the products related to these trademarks, as is the case with the claimant.

 

10. By means of the restructuring described above, the group to which ******** ********** ********** **** ** **** belongs, placed in Switzerland the profits from the granting of the use or enjoyment of the trademarks, advertisements and trade names developed in Mexico, which are held by the products marketed mostly in the Mexican market, generating a tax deduction in Mexico for the expenditure on royalties for the use or enjoyment of the trademarks, advertisements and trade names transmitted to *** *** ****

 

11. However, on 1 August 2013, the C.P.R. ****** was notified, in its capacity as the external auditor of the plaintiff company, of letter number 900 07-04-2013-40346 of 24 July 2013, issued by the International Auditing Authority "4" through which it was summoned to deal with matters related to the review of the opinion of the financial statements of the plaintiff, corresponding to the fiscal year 2008.

 

12. As a result of the procedure referred to in the previous point, the auditing authority considered that the information and documentation provided by the Registered Public Accountant was insufficient to observe the tax situation of the claimant company, and therefore decided to initiate its powers of verification directly with the latter, for the purpose of reviewing compliance with its income tax obligations for the 2008 tax year.

 

13. On 29 October 2013 the claimant was notified of official letter number 900-07-04-2013-48000, issued on 14 October 2013 by the International Taxation Administration "4" of the Tax Administration Service, requesting various information and documents in order to verify the correct compliance with the tax provisions as a direct subject of income tax for the 2008 tax year.

 

14. On October 23, 2015, it was notified of the resolution contained in official letter number 900 07 04-2015-55504 of the 19th of the same month and year, by which the International Taxation Administration "4" of the Tax Administration Service determined the following:

 

a) The deductions for "propaganda and publicity" expenses, marketing expenses and uncollectible credits, made by the plaintiff in the total amount of $1'856,517,431.00, for income tax, corresponding to the period from January 1 to December 31, 2008, were not applicable.

 

b) As a result of the foregoing, it ordered the parent company ******* ********* ********* ***** ** ****, to file a supplementary tax return for the 2008 fiscal year, in which it would determine its tax result in accordance with the change in the plaintiff's taxable income and, if applicable, determine the tax to be charged with the attachments to the law.

 

15. On December 8, 2015, the plaintiff filed an appeal for annulment of the contents of official letter number 900 07 04-2015-55504 dated October 19, 2015.

 

16. On 6 April 2016 the plaintiff was notified of official letter number 900-09-2016-2276 of 28 March 2016 (which constitutes the resolution challenged in the trial), by which the Central Administration of Large Taxpayers' Litigation of the Tax Administration Service resolved the appeal for revocation filed by the plaintiff, in the sense of confirming the resolution contained in official letter number 900 07 04-2015-55504 of 19 October 2015.

 

SIXTH. Based on the provisions of Article 50 of the Federal Law on Contentious Administrative Procedure, this Section shall analyse the SIXTH concept of challenge, in which the plaintiff checks the legality of the notification of official letter 900-07-04- 2013-48000 of 14 October 2013, with which the powers of inspection were initiated, of official letter of observations number 900-07-04-2015-22431 of 14 April 2015, and of the settlement resolution contained in official letter 900-07-04-2015-55504 of 19 October 2015.

In this concept of challenge, the plaintiff refers to the following:

 

(See transcript)

 

SUMMARY OF THE GROUNDS FOR CHALLENGE

In accordance with the above, the plaintiff states that the notifications of the official letter 900-07-04-2013-48000 of 14 October 2013 with which the powers of inspection began, of the official letter of observations number 900-07-04-2015-22431 of 14 April 2015 and of the settlement resolution contained in official letter 900-07-04-2015-55504 of 19 October 2015, met with a number of third parties, who stated that they worked for an undertaking which provides services to the applicant, without it being stated in the respective minutes of notification, in a detailed and duly detailed manner which undertaking they belong to and the link which they have with the applicant.

 

It is clear from the foregoing that the acts of notification were addressed to uncertain and unspecified persons.

 

That the authority cannot assume that a person who is circumstantially or accidentally in the domicile of a taxpayer is apt to inform about the whereabouts of the same or of his legal representative, nor much less, to receive the summons or minutes of notification for the practice of the diligence.

 

 

That the status of third party cannot be attributed to any person, but only to those who, due to their relationship with the taxpayer, offer some guarantee that they will inform the addressee of the document.

 

That for the above reasons, the notifier must ensure that the person at the domicile is not there due to accidental circumstances, so that it is necessary for the notifier to enter data that objectively allows the conclusion that the diligence was carried out at the indicated domicile, that his representative was sought and that in the absence of these the diligence was understood with the person at the domicile, ensuring the relationship of the same with the taxpayer.

 

That in this sense, it is the obligation of the notifier to record in the respective minutes or summonses, the data that undoubtedly lead to the certainty that the third party is a person who will give notice to the interested party both of the search and of the date and time in which the respective notification will be made, that is, objective data that lead to the conclusion that in the absence of the interested party, the diligence was understood with someone suitable for such purpose.

 

This is so because the summons and the respective notification act bind the interested party or his legal representative to wait for the diligence at the set time, with the warning that, if he does not do so, he will have to bear the consequence, consisting of the diligence being carried out with the person present or with a neighbour.

 

That the notification of those acts was carried out with various third parties, in their capacity as employees of an undertaking which provides services to the plaintiff, without indicating in the same act of notification, in a detailed and duly detailed manner, the connection which those persons had with the plaintiff.

 

That the notifier did not record in the respective minutes the factual circumstances which he took into account in order to understand the procedure with a third party, since the information which would give certainty that he was acting with a third party who would notify the taxpayer of the respective duty was not indicated.

 

That the notifier did not record the manner in which he ensured that the person with whom he understood each of the proceedings presented a certain guarantee that he would inform the claimant of the said acts, inasmuch as he did not record the data and circumstances that would allow him to ascertain the nature of the third party with whom the proceedings were understood.

 

 

That the voting credentials exhibited by the third parties with whom the notification was made do not prove their relationship with the plaintiff, so that the alleged relationship between the company in which those third parties work cannot in any way be considered sufficient for the actuary to have understood the proceedings with them, since he had to ensure that they were not at home due to accidental circumstances, which did not occur.

 

That in order to comply with the requirement of circumstance in terms of article 137 of the Federal Fiscal Code, the notifier must state the objective data that the person who receives the summons is not accidentally at the domicile of the taxpayer and that he will inform the latter about the diligence, because otherwise the indispensable budget for the legal warning to be effective could not be considered satisfied.

 

That when the official in charge of the notification of the official duty drew up the report, he had to record the circumstances that he had taken into account to consider that the third party with whom the notification was made would actually comply with the purpose of the report, that is, to give notice and to inform the person to whom the official duty is addressed.

 

That omitting the above, as occurred in the case, leads to the extreme that the third party's assertion is a unilateral statement made by the notifier, which is not corroborated by the statement of any person who was at the domicile and who effectively informed the notifier that the legal representative was absent.

 

Consequently, the review on the basis of which the defendant authority determined the tax credit to be borne by the claimant has become ineffective and, consequently, the contested tax assessment procedure is flawed.

 

That it is not an impediment to the above that section 51(2)(d) of the Ley Federal de Procedimeinto Contencioso Administrativo provides that the defences of the individual are not affected and do not transcend the meaning of the judgment, among others, irregularities in the notifications of the requests for data, reports or documents, or in the requests themselves, provided that the individual complies with them, exhibiting the requested information and documentation in a timely manner.

 

That the above is so, because the observations office, as well as the settlement office, are not simple requests for documentation or information, and therefore the assumption referred to in the legal precept in question is not updated, since through the former the taxpayer is informed of the facts or omissions detected by the tax authority in the financial year under review and through the latter, the contributions omitted by the taxpayer are determined.

 

That the fact that the claimant has responded in a precautionary manner to the notice of assessment and has filed an appeal for reversal of the notice of assessment does not in any way imply that the claimant has formally taken cognisance of it in the legal form and time, since the truth is that as can be seen from the minutes of notification of those notices, The proceedings were carried out with a third party who claimed to be an employee of a company which provides services to the applicant, so that it is not certain that the plaintiff was aware of the exact date on which the minutes of notification were issued and that the plaintiff was given the full period of time within which it was entitled to exercise its rights.

 

SUMMARY OF THE EXCEPTIONAL ARGUMENTS

 

In its reply, the defendant authority stated that the applicant's arguments were ineffective, and validated the contested notifications, while the applicant requested an extension of time to comply with the request made by letter 900-07-04-2013-48000 of 14 October 2013, It also replied to the observations contained in official letter 900-07-04-2015-22431 of 14 April 2015 and duly filed an appeal for annulment of the settlement decision contained in official letter 900-07-04-2015-55504 of 19 October 2015.

 

The defendant states that the notifications of the acts referred to were carried out in accordance with the law, since the law does not require that the notifiers ensure the character of the persons with whom the proceedings are to be carried out.

 

ESTABLISHMENT OF THE DISPUTE

 

The dispute consists of determining whether the notification minutes of the official letter 900-07-04-2013-48000 of 14 October 2013 with which the powers of inspection were initiated, of the official letter of observations number 900-07-04-2015-22431 of 14 April 2015 and of the settlement resolution contained in official letter 900-07-04-2015-55504 of 19 October 2015, are duly detailed with regard to the information of the third party with whom each of the aforementioned proceedings was carried out.

 

RESOLUTION OF THE SECOND SECTION OF THE SUPERIOR COURT

In order to resolve the dispute in this Recital, it is necessary to know what is established in Article 137 of the Federal Fiscal Code in this respect:

 

Article 137.- When the notification is made in person and the notifier does not find the person to be notified, he shall leave a summons at the domicile, either to wait at a fixed time on the following working day or to go and notify himself, within a period of six days, at the offices of the fiscal authorities.

 

In the case of acts relating to the administrative procedure of execution, the summons will always be for the wait indicated above and, if the person summoned or his legal representative does not wait, the procedure will be carried out with the person at home or, failing that, with a neighbour. If the latter refuses to receive the notification, it will be made by means of an instruction which will be fixed in a visible place of that address, and the notifier will have to give a reason for that circumstance in order to inform the head of the executing office.

 

If the notifications refer to summonses for the fulfilment of obligations not satisfied within the legal deadlines, the fees established in the regulations of this Code will be charged to the person who committed the breach.

 

From the precept transcribed, it is clear that when the notification is made in person and the notifier cannot find the person to be notified, he will leave a summons at the address, either to wait at a fixed time on the following working day or to go and notify the offices of the tax authorities within six days.

 

Likewise, it provides that if the person cited or his legal representative does not wait on the date and time indicated in the summons, the procedure will be carried out with whoever is at the domicile or, failing that, with a neighbour.

 

However, on this last point, the Judicial Power of the Federation has interpreted article 137 of the Federal Fiscal Code, indicating that in order to circumstance the notification act it is necessary that the notifier enters objective data that allows to conclude that

 

a) the diligence was carried out in the indicated domicile;

b) the taxpayer or its representative was sought; and

(c) in their absence, it was understood that the procedure was carried out with the person at the domicile

 

In the latter case, the third party is required to identify himself, provide his name and express the reason why he is at the place or the relationship he has with the interested party, without it being necessary for the notifier or visitor to obtain the documents which prove the link between the third party and the taxpayer, since the latter is not obliged to justify the reason why he is at the place or his relationship with the interested party and, therefore, to provide documentation referring to that circumstance.

 

The above was established in case law 2a./J. 85/2014 (10a.), Décima Época, supported by the Second Chamber of the Supreme Court of Justice of the Nation, published in the Gaceta del Semanario Judicial de la Federación, Book 10, September 2014, Volume I, page 746:

 

PERSONAL NOTIFICATION IN TAX MATTERS. TO CIRCUMSTANCE THE RECORD OF THE DILIGENCE UNDERSTOOD WITH A THIRD PARTY, IT IS UNNECESSARY FOR THE NOTIFIER TO COLLECT DOCUMENTS OR UNDOUBTED ELEMENTS THAT DEMONSTRATE THE NEXUS HE CLAIMS TO HAVE WITH THE TAXPAYER. From the interpretation of Article 137 of the Federal Fiscal Code and in congruence with the criteria of this Second Chamber of the Supreme Court of Justice of the Nation, contained in the jurisprudence 2a./J. 15/2001 (*), 2a./J. 60/2007 (**), 2a./J.101 /2007 (***) and 2a./J. 82/2009 (****), it should be noted that in order to substantiate the notification act it is necessary for the notifier to provide objective data that allow the conclusion that: a) the procedure was carried out at the indicated address; b) the taxpayer or its representative was sought; and c) in their absence the procedure was carried out with the person at the address. In the latter case, if the third party fails to provide his name, does not identify himself, and/or does not express the reason why he is in the place or the relationship he has with the interested party, the notifier shall be required to enter data that objectively lead to the conclusion that the proceeding was carried out at the domicile, such as the characteristics of the property; if the third party was inside or other data that reasonably prove that the proceeding was carried out in the correct place and with whom he will notify the interested party both of the search and of the date and time when the respective proceeding will be carried out. Hence, the omission of only one of the data to be provided by the third party is sufficient for the notifier, for the purpose of safeguarding the legality of his action, to be obliged to record the indicated data in detail.

 

Pursuant to the foregoing, in cases where the third party fails to provide his name, does not identify himself, and/or does not express the reason why he is in the place or the relationship he has with the data subject, the data setter will be required to record data that objectively lead to the conclusion that the procedure was carried out at the domicile, such as the characteristics of the property; if the third party was in the interior or other data that, reasonably, proves that he is acting in the correct place and with whom he will give notice to the data subject both of the search and of the date and time at which the respective notification diligence will be carried out.

 

However, in the present case, the notification of the official letter 900-07-04-2013-48000 of 14 October 2013 with which the powers of inspection began, the official letter of observations number 900-07-04-2015-22431 of 14 April 2015, and the settlement resolution contained in official letter 900-07-04-2015-55504 of 19 October 2015, were carried out in the following terms

 

(See transcript)

 

The following is noted from the digitized notification records:

 

NOTIFICATION RECORDS OF THE LETTER 900-07-04-2013-48000 OF 14 OCTOBER 2013.

 

That on 28 October 2013, the notifier attached to the Central Administration of International Taxation, of the General Administration of Large Taxpayers of the Tax Administration Service, was constituted at the tax domicile of the acting company, for the purpose of notifying it of the official letter 900-07-04-2013-48000 of 14 October 2013; for which reason it required the presence of its legal representative; however, the latter was not at the domicile, so it left a summons for the following day with the C. *************** ********* *******, in his capacity as a third party, who claimed to be an employee of a company that provided services to the applicant, identified himself with a voting card and stated that he was at home because he worked there. The notifier also stated that if the legal representative of the plaintiff did not wait at the time and on the day indicated in the summons, the procedure would be carried out with whoever was at the domicile.

 

That on 29 October 2013, the notifier attached to the Central Administration of International Taxation, of the General Administration of Large Taxpayers of the Tax Administration Service, was constituted at the tax domicile of the plaintiff, for the purpose of notifying him of the letter 900-07-04-2013-48000 of 14 October 2013, for which he required the presence of his legal representative, to which the C. ********* ****** *******, who attended the proceedings, expressly replied that the latter was not present.

 

That by virtue of the foregoing, the notifier carried out the diligence with the C. ********* ****** ********* *******, in his capacity as a third party, who identified himself with a credential to vote and stated that he worked in a company that provided services to the plaintiff.

 

NOTIFICATION RECORDS OF THE LETTER OF OBSERVATIONS NUMBER 900-07-04-2015-22431 OF 14 APRIL 2015

 

That on 23 April 2015, the notifier attached to the Central Administration of International Taxation, of the General Administration of Large Taxpayers of the Tax Administration Service, was constituted at the fiscal domicile of the petitioner company, for the purpose of notifying it of the letter 900-07-04-2015-22431 of 14 April 2015; for which reason it required the presence of its legal representative; however, the latter was not at the domicile, and therefore left a summons for the following day with the C. ***** *********** ******, in his capacity as a third party, who claimed to be an employee of a company that provided services to the applicant, identified himself with a voting card and stated that he was at home because he worked as an accountant in the tax area. The notifier also stated that in the event that the legal representative of the plaintiff did not wait at the time and on the day indicated in the summons, he would be diligent with whoever was at the domicile.

 

That on 24 April 2015, the notifier attached to the Central Administration of International Taxation, of the General Administration of Large Taxpayers of the Tax Administration Service, was constituted at the tax domicile of the plaintiff company, for the purpose of notifying him of the letter 900-07-04-2015-22431 of 14 April 2015, for which he required the presence of his legal representative, to which the C. ***** ******* **** ******, who attended the proceedings, expressly replied that this was not contravened.

 

That by virtue of the foregoing, the notifier carried out the diligence with the C. ***** ******* **** ******, in its third party character, who identified himself with a credential to vote and stated that he worked in a company that provides services to the plaintiff.

 

NOTIFICATION RECORDS OF THE LETTER 900-07-04-2015-55504 OF 19 OCTOBER 2015.

 

That on 22 October 2015, the notifier attached to the Central Administration of International Taxation, of the General Administration of Large Taxpayers of the Tax Administration Service, was constituted at the fiscal domicile of the petitioner company, for the purpose of notifying him of the official letter 900-07-04-2015-55504 of 19 October 2015; for which he required the presence of his legal representative; however, the latter was not at the domicile, and therefore left a summons for the following day with the C. ***** *********** ******, in his capacity as a third party, who claimed to be an employee of a company that provided services to the applicant, identified himself with a voting card and stated that he was at home because he worked there every day. The notifier also stated that if the legal representative of the plaintiff did not wait at the time and on the day indicated in the summons, the procedure would be carried out with whoever was at the home.

 

That on 23 October 2015, the notifier attached to the Central Administration of International Taxation, of the General Administration of Large Taxpayers of the Tax Administration Service, was constituted at the tax domicile of the plaintiff company, for the purpose of notifying him of the letter 900-07-04-2015-55504 of 19 October 2015, for which he required the presence of his legal representative, to which the C. ***** ******* **** ******, who attended the proceedings, expressly replied that this was not contravened.

 

That by virtue of the foregoing, the notifier carried out the diligence with the C. ***** ******* **** ******, in its third party character, who identified himself with a credential to vote and stated that he worked in a company that provides services to the plaintiff.

 

As we can see, in the three cases, the notifiers were constituted at the fiscal domicile of the plaintiff company in order to notify it of the above mentioned duties; however, since the legal representative of the plaintiff was not at that domicile, he was given notice for the following day, as established in Article 137 of the Federal Fiscal Code.

 

Notwithstanding the above, the legal representative of the plaintiff did not attend the summonses dated October 28, 2013, April 23, 2015, and October 22, 2015, so the respective proceedings were carried out with the persons who were at the domicile at that time, who provided their name and address, identified themselves with a credential to vote, and stated "they are employees of a company that provides services to the plaintiff.

 

By virtue of the foregoing, this Court considers that the notifications of the official letter 900-07-04-2013-48000 of 14 October 2013 with which the powers of inspection were initiated, the official letter of observations number 900-07-04-2015-22431 of 14 April 2015 and the liquidation resolution contained in the official letter 900-07-04-2015- 55504 of 19 October 2015, were carried out legally, that is, in terms of Article 137 of the Federal Fiscal Code.

 

The above is said because the notifiers recorded objective data that allows us to conclude that the diligence was carried out at the indicated address; that the taxpayer or its representative was sought; and that in their absence the diligence was understood with the person who was at the address.

 

In addition to the fact that the third parties with whom the proceedings were conducted identified themselves, provided their names and expressed their relationship with the plaintiff, the notifiers also sought the documents which would prove the link between the third parties and the taxpayer, since they are not obliged to justify the reason why the third parties were in the place or their relationship with the interested party, nor, therefore, to provide documentation relating to that circumstance.

 

On the contrary, the data recorded by the notifiers in relation to the third parties who attended the aforementioned proceedings are sufficient to estimate that they would make the legal representative of the shareholder aware of the letter 900-07-04-2013-48000 of 14 October 2013, with which the powers of inspection began, the letter of observations number 900-07-04-2015-22431 of 14 April 2015, and the settlement resolution contained in letter 900-07-04-2015-55504 of 19 October 2015.

 

The conclusions reached are supported by the jurisprudence 2a./J. 82/2009, of the Second Chamber of the Supreme Court of Justice of the Nation, Ninth Period, published in the Semanario Judicial de la Federación y su Gaceta, Volume XXX, July 2009, page 404:

 

PERSONAL NOTIFICATION PRACTICED IN TERMS OF ARTICLE 137 OF THE FEDERAL FISCAL CODE. DATA THAT THE NOTIFIER MUST RECORD IN THE MINUTES OF DELIVERY OF THE SUMMONS AND SUBSEQUENT NOTIFICATION TO COMPLY WITH THE REQUIREMENT OF CIRCUMSTANCE, WHEN THE RELATIVE DILIGENCE IS UNDERSTOOD WITH A THIRD PARTY. In order to comply with the requirement of circumstance, it is necessary that the notifier records in the minutes information that objectively allows the conclusion that he carried out the service at the indicated address, that he sought the taxpayer or his representative and that in their absence he understood the service with the third party, understood as the person who, due to his relationship with the taxpayer,  provide some guarantee that the document will be disclosed to the addressee. To this end, the notifier must ensure that the third party is not at the address due to accidental circumstances, ranging from persons who live in the address (family members or domestic servants) to those who are normally, temporarily or permanently there (workers or tenants, for example). Furthermore, if the third party does not provide his or her name, does not identify himself or herself, or does not indicate the reason why he or she is in the place or his or her relationship with the interested party, the diligence officer must specify the characteristics of the property or office, that the third party was inside, that he or she opened the door or that he or she is attending to the office, or other diverse data that undoubtedly lead to the certainty that he or she is acting in the correct place and with a person who will give notice to the interested party both of the search and of the date and time in which the respective notification diligence will be carried out.

 

As well as the thesis VII-CASR-2OC-13, published in the Journal edited by this Tribunal, Séptima Época, Year V, No. 43, February 2015, page 179:

 

PERSONAL NOTIFICATION. ARTICLE 137 OF THE FISCAL CODE OF THE FEDERATION DOES NOT FORESEE AS A REQUIREMENT OF VALIDITY THAT THE NOTIFIER SHOULD ASCERTAIN WITH A SUITABLE DOCUMENT THE CHARACTER OF THE THIRD PARTY ATTENDING TO THE DILIGENCE. From the interpretation of the aforementioned legal provision it is noted that in order to safeguard the guarantee of legal certainty for taxpayers, it is the obligation of the notifiers to draw up minutes in which the facts relating to the notification are stated, such as that it was constituted at the respective domicile; that it was requested by the presence of the addressee of the act or his legal representative, and that because he was not present he left a summons at the domicile to wait at a fixed time on the following working day; that it was constituted again at the domicile; that it was requested by the presence of the aforementioned person or his legal representative, and that because they did not wait for him at the time and on the day fixed in the summons, the diligence was carried out with the person who was at the domicile or in his absence with a neighbour; Consequently, if during the service of the document the third party who is dealing with it states that he has an employment relationship with the addressee, that relationship is sufficient to ensure that the document to be served could be delivered, without the notifier being obliged to require a suitable document to prove the existence of the employment relationship, since there is no legal provision which obliges the notifier to ascertain the truthfulness of the third party's statement, since the notary must merely specify the circumstances which occurred during the service.

 

Enforcement of Judgment issued in the Contentious Administrative Proceedings No. 2890/11-07-02-1.- Resolved by the Second Western Regional Chamber of the Federal Court of Fiscal and Administrative Justice, on 21 March 2014.

 

The Court notes that the plaintiff duly attended to the above-mentioned documents, while it issued a ruling in relation to the requirement of 14 October 2013, with which the powers of inspection began, by requesting an extension in writing received by the General Administration of Large Taxpayers on 20 November 2013 (pages 124 and 123 of administrative file CCM010710UU1, VOLUME 1 OF 1); Likewise, by means of the document submitted to the authority on 27 May 2015, the applicant replied to the letter of observations of 14 April 2015 (pages 299 to 261 of administrative file CCM010710UU1, VOLUME 1 OF 1); and finally, on 8 December 2015, it filed an appeal for annulment of the settlement decision of 19 October 2015 (pages 265 to 275 of administrative file R. R. 240/15), which strengthens the considerations of this Court in the sense that the respective proceedings were carried out legally, since the third parties who attended them did inform the plaintiff of the acts in question.

 

Consequently, the SIXTH concept of objection to the claim is UNPROPERLY founded.

 

SEVENTH. Based on the provisions of the second paragraph of Article 50 of the Federal Law on Contentious Administrative Procedure, this Section will analyse the concept of challenge FIFTH of the lawsuit, in which the plaintiff disputes the legality of the official letter number 900-07-04-2013-48000 of 14 October 2013 through which the International Tax Administration Service "4" requested various information and documents in order to verify the correct compliance with the tax provisions as a direct subject of income tax for the 2008 fiscal year.

 

(See transcript)

 

SUMMARY OF THE GROUNDS FOR CHALLENGE

 

 

The plaintiff argued that the settlement document is illegal because it is the result of a flawed procedure, since the defendant authority did not properly substantiate or motivate document number 900-07-04-2015-55504 dated 19 October 2015, in relation to the object of the review.

 

That, in its letter No 900-07-04-2013-4800 of 14 October 2013, the defendant failed to provide a proper statement of reasons for the purpose of the review which gave rise to the contested decision, in so far as that purpose was limited to verifying solely and exclusively compliance with the applicant's tax obligations 'in order to verify correct compliance with the tax provisions to which it is subject (i) as the direct subject of the next federal contribution: income tax, for income subject to preferential tax regimes, and (ii) as a withholder and jointly and severally liable for the following federal contribution: income tax, caused by transactions with residents abroad; for the tax year from 1 January 2008 to 31 December 2008'.

 

That the review order from which the tax assessment was derived is not duly founded and reasoned, given that in said resolution the authority modified the taxable income of the claimant company derived from the rejection of the deductions made for "propaganda and advertising" and "marketing expenses", as well as for "uncollectible accounts", all these expenses incurred in national territory, given that said concepts do not correspond to its character of i) direct subject for income from REFIPRES, nor ii) as withholder or jointly and severally liable on the occasion of operations carried out with residents abroad.

 

That the deductions rejected by the defendant are not income subject to REFIPRES, but precisely outlays that were made in national territory and not in REFIPRES.

 

That the deductions made by the plaintiff do not derive from her failure to withhold or improperly withholding tax on transactions with residents abroad during 2008.

That from the analysis made of the outlays, as well as the object of the review, it will be noted that the expenses for said concepts do not correspond to income from REFIPRES as a direct subject, nor do they correspond to withholdings not made for payments made abroad, since the outlays were made within national territory.

 

That the principles of foundation and motivation cannot be circumvented by the auditing authorities when issuing review orders, since the purpose of such principles is, firstly, that the person reviewed has precise knowledge of the obligations to be reviewed and, secondly, that the review is strictly in accordance with the verification of the lines established in the official letter with which the exercise of the powers of verification is initiated.

 

That the fact that the review order establishes clearly, precisely and specifically which taxes or concepts will be the object of the audit by the reviewing authority, takes into account the fact that the taxpayer reviewed may have full knowledge of the obligations under his charge, the object of the review and that the auditors are committed to reviewing only and exclusively the compliance with the obligations that really correspond to them, in order to safeguard the principle of legal certainty.

 

That if the documents by means of which the tax authorities require the taxpayers to provide various information and accounting documentation do not contain the object of such request or do not specify exactly each of the concepts that will be reviewed or settled, it is evident that the settlements derived from the review of those documents and information are the result of an act that is vitiated by illegality.

 

All review orders must comply with the legal requirements for their issuance, that is to say, they must be duly founded and reasoned. To this end, it is strictly necessary that the tax authority clearly specifies in said order not only the documentation required, but also the category attributed to the governed to whom it is addressed, the power exercised, the denomination of the contributions and the period to be reviewed, in order to give full security and certainty to the taxpayer and to avoid the undue or excessive exercise of the review attribution, to the detriment of individuals.

 

That in the event that an audit procedure is carried out for an item or contribution that has not been expressly indicated as subject to review in the respective order, the result would be that the settlement from which it derives would be illegal.

 

That in this case, having determined that the company is responsible for rejecting deductions for operations carried out with residents in national territory, under a different concept to that specified in the official letter 900-07-04-2013-48000 dated

14 October 2013, makes such a determination illegal, since the official letter through which the review was initiated lacks the necessary foundation and motivation.

 

That the tax authority, in its official statement of assessment, establishes and reiterates that the decision refers only to the contribution to which the applicant is subject as a direct subject of income tax for the 2008 tax year, without including compliance with the obligations arising from transactions resulting from the obtaining of income from sources of wealth located in national territory.

 

That the tax authority, when issuing the tax assessment notice, states that it was issued on the basis of a purpose other than that of its determination, since the deductions rejected for 'advertising and publicity' and 'marketing expenses', as well as for uncollectible accounts, were made with parties resident in national territory.

 

By virtue of the foregoing, the plaintiff was left in a state of complete legal uncertainty when it was determined to reject deductions which were not the subject of the review which was carried out.

 

SUMMARY OF THE EXCEPTIONAL ARGUMENTS

 

For its part, the defendant authority in answering the complaint, stated that the plaintiff loses sight of the fact that the letter 900-07- 04-2015-55504 dated October 19, 2015 comes from a sequential procedure carried out with the public accountant, according to Article 52-A of the Federal Fiscal Code, so the review order must observe the provisions of Article 38 of that law, without further details.

 

That the power referred to in Article 52-A of the Federal Fiscal Code should not be confused with that established in Article 42 of said Tax Code.

 

That the purpose of the letter 900-07-04-2015-55504 dated 19 October 2015 is duly defined, since it specified that compliance with the tax provisions to which the plaintiff was subject would be verified: 1) as a direct subject in matters of income tax, 2) for income subject to preferential tax regimes, 3) as a withholder and jointly and severally liable in matters of income tax, and 4) operations carried out with residents abroad.

 

DETERMINATION OF THE DISPUTE

 

The dispute in this recital consists of determining whether the provisions of the settlement resolution contained in official letter 900-07-04-2015-55504 dated 19 October 2015 are in accordance with the purpose specified in official letter number 900-07-04-2013-48000, dated 14 October 2013, by which the authority began its powers of verification.

 

DECISION OF THE SECOND SECTION OF THE SUPERIOR CHAMBER

 

First of all, it is necessary to impose on us the content of the trade 900-07-04-2013-48000 of 14 October 2013:

 

(See transcript)

 

In accordance with the foregoing, the International Supervisory Authority "4" exercised the powers of verification provided for in Articles 42, section II and 52-A, first paragraph, section II of the Federal Fiscal Code, since it did not have sufficient information and documentation to verify the fiscal situation of the plaintiff and in order to continue with the procedure provided for in Article 52-A of the aforementioned legal system.

 

By virtue of the foregoing, said authority determined to require various information, data and documents from the taxpayer who is now the plaintiff, since in the procedure carried out with the Public Accountant who ruled on the financial statements of the plaintiff, it did not obtain sufficient information and documentation to verify its fiscal situation.

 

It also stated that the information and documents required were considered necessary for the exercise of the authority's powers of tax verification, in order to verify the correct compliance with the tax provisions to which it was subject as a direct subject, in matters of income tax, for the income subject to preferential tax regimes, as well as withholder and jointly and severally liable in matters of income tax, caused by the operations carried out with residents abroad, for the tax year from 1 January 2008 to 31 December 2008.

 

Similarly, the authority indicated that the audit power exercised would not include the review and verification of compliance with the obligations arising from the conclusion of transactions with related parties, which are considered as such under the terms of the Income Tax Law, considering the prices and amounts of consideration used with or between independent parties in comparable transactions; those derived from the tax consolidation regime to which the claimant was subject; and those relating to the origin of goods, as well as their entry and exit to national territory.

 

Once the above is specified, the content of Articles 42, Section II and 52-A, first paragraph, Section II of the Federal Fiscal Code, on the basis of which the authority began its powers of verification with the plaintiff, shall be analyzed first:

 

Article 42.- The tax authorities shall be empowered to verify that the taxpayers, jointly and severally liable parties, or third parties related to them, have complied with the tax provisions and, if applicable, to determine the omitted contributions or tax credits, as well as to verify the commission of tax crimes and to provide information to other tax authorities:

 

(…)

 

II. To require the taxpayers, jointly and severally liable or third parties related to them, to exhibit in their homes, establishments or in the offices of the authorities themselves, for the purpose of carrying out their review, the accounts, as well as to provide the data, other documents or reports required of them.

 

Article 52-A.- When the tax authorities, in the exercise of their powers of verification, review the report and other information referred to in this Article and the Regulations of this Code, they shall be

(…)

II. The public accountant who issued the opinion having been requested to provide the information and documents referred to in the previous section, after having received them or if they are not sufficient in the opinion of the tax authorities to ascertain the taxpayer's tax situation, or if they are not submitted within the time limits laid down in Article 53-A of this Code, or if such information and documents are incomplete, the said authorities may, in their opinion, exercise their powers of verification directly with the taxpayer.

 

It follows from the provisions transcribed above that the tax authorities, in order to verify that taxpayers, jointly and severally liable persons or third parties related to them have complied with the tax provisions and, where appropriate, to establish the contributions omitted or the tax credits, as well as to verify the commission of tax offences and to provide information to other tax authorities, are empowered, inter alia, to require taxpayers, jointly and severally liable persons or third parties related to them, to produce at their residence

establishments or in the offices of the authorities themselves, for the purpose of carrying out their review, the accounts, as well as providing the data, other documents or reports required of them.

 

That when the tax authorities, in the exercise of their powers of verification, review the report and other information referred to in Article 52-A and the Regulation of the Code, they must observe the rules established therein.

 

That having been requested from the public accountant who prepared the opinion, the information and documents relating to the financial statements of the taxpayers, after having received them or if they are not sufficient in the opinion of the tax authorities to ascertain the tax situation of the taxpayer, or if they are not submitted within the time limits laid down in Article 53-A of the Code, or if such information and documents are incomplete, those authorities may, in their opinion, exercise their powers of verification directly with the taxpayer.

 

In this regard, we have that the tax authority, began its faculties of verification directly with the plaintiff, specifically that established in Article 42, Section II of the Federal Fiscal Code, by virtue of which it considered that the information and documentation provided by the Public Accountant was not sufficient to know its tax status.

 

In other words, the defendant acted in accordance with Article 52-A of the Federal Fiscal Code, which provides for the possibility that once the review procedure with the Public Accountant has been exhausted, the tax authorities may initiate their verification powers directly with the taxpayers, in the cases referred to therein; However, contrary to the defendant's argument, when answering the complaint, the auditor did exercise the power of verification consisting of the review of the accounting or cabinet review, in terms of Article 42, Section II of the law, being obliged to indicate in the order or requirement: The documentation required, the category attributed to the governed party to whom it is addressed, the power exercised, the denomination of the contributions, and the period to be reviewed, in order to give full security and certainty to the taxpayer and to avoid the undue or excessive exercise of the review power.

 

The foregoing, in order to satisfy the requirements of substantiation and motivation of the administrative acts, in accordance with article 38, section III of the Federal Fiscal Code, as derived from the jurisprudence 2a./J. 68/2000, of the Second Chamber of the Supreme Court of Justice of the Nation, Ninth Period, published in the Judicial Weekly of the Federation and its Gazette, Volume XII, August 2000, page 261:

 

DESK OR CABINET REVIEW. THE RELATIVE ORDER, WHICH IS GOVERNED BY ARTICLE 16, FIRST PARAGRAPH, OF THE CONSTITUTION, MUST INDICATE NOT ONLY THE DOCUMENTATION REQUIRED, BUT ALSO THE CATEGORY OF THE SUBJECT (TAXPAYER, JOINT AND SEVERAL OR THIRD PARTY), THE CAUSE OF THE REQUEST AND, IF APPLICABLE, THE TAXES TO BE VERIFIED. This Supreme Court of Justice of the Nation has already established that the desk or cabinet review order has its basis in the first paragraph of article 16 of the Constitution; Therefore, the issuance of an order of this nature must comply with the provisions of that precept of the Supreme Law, which in tax matters details article 38, section III, of the Federal Tax Code, that is, it must comply with the principle of foundation and motivation, concepts that the previous integration of the Second Chamber of this High Court, in the thesis of jurisprudence 260, visible on page 175, of Volume VI of the Appendix to the Judicial Weekly of the Federation 1917-1995, under the heading "FOUNDATION AND MOTIVATION. "In the case of the former, it was defined as the expression of the legal or regulatory precept applicable to the case, and in the case of the latter, the precise indication of the special circumstances, particular reasons or causes that have been taken into consideration for the issuance of the act, and there must be an adaptation between the reasons given and the applicable norms. Therefore, if according to Article 42, Section II of the Federal Fiscal Code, the power of desktop review may refer to three types of subjects, which are the direct cause, the jointly liable and the third related to them, and its exercise may derive from different reasons, namely I. To verify compliance with tax provisions; II. To determine omitted taxes; III. Determining tax credits; IV. To verify the commission of tax offences; and, V. Providing information to various tax authorities; it must be concluded that the order for review issued in this regard must be contained in a written order from a competent authority, duly founded and reasoned, which implies that it not only expresses the documentation required, but also the category attributed to the governed to whom it is addressed, the power exercised, the denomination of the contributions and the period to be reviewed, in order to give full security and certainty to the taxpayer and to avoid the undue or excessive exercise of the power of review, to the detriment of individuals.

 

However, it is necessary to know the content of the official letter 900-07-04-2015-55504 dated 19 October 2015, through which the tax authority determined the tax situation of the acting company:

(See transcript)

 

It follows that the audit authority, in relation to payments made by the claimant in 2008 for advertising and publicity and for

 The Court of First Instance found that they were not strictly indispensable, on the ground that the brands of the products it markets are not its property and that it is therefore not its responsibility to exploit them.

 

Consequently, in its annual income tax return for the financial year 2008, the claimant wrongly deducted the amounts in the amount of $526,660,963.00 and $1,304,856,468.00 for advertising and publicity and marketing expenses, respectively, for which reason the auditor considered that the plaintiff should adjust its tax result for the determination of income tax for the year in question, considering such concepts as non-deductible and pay the corresponding tax.

 

With respect to the deduction of uncollectible accounts in the amount of $25,000,000, the authority determined that some of these accounts exceeded the limit established in paragraph a), section XVI of article 31 of the Income Tax Law; likewise, it warned that the age of the balances referred to, exceeds the year of maturity, that is, that the plaintiff company allowed its debtors to increase the uncollectible account without filing any arbitration procedure that would allow it to demonstrate the notorious practical impossibility of collection against its creditors.

 

Similarly, the authority learned that the legal representative of the plaintiff failed to submit during the audit process information statement or, if appropriate, the document submitted to the Tax Administration Service, in accordance with the second paragraph of Article 18 of the Federal Fiscal Code in force in 2008, reporting the uncollectible receivables it intended to deduct.

 

In view of the above, the tax authority considered that the claimant did not provide the documentation with which it could prove that it had complied with the requirements referred to in article 31 of the Income Tax Law, for which reason it rejected the income tax deduction for uncollectible accounts in the amount of $25'000,000.00.

 

That the authority determined that of the total authorized deductions in the amount of $31'954,849,360.00 those related to the concepts of advertising and publicity in the amount of $526'660,963.00, marketing expenses in the amount of $1'304,856,468.00 and for the concept of uncollectible accounts in the amount of $25'000,000.00, whose sum of such amounts is $1'856,517,431.00, were undue, and therefore this modified its tax result.

 

Once the authorized deductions that the plaintiff should have considered were determined, with respect to the non-consolidable part, it was determined that the tax profit corresponded to the amount of $3'082'309,114.00.

 

Considering that the tax authority determined a difference in the tax result of the plaintiff, in the amount of $1'856,517,431.00, the part of such difference that corresponds to its controlling company ******* ********* **** ** ****, while the plaintiff determines its consolidated tax result, amounts to $1'856,517,431, corresponding to 100% of the tax profit determined related to the consolidable participation.

 

Consequently, considering that the controlling company's participation in the plaintiff's tax result was 100% and that the plaintiff determined a tax profit in the amount of $3'082'309,114.00, which resulted to be greater than the tax profit in the amount of $1'856'517,431. 00, derived from the non-deductible items, ******* ********* ********* **** ** ***** had to file a complementary declaration for income tax correction, modifying the tax profit declared by the taxpayer for the purpose of reflecting the profit in the amount of $3'082'309,114, determined by the auditing company.

 

That the tax assessment resolution only refers to the contributions to which the plaintiff was subject as a direct income tax payer for the 2008 fiscal year, not including compliance with obligations derived from entering into transactions with related parties, considered as such under the terms of the Income Tax Law, considering the prices and amounts of consideration that would have been used with or between independent parties in comparable transactions, resulting from obtaining income from sources of wealth located in Mexico, those derived from the tax consolidation regime to which the plaintiff was subject; nor those relating to the origin of goods, as well as their entry into and exit from national territory.

 

In the light of the foregoing, the Court considers that the applicant is not justified in maintaining that the findings of the audit authority in the tax assessment decision do not comply with the purpose of the review carried out on the applicant, since, as is apparent from the content of document 900-07-04-2013-48000, of 14 October 2013, by which the defendant began its powers of verification with the applicant, it was noted that the information and documentation required was considered necessary for the exercise of the authority's tax audit powers, in order to verify the correct compliance with the tax provisions to which it was subject, inter alia, as a direct subject, in the field of income tax, for the tax year from 1 January 2008 to 31 December 2008.

 

Therefore, the audit authority determined that the plaintiff unduly deducted advertising and publicity expenses in the amount of $526,660,963.00, marketing expenses in the amount of $1,304,856,468.00 and the concept of uncollectible accounts in the amount of $25,000. 000.00, with respect to income tax for the 2008 fiscal year, so it is incontestable that these concepts are included within the object of the review specified in official letter 900-07-04-2013-48000, dated 14 October 2013.

That is so because the applicant made the abovementioned deductions in its annual income tax return; however, the review carried out by the auditor, whose purpose was precisely the obligations to which the applicant was subject as a direct subject of income tax for the 2008 tax year, found that those deductions were improper.

 

Nor is the applicant correct in that the subject of the review was only the income subject to preferential tax regimes, as well as that derived from transactions with residents abroad, in respect of income tax, for the tax year from 1 January 2008 to 31 December 2008, since those items were identified in the notice 900-07-04-2013-48000, of 14 October 2013, as part of the review, as the authority indicated that it would review the obligations to which the claimant was subject in its capacity as a direct subject of income tax, in respect of the 2008 tax year, and in addition, the items referred to above, i.e. it was not limited to income subject to preferential tax regimes, nor to income derived from transactions with residents abroad.

 

Consequently, the fifth concept of challenge asserted by the plaintiff in the lawsuit is UNFOUNDED, since the review carried out by the tax authority is in line with the purpose indicated in the official letter 900-07-04-2013-48000, of 14 October 2013.

 

EIGHTH: Based on the provisions of Article 50, second and third paragraphs of the Federal Law on Administrative Litigation Procedure, this Section will analyze the concepts of challenge FIRST and SECOND of the lawsuit, in which the plaintiff disputes the legality of the settlement decision in terms of deductions for marketing and advertising expenses.

 

 

(See transcript)

 

SUMMARY OF THE GROUNDS FOR CHALLENGE

 

The plaintiff argues that the contested resolutions are illegal, since the authority, not knowing the nature of the expenses for "marketing expenses" in the amount of $1,304,856,468.00, concluded that they were equal to the expenses made by the plaintiff for "propaganda and publicity", and therefore rejected the deduction.

 

That the marketing expenses are not equal to the outlays made for "propaganda and publicity" and, therefore, their deduction cannot be rejected for the same reasons.

 

The authority considered that the marketing costs are the same as those incurred for "advertising and publicity" and therefore rejected them for the same reasons, so that the only thing that has to be proved is that these costs do not share the same nature, in order to demonstrate the illegality of the rejection.

 

That the authority maintains that the marketing costs and the 'advertising and publicity' costs increased the value of the brands, but does not support that assertion.

 

That the authority does not establish how much the brand was worth before and after these expenditures were made, nor does it indicate the type of study or research it conducted to conclude that the marketing and "advertising and publicity" expenses increased the value of the brand.

 

It offers as evidence what the authority claims in the contested decisions, in so far as it expressly acknowledges that the marketing costs and the costs of 'advertising and publicity' represent a subsidiary benefit for the applicant, consisting of the value of its sales.

 

That the increase in the applicant's sales is sufficient for those expenses to be regarded as strictly indispensable, even if the auditor classifies them as subsidiary.

 

The authorities maintain that the expenses under analysis resulted in an increase in the value of the trademark, and even in the decision on the appeal for revocation they describe in doctrine the types of values that a trademark can have; however, they do not support the alleged increase in the value of the trademarks held by the products marketed by the plaintiff with any information or documentation, such as valuations by certified experts in the field, public information taken from national or international sources, contracts, among others.

 

That under the legal principle of the burden of proof, "he who claims is obliged to prove", if the defendants intended to reject the deductions made by the plaintiff, it was appropriate that they should support their claim with the corresponding information and documentation.

 

That the authorities made an incorrect assessment of the facts leading to the refusal to pay marketing costs, since they confused the object and purpose and nature of those costs with advertising and publicity costs.

 

That the expenditure on advertising and publicity is that incurred for the purpose of advertising, through various media, the products which the applicant distributes and markets.

 

That the expenses for marketing are those incurred for the purpose of placing on the market, in an efficient and orderly manner, the products distributed and marketed by the company, creating a link between the consumer and the product at the specific moment of consumption.

 

The purpose and nature of the marketing expenditure is different from that of advertising and publicity and in no way can it be considered to increase the value of the brand or its presence in the market, since such expenditure is aimed directly at placing the products marketed by the company on the market through promotions and commercial strategies.

 

That the main items for which the applicant made expenditure under the heading of 'marketing costs' correspond to 1) promotional items, in which the name, logo or insignia of the company is generally printed (commemorative cups, personalized ice-boxes, chairs or various types of furniture, calendars, cup holders, personalized thermoses, cork stoppers, T-shirts, among others); 2) consumer promotions (direct discounts, added products, crosses with other categories, added value items, illusion promotions with prizes; 3) ice (in-kind support); 4) sponsorships; 5) fairs.

 

That the marketing expenses constitute expenditures made by the company with the aim of encouraging consumption and, consequently, achieving penetration in a certain territory or specific and strategic area for the placement of the products it sells.

 

That these expenses are related to different aspects, such as the territoriality, areas, markets where it is sought to have a margin of penetration or greater participation with respect to the products that it distributes and markets, likewise, they seek to establish a link with the final consumer.

 

That marketing expenditure is incurred in order to intensify support for a certain position or have a presence in a certain market, regardless of whether the brand under which it is marketed is recognized globally.

 

In contrast, advertising and publicity expenses have as their object or purpose the transmission of information to consumers through mass media such as television, radio, newspapers, magazines, direct mail, mass transportation vehicles and exhibitors

information on the products it markets and distributes as a predominant activity.

 

That those expenses are reflected at the specific moment of consumption and not, through advertising, whose impact is received by the consumer regardless of whether he is purchasing the product.

 

It is clear that marketing costs are not related to advertising and publicity costs, but rather that these are a support at the time of consumption in strategic areas, territories or markets, and that at that time advertising and publicity does not take place.

 

By virtue of the foregoing, the fact that the authorities refuse to deduct the marketing costs which are necessary for the applicant, using for that purpose the same arguments as those used to refuse to deduct the costs of advertising and publicity, is wholly illegal, since those costs are not of the same nature.

 

That in the event that the expenditure on advertising and publicity is not comparable to the payment of royalties and therefore not deductible, this is not the case with regard to marketing expenditure, since the purpose of this is to encourage consumption and in no way leads to an increase in the value of the brand.

 

That the concept of indispensability derives from the fact or the need or obligation to do or carry out something that is forced or unavoidable to achieve a certain end.

 

 

That a deduction can be considered strictly indispensable when it is obligatory or necessary to achieve a specific end.

 

That the Supreme Court of Justice of the Nation has considered that the character of indispensability is linked to the achievement of the corporate purpose of the company, that is, it must be a necessary expense for the full completion of its activities, so that if it is not done, these would have to be reduced or suspended.

 

That the marketing expenses are directly related to the activity of the company, since the concepts that make up these expenses (promotional items, ice, sponsorship, etc.) are intended to encourage consumption, creating a link between the consumer and the product that is distributed and marketed.

 

That the activity carried out by the acquiring company consists in the distribution and marketing of the beers "***** ******"* "***"* "******"* "********"* "** *****", among others, and the promotional items are fundamental to encourage consumption.

 

That the object of the claimant is itself the power to buy, sell, distribute and market in general, beer, ice and all kinds of similar and related items, and also to perform the acts, enter into the contracts and carry out the other operations that are necessary or conducive to the main object of the company.

 

That the marketing expenses are necessary to achieve the purposes of its activity, since its purpose is to distribute and market beer, and therefore, like any other company engaged in the same activity, it needs to implement measures such as promotions, distributing promotional items, providing support in kind consisting of ice, among others.

 

That if the applicant did not incur the costs of marketing, the purpose of which is to encourage consumption by providing articles or implementing dynamics which act as a link between the consumer and the products which the applicant markets (beer), its main activity could be affected and its normal operation or development hindered, which would reduce its sales and, consequently, its income, since it would not be able to compete with the other undertakings in the same sector which do incur such costs.

 

That if the aforementioned expenses were not incurred, the activities of the applicant could be affected and it could even be forced to suspend certain operations.

 

That the marketing expenses translate into a benefit or advantage for the plaintiff with respect to its operational sales, since there is a relationship of consumption and the products that it obtains through those expenditures to be subsequently delivered to the final consumer, which encourages it to obtain the product.

 

That the expenditure incurred is in proportion to the applicant's operations, since in 2008 it marketed and distributed a total of 260,700 crates of beer; in that regard, the marketing expenditure is necessary for the attainment of its objective

 

That does not preclude those expenses from representing a gain or obtaining a direct profit, since the justification for the deductibility of an expense must necessarily be based on an objective reason relating to the purposes of the taxpayer's activity, so that its realisation may bring him a profit, without that necessarily meaning that a profit must be obtained in the business in question, but rather the expectation of obtaining such a profit.

 

That the audit authority should have conducted a proper study of the evidence provided to ensure proper compliance with applicable rules, and the defenses that correspond to the plaintiff, according to law, which was not met, since the documents provided were not analyzed properly.

 

During the audit procedure and in the action for annulment, the applicant provided sufficient evidence to prove the appropriateness of the deduction of marketing costs.

 

That the authority improperly assessed the working paper with the integration by supplier of the expenses for marketing expenses; invoices more representative in terms of amount, as well as bank statements showing and verifying the expenses of each and every invoice

 

That the documents referred to show the nature of the expenses incurred for this concept, as well as a detailed explanation of the function or objective of each of the concepts that make up the marketing expenses.

 

If the authority had assessed the documents in question, and had taken account of the type of industry to which the applicant belongs, the competition in that industry and the products which it sells, it would have declared the deduction of marketing costs to be appropriate, since it is clear from those documents that the nature and purpose of the expenditure are detailed and without them it would be impossible for the applicant to fulfil its corporate purpose.

 

SECOND.

 

The tax authorities unlawfully refused the deduction for advertising and publicity, even though it was proved that it was justified, since those expenses were strictly necessary for the fulfilment of the applicant's corporate purpose and were supported by documentary evidence in accordance with the provisions of Article 31(I) and (III) of the Income Tax Law.

 

That in the contested decisions at no time is the materiality or reality of the services or object of the payment of the advertising and publicity expenses questioned, and therefore this cannot form part of the dispute.

 

The contested decisions are unlawful because the authorities base their argument on the fact that the marketing and advertising costs incurred increased the value of the marks, but at no time do they provide any information to support that finding.

 

The authorities do not support their assertion, nor do they prove the value of the marks before such expenditure was made or the value of the marks after such expenditure. Furthermore, they do not refer to any study or research which would enable them to conclude that the expenditure made resulted in an increase in the value of the marks held by the products marketed by the applicant.

That the authorities do not support their claims with any information or documentation, such as valuations by certified experts in the field, public information taken from national or international sources, contracts, among others.

 

That contrary to the claims of the authorities, the expenses for advertising and publicity do comply with the requirement contained in section I of Article 31 of the Income Tax Law and therefore are deductible; likewise, the authorities made an undue assessment of the evidence provided during the audit procedure, as well as in the appeal for revocation.

 

The tax authorities start from incorrect premises and fail to consider the existence of others, arguing that the expenditure on advertising and publicity made by the applicant conferred a benefit on the third party proprietor of the trade marks under which the applicant markets its goods; however, the defendants failed to have regard to the fact that the benefit obtained by those expenditure was the increase in sales of those goods.

 

That the applicant's advertising and publicity expenditure constitutes expenditure for the purpose of promoting the consumption of the products it offers, consisting of the marketing of beers, through the dissemination of ideas and information with the intention of persuading a market to purchase the products.

 

That advertising constitutes an announcement to the public with the aim of promoting the consumption of the products, consisting of the sale of the beers "***"* "******"* "********"* "** *****", among others, and propaganda is the dissemination of ideas and information to induce or intensify specific attitudes and actions with the intention of convincing an audience to adopt the attitude or action that the acquisition of a product for consumption represents.

 

That through these expenditures is intended to influence the consumer to buy the products it sells, whose purchase action may be motivated by the conviction promoted through advertising, as this is a form of communication that aims to promote the consumption of goods.

 

That the benefit obtained by the plaintiff when making expenditures for advertising and publicity is reflected not only in maintaining consistency in the volume of sales of the products in question that it distributes and markets, through the dissemination of ideas and information, but also in convincing third parties in different markets to purchase its products, as well as maintaining or increasing the presence of the product, its consumption and therefore its sales.

 

That the increase in the amounts of royalties is not a consequence of the expenses made for advertising and publicity, but rather that this situation is a consequence of the increase in sales.

 

That from the amending agreement dated 1 January 2005, through which the parties agreed to modify the content of Clause Ten of the non-exclusive licence agreement for the use and exploitation of intangible assets known as trademarks, commercial advertising and other industrial property rights dated 1 March 2003, it is understood that the consideration to be paid by the claimant for the use of the trademarks "***** ******"* "******"* "********"* "** *****", would be calculated in proportion to sales and not in accordance with a fixed fee.

 

That by virtue of the foregoing, it is incorrect for the authority to hold that the increase in the payment of royalties is a consequence of the expenses made for "propaganda and advertising".

 

That the expenditure on advertising and publicity is directly related to the activity of the claimant, since such services provided by various entities consist of placing advertisements and persuasive messages, in time or space, that attempt to inform and/or persuade members of a particular target market or audiences about their products, services, organizations or ideas, i.e. they publicize a product or service using a medium as a vehicle to reach the individual.

 

That the expenditure on advertising and publicity is directly related to the activity of the applicant, since it is necessary in order to transmit to consumers, by means of mass media such as television, radio, newspapers, magazines, direct mail, mass transport vehicles and outdoor displays, information concerning the products which the applicant markets and distributes as a predominant activity.

 

It is clear from the object of the applicant itself that it has the power to enter into all kinds of contracts and agreements which are a consequence of or in keeping with its object, and to provide or receive services related to the promotion of its object, including the contracting of services by way of advertising and publicity.

 

That the contracting of services for which the plaintiff makes expenditures for the concept of advertising and publicity, consisting, among others, of advertising campaigns that are transmitted through the various media, are necessary to make the products that the plaintiff distributes and markets reach the minds of the target consumers, so that they remain in the taste and awareness of their potential consumers.

 

If the plaintiff did not incur the costs of advertising and publicity, its main activity could be affected and its normal operation or development, and consequently its sales and income, could be hindered, since it could not compete with other undertakings in the same sector.

 

That the expenditure incurred is in proportion to the applicant's operations, since in 2008 it marketed and distributed a total of 260 700 crates of beer. In that regard, the expenditure on advertising and publicity is necessary for the attainment of its objective.

 

As a result of the expenditure on advertising and publicity incurred by the applicant through the various advertising media, consisting of television, radio, billboards and other printed media, the applicant has succeeded in placing the products it markets in the minds of consumers, thereby increasing its sales and, consequently, its revenue.

 

Advertising and publicity expenses are deductible, as long as their indispensability is proven and the Supreme Court of Justice has established that the origin of income tax is not conditioned to the fact that the expenses are necessarily linked to the predominant activity of the taxpayer, but that they are operations in which the taxpayers are involved with the purpose of generating income.

 

That the contested decisions show how the authorities recognise that the expenses referred to generate an economic benefit for the claimant.

 

That it is incorrect that the authorities consider the benefit obtained by the plaintiff to be subsidiary, since the relationship between the expenditure on advertising and publicity, the increase in sales and the obtaining of greater income is direct.

 

That the advertising of trade marks has an ancillary character, the main operation being the advertising of the products, since the mere fact of marketing the products under that mark leads to advertising of the same, since the products hold it and therefore advertising of the product and of the trade mark cannot be dissociated.

 

If advertising and publicity expenditure were subsidiary and not principal, it would not affect the origin of the deduction, since the law does not make a distinction in that regard, since it does not limit the origin of the deduction by reason of the type of benefit obtained.

 

That advertising and publicity has a great influence on the consumer, since it is through it that the applicant succeeds in selling large volumes of product, a situation which makes it unlawful for the tax authorities to refuse the applicant the deduction.

 

That the authorities did not properly evaluate the evidence offered, namely: the 2003 non-exclusive licence agreement for the use and exploitation of intangible assets known as trade marks, commercial advertisements and other industrial property rights, and its respective amending agreement, which states that the payment of royalties will be in proportion to the sales of the products; the working role with the integration by supplier of the costs of advertising and publicity; Invoices that are more representative in terms of amount, as these invoices prove that the expenditure was made and that it was necessary to increase sales of the products that the company markets and distributes; the working paper that shows the financial projection or budget considered by the company to estimate advertising and publicity expenses, by sales region for 2008, from which the nature of these expenditures can be inferred.

 

That the assessment of the study through which the impact of the expenses incurred in advertising media is analyzed was omitted.

 

That the payment of royalties is a different concept from that of advertising and publicity, and derives from different obligations and needs, and therefore cannot legally be considered to be the same type of outlay.

 

That the plaintiff pays its royalties and therefore retains 10% of such payment which it pays in full to the Federal Treasury and 2, makes its annual income tax calculation for which it likewise pays the aforementioned tax.

 

That the deductibility for advertising and publicity is in line with market standards, according to public and comparable information.

 

That if the amounts relating to advertising and publicity expenses are added to the royalties, the resulting amount is the amount represented by the net sales for the year.

 

The advertising and publicity expenses and royalties have been shown as a whole for the purpose of determining the percentage they represent in relation to net sales for the financial year, since they are intrinsically related concepts in companies whose activity is closely linked to the use of trade marks.

 

That royalties constitute payments of any kind for the use or temporary enjoyment of trademarks and trade names, among others; while advertising and publicity refers to those expenditures made with the aim of promoting the consumption of the products offered through the dissemination of ideas and information with the intention of convincing a market to acquire them.

 

This does not preclude the economic interest group to which the plaintiff belongs from developing the brands in question and subsequently referring them to a company of the group of Swiss nationality, to which it pays royalties, because there is no legal precept preventing that business strategy.

 

That the authority's conclusion that the marks were advertised and not the products marketed is illogical, since such a determination does not take account of the business reasons, economic substance and financial reality.

 

That a brand is not advertised in isolation, but is undoubtedly associated or linked to the product or service it covers and precisely for the purpose of obtaining consumer acceptance.

 

That it is false that the purpose of the restructuring was so that the relative profits would be taxed in Switzerland and not in Mexico, since the plaintiff, in terms of Article 200 of the Income Tax Law, made the withholding corresponding to the payment made by way of royalties for the exploitation of the trademarks of which it is the owner.

 

SUMMARY OF THE EXCEPTIONAL ARGUMENTS

 

 

For its part, the respondent authority, in replying to the complaint, stated that it had responded punctually and legally to the arguments put forward by the plaintiff in the administrative seat.

 

That the authorities did not confuse the nature of the expenditure on marketing and on advertising and publicity, but that both items were rejected for the same reasons because neither was deductible for income tax purposes.

 

They considered that the marketing costs and the costs of advertising and publicity are not strictly necessary for the carrying out of the activities of the applicant, by virtue of the fact that the latter pays for the use of the trade mark *******************, which already has a presence and recognition on the national market, and therefore it is not strictly necessary for it to claim an additional deduction for advertising and publicity.

 

By paying royalties for the use of intangible assets which are present on the market, it is making a payment which is also intended to ensure its presence and recognition on the market, so that it is possible to conclude that the applicant has made two payments for the same purpose, so that marketing and advertising costs cannot be deducted.

 

Such expenses are not indispensable since the immediate benefit is obtained by the owner of the mark, since it is he who will have intangibles with a better position in the market, which will allow him to obtain a greater profitability by charging royalties for the use of the same, since the greater the sales, the greater the counter benefit he will charge for the use and enjoyment.

 

That the incurrence of expenditure on marketing, advertising and publicity benefits the applicant in the alternative and only to the extent that it actually results in a verifiable increase in sales of the goods and services it offers.

 

The fact that the payments made by the applicant for marketing, advertising and publicity are indispensable in respect of a trade mark which it does not own is not justified, since they are not closely linked to the achievement of the applicant's objective, since, if those expenses were not incurred, its activities would not be suspended and would not necessarily be significantly reduced.

 

That the achievement of the plaintiff's objective does not depend solely on the purchase by the user public of the goods which it markets, since there are various forms of income which it may receive from its activity.

 

The decision to settle the case is based on purely fiscal premises, not on the impact of advertising for a product on its sale.

 

That, by making payments in respect of royalties from a brand with a market presence, the plaintiff is making an outlay which is also intended to benefit from the presence and recognition on the market of the brands which use its products for sale.

 

That the marketing and advertising expenses were rejected essentially because: 1) the claimant does not own the brand which it advertises and markets, 2) the rejected expenses have the same purpose as those incurred by way of royalties and 3) in that sense, it is not strictly indispensable for the claimant to make such payments.

 

That it is not for the authority to establish that the value of the trade mark was increased by the expenses incurred by the applicant in respect of advertising and marketing, but that the applicant has the burden of proving that the expenses incurred are deductible.

 

That the refusal of the deductions is based primarily on the fact that the corresponding expenses are not deductible for income tax purposes, because those expenses tend to increase the assets of the owner of the trade marks.

 

That if the plaintiff did not have to make the expenses in question, she would still be able to continue with her business.

 

That an expense is strictly indispensable when the expenditure is intended for or directly related to the activity of the company, is necessary to achieve the purposes of its activity or the development thereof, that if it does not occur it could affect its activities or hinder its normal operation or development, must represent a benefit or advantage for the company in terms of its operational goals and must be in proportion to the operations of the taxpayer.

 

The applicant did not prove that the expenses incurred were incurred in connection with activities which are essential to the achievement of its corporate purpose, since it is apparent from the information and documents submitted that the applicant is not the owner of the trade marks, so that there is no evidence that the expenses are directly linked to its corporate purpose.

 

That the purchase, sale, distribution and general trading of beer, ice and all manner of articles similar or related to the foregoing is not the sole purpose of the applicant, but has various objects.

 

That the payments for marketing and advertising are additional costs which are unrelated to the applicant's business objective and therefore do not satisfy the condition of indispensability

 

That the purposes of advertising are not limited to attracting potential purchasers or users of the goods and services offered, but that the ultimate aim is to confer value on the marks and to position them on the market, thus benefiting their proprietor directly and, in a subsidiary manner, their licensees, which is a desirable but not necessary expense for them.

 

That it is not viable to estimate that the expenses for marketing and advertising could predominantly affect the development of the activities of the plaintiff, since the latter already pays royalties that allow it to take advantage of the value previously acquired by the trademark in question and the influence it generates in consumers, so that it is not indispensable for the plaintiff to continue increasing the value of the trademark through its advertising and marketing, since it is not the direct beneficiary.

 

That the applicant does not prove that, as a result of the costs it incurred, it had higher sales than in the previous tax year.

 

The evidence offered by the applicant does not invalidate the refusal of the above-mentioned deductions, since they are not appropriate.

 

That the arguments of the claimant that it is not an obstacle to accepting the deductibility of the costs that the economic interest group to which the claimant belongs developed the trade marks in question and subsequently referred them to a company of the group of Swiss nationality are not admissible, since that is not a tort.

 

The Court objects to the expert evidence on advertising, propaganda and marketing offered by the claimant, since it reinforces the reasoning for rejecting the deductions and only highlights the distinction between the two concepts.

 

ESTABLISHMENT OF THE DISPUTE

 

 

In accordance with the arguments put forward by the parties, this Court considers that the dispute consists of determining whether the expenses incurred by the plaintiff for "marketing expenses" and "advertising and publicity" are strictly indispensable for the purposes of the taxpayer's activity, and therefore, are deductible in terms of Article 31, section I of the Income Tax Law.

 

DECISION OF THE SECOND SECTION OF THE SUPERIOR COURT

 

 

In order to resolve the specified dispute, it is necessary to impose on us the content of the settlement resolution contained in the official letter number 900-07-04-2015-55504 dated October 19, 2015, in the part where it determined that the deductions made by the plaintiff for the concepts of "marketing expenses" and "advertising and publicity" are undue.

 

(See transcript)

 

 

From the above, it can be seen that the authority made the following toral determination:

 

That as a result of the authority's powers of verification with the acting company ******** ******************** **** ** ****, it learned that during 2008, the latter made royalty payments of $964,053,683. 00 arising from the granting of temporary use or enjoyment of the trademarks under which it markets its products, since these trademarks are not owned by it, but by its related party resident in Switzerland *** *** ****, which acquired these trademarks as part of a restructuring of the group to which they belong, in order to transfer the trademarks developed in Mexico to a low tax country.

 

As a result of the exercise of the powers of verification, it was learned that in addition to the "royalties" of $964,053,683.00 for the use of the trademarks under which it markets its products, it also incurred "advertising and publicity" and "marketing expenses" of $526,660,963. 00 and $1,304,856,468, respectively, in order to publicise the various brands of the "********** *********" group, under which it markets its products and thereby contribute greater presence and value to said brands, which are not its property.

 

That the applicant considered, in 2008, both the costs of royalties and those of 'advertising and publicity' and 'marketing costs' to be deductible for income tax purposes

 

That, in order to analyse the origin of the deductions specified, the background of the applicant company must be considered.

 

That the applicant's predominant activity is the distribution of the beer it produces ********** ********** ****** ****, now (***** ********** ********** **** ** ****), and that the main marks used on the goods it distributes are "***** ******"* "***"* "******"* "********"* "** *****", among others.

 

That until January 2003, ********** ******************** **** ** ****, was the owner of the brands used in the beer distributed by the actor.

That in February 2003, ********** ******************** **** ** ***** was spun off, surviving in its capacity as a spun-off company, the entity ************* **** ** ****, resident in Mexico, to which it transferred, inter alia, intangible assets such as brands, notices and trade names.

 

As a result, on 1 March 2003, the claimant and ********** ********** ********** **** ** ***** entered into a non-exclusive licence agreement with ********* **** ***** * **** to use and exploit intangible assets known as trademarks, trade names and other industrial property rights.

 

That on October 20, 2003 ********** ***************** **** ** **** (previously ***** ********* **** ** ****), incorporated in Mexico at *** ************** **** ** ****, a company belonging to the group and that on December 15, 2003, i.e. only two months after its incorporation, it changed its tax domicile to Switzerland, cancelling from that moment on its federal register of taxpayers in Mexico.

 

That on 18 December 2003, ********* **** ****** ****, merged with *** ************** **** ** ***** entity resident in Switzerland, the latter subsisting, which holds the intangible assets such as brands, notices, trade names that were owned by ********* **** **** ** ****

 

That once *** ************** **** ** ****, acquired the ownership of the brands, notices and commercial names mentioned above, these are contributed in the company **** *** ***., constituted on 17 June 2004, thus becoming a shareholder of the latter at 100%.

 

Consequently, as from 2004, *** *** ****, resident for tax purposes, in Switzerland, began to benefit from the granting of the use and exploitation of the trademarks, commercial notices and other industrial property rights, originally developed in Mexico by ********** ********** **** ** ****, with the related parties resident in Mexico being obliged to pay this consideration in their capacity as marketers of the products related to these trademarks.

 

By means of the restructuring described above, the group to which the plaintiff belongs migrated to Switzerland the profits from the granting of the use or enjoyment of the trademarks, advertisements and trade names developed in Mexico, which are held by the products marketed mostly in the Mexican market, generating a tax deduction in Mexico, for the expenses for the concept of royalties for the use or enjoyment of the intangible assets transmitted to *** *** ****, so that it is appreciated that the apparent sole purpose was that the relative profits were taxed in Switzerland and not in Mexico.

 

That there is inconsistency with respect to the expenses that increase the value of the trademark "********** *********", because while the expenses for advertising and marketing expenses were absorbed by the plaintiff, who obtains the benefit of them is the owner of the trademark, as its value increases.

 

That the marks are designed with the purpose of identifying a good or service of another and denote quality or belonging, therefore, under this definition there is no doubt that the mark "********** ********** **** ** ****, identifies the products it sells, denote their quality and belonging and in this sense, advertising is intended, to disseminate, convey, publicize, make known, advertise, some good or service in order to penetrate the market and cause the sale of these, making known the benefits, quality and characteristics of the goods or services.

 

In this case, what is advertised are the brands used by the company to manufacture and market its products, since it is precisely these brands that distinguish it from its competitors and denote the quality they possess.

 

That the advertising and marketing expenses incurred by the plaintiff are directed to the products marketed under the trademark "********** *********", regardless of who produces or markets them.

 

That the real benefit of these expenses for advertising and publicity is obtained directly by the brand and its owner, since this brand already has presence in the market.

 

That it is clear that advertising and publicity will increase the value of the brand, reflecting an increase in the consideration charged to the plaintiff by the owner of the brand, caused by the increase in sales of the products named under its name, so that in any case, the realization of these expenditures would be indispensable only to the owner of the brand.

 

That the benefit to the plaintiff of the costs of advertising and publicity, as well as of royalties, is to have a brand name with a presence and acceptance in the market, in order to increase its sales volume.

That the expenses incurred in marketing and advertising are not strictly necessary for the activities of the claimant, since the claimant pays royalties, which include presence and recognition in the national market, and therefore the claimant intends to make an additional deduction.

 

That the nature of indispensability is closely linked to the achievement of the taxpayer's corporate purpose; this expense must be necessary to fully complement the taxpayer's activities, as well as bring him a profit, and as a consequence of not doing so, those activities would have to be suspended, or they would necessarily decrease, i.e. if the expense were not carried out, the taxpayer's activity would no longer be stimulated, and consequently its income would be reduced to its detriment.

 

That the expenses referred to in section I of the Income Tax Law in force in 2008 are those necessary for the operation of the company and without which its operational goals would be hindered to such an extent that it would prevent the achievement of its corporate purpose.

 

That the marketing expenses, as well as those of propaganda and publicity are routine, since they do not generate an additional return to the marketing of products, and therefore are not strictly indispensable.

 

That therefore, the plaintiff incurred expenses in marketing and in advertising and publicity for brands which are not its property and which it is not its duty to exploit since they are not strictly indispensable for obtaining its income, since it also makes expenses for royalties for the use of the brand in order to have a greater presence in the market through a recognised brand. Therefore, it is unnecessary to pay for both concepts at the same time.

 

By virtue of the foregoing, the plaintiff unduly deducted the amounts of $526,660,963.00 and $1,304'856,468.00, for advertising and publicity and marketing expenses, respectively, for which the authority considered that it should adjust its tax result for the determination of income tax for the 2008 fiscal year and pay the corresponding tax.

 

It is clear and evident that the taxpayer, by making payments for advertising and publicity of products under the brand name "********** *********", generates or maintains a certain positioning of this brand in the market, which results in increased net sales.

 

In the light of the foregoing, the applicant is considered to have made two payments for the same purpose. In addition, the advertising and publicity costs generate or maintain the positioning of that mark, which is not the property of the applicant, so that it was not its responsibility to make those payments, but rather that they should be a burden on the owner of the intangible assets.

 

That if the applicant did not make the payments for "advertising and publicity" and "marketing expenses", it would not lose the benefit of its presence and penetration of the market, since for those purposes it already pays royalties for the use of a mark which is widely accepted in the market and which enables it to influence the acceptance of the products it sells under the mark "********** *********", thereby increasing its sales and fulfilling its corporate purpose.

 

The greater the positioning of the brands in the market, the greater the sales obtained, and this is clearly enhanced by the presence and distinction that the brand has, so that who should have the burden of ensuring that the brands acquire greater value and perform the activities and expenditures that this entails, is precisely the owner of the brands.

 

It is therefore incongruous for the taxpayer to seek to make an expense that is not indispensable deductible, since it does not correspond to her, given the fact that if she were to dispense with it, her income would not be affected.

 

That the payment of "advertising and publicity" and "marketing expenses" is related to the royalties for the use of the trademark; in this sense, by claiming these expenses, it is the equivalent of paying twice for the same benefit.

 

Therefore, the observations regarding the deductions for "advertising and publicity" and "marketing expenses", in the amounts of $526,660,963.00 and $1,304,856,468, respectively, are still valid, as they are not strictly necessary expenses for the taxpayer. Therefore, the taxpayer must adjust its tax result to determine income tax for fiscal year 2008, considering these items as non-deductible and pay the corresponding tax.

 

 

Once the reasons for which the authority wrongly determined the deductions made by the plaintiff for marketing expenses and advertising and publicity are known, this Section considers that the plaintiff is not in the right, since it states that the defendant, in issuing the tax assessment decision, loses sight of the nature of the items in question, since it considers them to be equal and therefore rejects their deduction for the same reasons.

 

That is so because it is clear from the content of the decision that the authority determined that both deductions are improper because they are not strictly indispensable for the purposes of the plaintiff's activity, but at no time did it state that those items referred to the same expenses, or that they share the same nature, but that they do not comply with the requirement laid down in Article 31(I) of the Income Tax Law, since the trade marks which the plaintiff uses and exploits already have a presence on the market. The arguments put forward by the plaintiff in that regard are therefore unfounded.

However, in order to resolve the dispute raised by the parties, it is necessary to analyse the provisions of Article 31(1) of the Ley del Impuesto sobre la Renta, since, as can be seen, the authority based its decision on the fact that the costs incurred by the applicant did not meet the requirement of strict indispensability in order to be deductible.

 

The regulatory section in question provides as follows:

 

Article 31. The deductions authorized in this Title shall meet the following requirements:

 

I.  I. They shall be strictly indispensable for the purposes of the taxpayer's activity, except for donations that are neither onerous nor remunerative and that meet the requirements provided for in this Law and in

 

 

the general rules established for this purpose by the Tax Administration Service and granted in the following cases:

(…)

 

It is clear from the article transcribed that one of the requirements for deductions is that the expenses are strictly indispensable for the purposes of the taxpayer's activity.

In this regard, the Federal Judiciary has established what should be understood by "strictly indispensable", in the thesis 2a. CIII/2004, Novena Época, of the Second Chamber of the Supreme Court of Justice of the Nation, published in the Semanario Judicial de la Federación y su Gaceta, Tomo XX, December 2004, page 565:

 

RENT. INTERPRETATION OF THE TERM "STRICTLY INDISPENSABLE" REFERRED TO IN ARTICLE 31, SECTION I, OF THE RELATIVE TAX LAW

(LEGISLATION IN FORCE IN 2002). The aforementioned precept establishes that the deductions authorised by Title II, relating to legal entities, among other requirements, must be "strictly indispensable" for the purposes of the taxpayer's activity. However, the generic concept of that requirement is justified by the number of cases in which that qualification may be made in each specific case; therefore, since it is impossible to define all the possible cases or to establish general rules for their determination, that term must be interpreted in the light of the purposes of each company and the specific expenditure in question.  In these conditions, the character of indispensability is linked to the achievement of the company's corporate purpose, that is to say, it must be necessary expenditure for the full implementation of its activities, so that if it is not carried out, these would have to be reduced or suspended; hence the legislator only allows the exclusion of expenditure of this nature when considering the contributory capacity of the subject, when there are legal, economic and/or social reasons that justify it.

In accordance with the above thesis, the term "strictly indispensable" must be interpreted in the light of the purposes of each undertaking and the specific expenditure concerned.

Therefore, the nature of indispensability is linked to the achievement of the company's objective, that is to say, it must be necessary expenditure for the full implementation of its activities, so that if it is not carried out, these would have to be reduced or suspended; therefore, the legislator only allows the exclusion of expenditure of this nature when considering the contributory capacity of the subject, when there are reasons of a legal, economic and/or social nature which justify it.

 

Likewise, the thesis with registration number 222536, Octava Época, published in the Judicial Weekly of the Federation, Volume VII, June 1991, page 289, defines the aspects to be considered to determine whether an expense is strictly indispensable for the purposes of the taxpayer's activity or not:

 

INCOME TAX, EXPENSES THAT ARE STRICTLY INDISPENSABLE FOR THE PURPOSES OF THE COMPANY. THE DEDUCTIBILITY OF BONUSES AND PRIZES IS ALLOWED

TO INSURANCE AGENTS. The deductible expenses allowed by law to the taxpayers, as it is known, must comply with certain requirements, among which are, that they are strictly indispensable for the purposes of the business activity, the generic conception of this requirement, which the legislator established in section I of article 24 of the Income Tax Law, is justifiable when taking into account the amount of supposed cases, The definition of "strictly essential" in each specific case cannot be defined in a way that covers all possible scenarios or establishes general rules for determining them. In this way, it is necessary to specify the elements that we take into account to determine that in the specific case, the bonuses and prizes paid to insurance agents are deductible. In the first place, by expenses we mean the outlay or outflow of money or goods from a company's assets, without recovery. Secondly, we must pay attention to the common meanings given to us by the Dictionary of the Spanish Language, which indicates as the meaning of strictly "precisely, in all rigor of law", and as strictly "narrow, adjusted entirely to the need or to the law" (page 592 of the nineteenth edition), and as far as it is necessary, it indicates three meanings: "It is said of what is done and executed that it is obliged to do something else, as opposed to voluntary and spontaneous" and "that it is necessary or necessary for an end" (page 920 of the same edition). Thus, according to the common and usual meaning of the qualifiers used by the legislator, by strictly necessary we mean that which is wholly in keeping with the need or the law, which must inevitably be done or adjusted to achieve a given end. Finally, and for a better understanding of the qualifiers examined, it is convenient to pay attention to the common elements that have been taken into account in the doctrine, those elements are: 1) That the expense is directly related to the activity of the company. 2) That it is necessary to achieve the aims of its activity or the development of the same. 3) That if it does not occur, its activities could be affected or its normal operation or development hindered. As the elements considered are clear, it remains to explain their application to the specific case. We will begin by saying that the business activity of the complainant refers to the activities of an insurance institution, having the concession to operate in life, share and illness insurance, and in the case of damage in the branch of credit only as a reinsurer, that is, taking on partially or totally a risk already covered by another institution, or the remaining damage that exceeds the amount insured by the first one. To carry out this business activity, the complainant has, among other collaborators, insurance agents that intervene in the contracting of insurance or reinsurance, by means of the exchange of proposals and acceptances, and advice to conclude, maintain or modify them, according to the best convenience of the contracting parties. However, this institution paid bonuses and prizes to several of its insurance agents, for their intervention in the issuing of policies and based on production volumes, portfolio conservation, recruitment, renewal, etc., this expense is directly related to their business activity and its development. Thus, payments consisting of bonuses, prizes or incentives to insurance agents who have made the greatest number of contracts, or renewals, or retained or extended clients, acts that are objectively appropriate to the company's purposes, are true compensations, i.e. the better the agents' work results from income obtained from insurance sales, the better the insurance company's income, and therefore it is necessary for it to pay more to its promoters or sellers to increase its own tax base. In addition, this payment is in turn an income of the worker, for which he is paying his own tax. Thus, a close link can be assumed between the outlay and the increase obtained in sales, which proves the need for the expenditure. Moreover, with such stimuli, the progress of the company is originated, and it becomes necessary to achieve this end, they are thus made, obliged to maintain and preserve the unit of production and distribution of the insurance service provided by the complainant. For a better understanding of the case under study, it is worth asking, if the outlay is not made, the company's activities would have to be suspended, or they would necessarily be reduced. The answer is definitely yes, that is, if the complaining company does not reward, stimulate or recognize through economic remuneration the greater effort or work carried out by its insurance agents, the latter, not receiving an incentive, will cease to fuel the company's activity, and its production and consequently its income will necessarily be reduced. Therefore, the expenses incurred for bonuses and prizes paid to insurance agents are not superfluous and unnecessary expenses, but expenses strictly indispensable for the purposes of the complaining company, since not doing so could affect its activities or hinder its development.

 

From the thesis transcribed, it is clear that in order to determine whether an expense is deductible or not, in terms of Article 31, section I of the Income Tax Law, the qualification of "strictly indispensable" must be interpreted, taking into account the purposes of each company and the specific expense itself.

 

Likewise, it refers to the fact that "expenditure" means the outlay or output of money or goods from a company's assets, without recovery.

 

On the other hand, in accordance with the common meanings of the Dictionary of the Spanish Language, it defines what is strictly indispensable as that which is adjusted entirely to the need or to the law, which inevitably has to be done or adjusted to achieve a specific end.

 

Similarly, it refers that in addition, the analysis of the origin of the deduction in question must be made in light of the common elements that have been taken into account in the doctrine, namely

 

a.            That the expense is directly related to the activity of the company.

 

b.            That it is necessary to achieve the aims of its activity or the development of the same.

 

c.             That if it does not, its activities could be affected or its normal operation or development hindered.

 

In this respect, to determine whether the expenses incurred by the plaintiff for marketing and advertising are strictly indispensable for the purposes of its activity, this Court will consider the purpose of the activity, as well as the nature of the expense itself, in order to establish whether such expenses are directly related to the activity of the company, whether they are necessary to achieve the purposes of its activity or the development thereof, and whether their non-occurrence could affect its activities or hinder its normal operation or development.

 

By virtue of the above, the object of the acting company must be taken into account, which is derived from the public deed 12,131 of October 30, 2007, raised by Notary Public 74 in the state of Nuevo León, which was offered as evidence by the plaintiff, which is assessed in terms of Article 46, section I of the Federal Law of Contentious Administrative Procedure:

(See transcript)

 

(…)

It is clear from the foregoing that the applicant's main business is the purchase, sale, distribution and general trade of beer, ice and all kinds of similar and related items.

 

In that regard, the Real Academia Española states that sale, distribution and trade must be understood as

 

Sale.- 1. f. Action and effect of selling

 

Selling

1. tr. Transfer to someone for the agreed price the property of what you own.

2. tr. Displaying or offering the goods or merchandise to the public for those who want to buy them.

 

Distribution.

1.f. Action and effect of distribution.

2.f. Distributing a product to the premises where it is to be sold.

 

Trade.

1.m. Buying, selling or exchanging goods or services.

 

However, the claimant maintains that the expenses incurred for the concepts of marketing and advertising are deductible under Article 31, Section I of the Income Tax Law, since they are strictly indispensable for the purposes of its activity, since it is engaged in the sale of beer under the brands "***** ******", "***", "******", "********", "** *****", among others.

 

Marketing costs.

 

First, the Court will analyse the appropriateness of the deduction for marketing expenses, and to that end it is necessary to know what is to be understood by "marketing".

 

In this regard, the Royal Spanish Academy defines this concept as follows:

 

Marketing

To market.

 

1. tr.To give a product conditions and distribution channels for its sale

2. tr.Putting a product on sale. They are going to market a new brand of coffee.

 

In that connection, it is considered that, if the applicant's object is the sale, distribution and general trading of beer, which consists in displaying or offering its products to the public for those who wish to buy them, and in distributing the product to the premises or places where it is purchased, it is incontestable that the expenditure which it incurs by way of marketing is strictly indispensable to the proper performance of its activities, it being understood that it is through marketing that the products are provided with the conditions and means of distribution for their sale.

 

Accordingly, the Court considers that, contrary to the contention of the defendant authority in the tax assessment, the marketing costs are deductible for income tax purposes, since they are directly related to the sale, distribution and general trading of beer, and are also necessary to achieve the aims of the activity of the undertaking concerned or the development of that activity, and if they do not occur, their activities could be affected or their normal operation or development hindered.

 

This is so because the marketing of a product is necessary for its sale or for its acquisition by the general public, so that, if the applicant's objective is the sale, distribution and general trade of beer, the expenditure incurred by it under that heading is strictly necessary for the conduct of its business, since, otherwise, it would not be able to make its products available to the public for purchase.

 

The defendant is therefore wrong to state that the marketing costs are included in the payment of the royalty which the applicant pays for the use and exploitation of the marks in question, since those marks are already positioned on the international market, so that those costs are unnecessary.

 

That is so because, for the purposes of determining whether or not those costs are indispensable to the development of the applicant's activities, it is irrelevant whether the marks have an international reputation or whether they are widely recognised, since, as was stated, the marketing of a product concerns the manner or means by which that product is made available to the public for purchase; Consequently, what the defendant should have considered was whether that expense was linked to the activities carried out by the claimant, that is to say, whether it was in accordance with the provisions of the Income Tax Law in that regard and not, based on subjective assessments, since it is improper for the authority to reject the deductions on the ground that the claimant no longer needs to incur marketing expenses, since the brands with which it sells its products are already known.

 

Rather, the applicant should have analysed the deductions made for marketing expenses in the light of the concept of strictly indispensable expenditure, which is laid down in section I of Article 31 of the Income Tax Law.

 

Since it did not do so, the defendant authority's determination that the payment of the royalty includes the aforementioned marketing concepts is unlawful and therefore unnecessary, since the marks whose use and exploitation the applicant has a presence and recognition in the market.

 

In the same vein, the view taken by the authority in the settlement decision that, since the applicant is not the proprietor of the marks under which it sells its products, it does not benefit from the marketing costs, but rather the owner of the marks who benefits from those costs, since they increase the value of the mark, has no legal basis.

 

This, because it is emphasised, marketing refers to the manner or means used to make the goods available to the public for purchase, for example, the acts necessary for those goods to be offered for sale in supermarkets, which is not carried out by the proprietor, but by the acquirer, in so far as he is engaged in the sale, distribution and trade of beer.

 

Therefore, the authority should have taken into account the provisions of Article 31(I) of the Ley del Impuesto sobre la Renta in order to determine whether the expenses incurred by the applicant were strictly indispensable to it for the purposes of its activity, it being immaterial whether or not it is the owner of the trade marks, since, since it has the use and exploitation of those trade marks for the sale, distribution and general trade of beer, it is undeniable that it must carry out marketing activities which generate expenses for it.

 

The foregoing is due to the fact that all acts of authority must be duly founded and reasoned in terms of Article 16 of the Constitution, and the legal precept applicable to the case must be precisely expressed and the special circumstances, particular reasons or immediate causes that have been taken into consideration for issuing the act must be precisely indicated.

 

This is supported by the jurisprudence VI. 2o. J/248, issued by the Federal Judicial Power, Eighth Period, published in the Gazette of the Judicial Weekly of the Federation, No. 64, April 1993, page 43:

 

FOUNDATION AND MOTIVATION OF THE ACTS

ADMINISTRATIVE: In accordance with article 16 of the Constitution, all acts of authority must be sufficiently founded and reasoned, it being understood that firstly, the legal precept applicable to the case must be expressed precisely and secondly, that the special circumstances, particular reasons or immediate causes that have been taken into consideration for the issue of the act must also be precisely indicated, it being necessary, furthermore, that there be an adaptation between the reasons given and the applicable rules, that is to say, that in the specific case the normative hypothesis is configured. That is, when the precept in question prevents anyone from being harassed in their person, property, or rights, except by virtue of a written order from a competent authority that bases and motivates the legal cause of the procedure, it requires all the authorities to comply with the law, expressing which law it is and the precepts of it that support the relative order. Specifically, in administrative matters, in order to consider an authoritarian act as correctly founded, it is necessary that) - The legal bodies and precepts which are being applied to the specific case, that is, the normative assumptions in which the conduct of the governed party is framed so that he is obliged to pay, which shall be indicated with all exactness, specifying the applicable paragraphs, sub-incises, fractions and precepts, and b) the legal bodies and precepts which grant competence or powers to the authorities to issue the act in detriment of the governed party.

 

SECOND COLLEGIATE TRIBUNAL OF THE SIXTH CIRCUIT.

 

In addition, we have that of the Modifying Agreement to the Non-Exclusive License Agreement for the Use and Exploitation of Intangibles called trademarks, commercial advertisements and other industrial property rights, entered into between **** **** ** **** and the plaintiff, it is not noted that the marketing costs are included in the payment of the royalty made by the plaintiff for the use and exploitation of the trademarks in question, as can be seen from the following reproduction:

 

 

(See transcript)

 

From the digitized Contract, which is valued in terms of article 203, of the Federal Code of Civil Procedures1 , as it is a private documentary, it is noted that the licensor grants the licensee a non-exclusive license to use and exploit the assets, in relation to all the products or services to which they apply, under the terms of the Contract.

1 Article 203.- The private document shall be evidence of the facts mentioned therein only insofar as they are contrary to the interests of its author, when the law does not provide otherwise. The document coming from a third party only proves in favour of the party who wants to benefit from it and against his or her co-contractor, when the latter does not object to it. Otherwise, the truth of its content must be proven by other evidence.

A private document containing a declaration of truth attests to the existence of the declaration, but not to the facts declared. The provisions of the second paragraph of Article 202 apply to the case. […]

 

That for the non-exclusive use and exploitation of the assets, the licensee will pay a percentage of the amount of the licensee's quarterly sales to the licensor on a quarterly basis according to the calendar year.

 

That said percentage will be determined in accordance with a transfer price study that the licensee must request from a recognised tax consultancy firm in the field, before the end of each licensee's business year; said study must also take into account the inflation indexes of the country where the assets are used and the variations in the exchange rate of the corresponding currency against the US dollar, so that the consideration corresponds to that which must be paid between independent parties in comparable operations.

 

Therefore, the amount of the royalty paid by the claimant as consideration for the use and exploitation of the trademarks will always be based on the sales obtained by the claimant. Furthermore, this amount will be calculated taking into consideration a transfer price study and the inflation indexes of the country where the assets are used and the variations in the exchange rate of the corresponding currency against the US dollar.

 

The contract under analysis does not stipulate that marketing expenses are included in the royalty payment, due to the prestige of the brands, but rather establishes that this amount will depend on the sales of the licensee, in this case, the claimant.

 

Therefore, if the purpose of marketing the products is to make them available to the public for purchase, it is undeniable that the expenses for this concept must be paid by the person who sells the products, as is the case, since it is the plaintiff who directly benefits from the increase in sales of its product.

 

It is not contrary to the above that the defendant refers to the fact that the marketing costs benefit the owner of the brands, because they increase the value of the brands, since, as has already been said, if the purpose of the costs in question is to increase the sales of the product, the direct benefit is for the plaintiff, since its object is the sale, distribution and trade of beer in general.

 

The Court also took into account the fact that the plaintiff considered various items of marketing expenditure without the tax authority having analysed and verified each of them in order to determine whether the respective deduction was appropriate.

 

Therefore, it is appropriate to declare the invalidity of the settlement decision contained in Official Letter No. 900-07-04-2015-55504 dated 19 October 2015, with regard to the marketing expenses, so that the defendant authority may issue a new document analysing, verifying and detailing the items which were considered by the claimant for this concept, in order to determine the origin of the respective deduction.

 

Advertising and publicity expenses.

 

However, with regard to the expenses for the concept of "propaganda and publicity", it is considered that these are not deductible, in terms of Article 31, section I of the Income Tax Law, as they are not strictly indispensable for the development of the activity of the plaintiff.

 

This is because, as is clear from the Non-Exclusive Licence Agreement for the Use and Exploitation of Intangibles known as trademarks, commercial advertisements and other industrial property rights, entered into between **** ** **** and the plaintiff, which was previously digitised, the latter is not the owner of the trademarks it uses to sell its products, and therefore these expenses for "propaganda and advertising" increase the value of the trademarks for the benefit of a third party, i.e. the owner of the trademarks, which may even justify a higher payment of royalties.

 

However, it is necessary to refer to the definition of the Real Academia Española of the concepts "propaganda" and "advertising":

 

Propaganda

From lat. mod. Congregatio de] propaganda [fide] '[Congregation for] the propagation [of the faith]', a congregation of the Roman curia in charge of the missions, founded by Gregory XV in 1622.

 

o f. Action and effect of making something known in order to attract followers or buyers

o f. Texts, works and media used for propaganda.

o f. Association whose purpose is to propagate doctrines, opinions, etc.

o f. Rel. In the Catholic Church, an organism of the Roman Curia responsible for the propagation of the faith.

 

Advertising

- f. Quality or state of the public.

- f.Set of means used to disseminate or spread the news

- of things or facts.

- f. Dissemination of news or advertisements of a commercial nature to attract potential buyers, viewers, users, etc.

 

As we can see, these concepts have different definitions depending on the context in which they are used, so in this case, this judge will stick to the one that is appropriate to the subject matter at hand.

 

According to the above, these concepts refer to the action and effect of making something known in order to attract followers or buyers and to the set of means used to disseminate or spread the news of things or facts.

 

On the other hand, the Federal Judiciary defines the advertising function as a fundamental activity in the process of marketing and implementing the maximization of profits of companies, which is developed with the purpose of allowing the identification of brands and awakening the impulse to buy in potential buyers, specifying that the act of consumption is directed to the advertised brand and not to the article, as warned in the thesis I.4 o.A.144 A (10a.), Décima Época, published in the Gaceta del Semanario Judicial de la Federación, Book 61, December 2018, Volume II, page 1110:

 

BRANDS, ORIGIN AND EFFECTS OF THEIR ADVERTISING.

Distinctive signs are products with added value and serve to advertise the qualities or peculiarities of the articles that carry them; hence one of their characteristics is their "distinctiveness". Under these conditions, if the brand does not distinguish, it will not be able to identify the product, let alone fulfil the function of promoting its sale. In relation to the advertising function of brands, it is considered that, essentially, it is a fundamental activity in the marketing process and in the implementation of profit maximization of companies, which is developed with the purpose of allowing its identification and awakening the impulse to buy in potential buyers, so that the act of consumption is aimed at the advertised brand and not at the article. Thus, advertising is the best instrument to build brands, in its intention to convince, persuade, contribute, change or modify beliefs and, consequently, behaviours that lead to the use or consumption of a product or service. From the above, it follows that use of the mark not only occurs when suppliers make the goods or services bearing the mark directly available to the consumer public in order to produce a profit, but that the distinctive sign is also used by means of the advertising generated for its consumption, insofar as it implies the consumer's imminent reach to the goods for their acquisition.

 

FOURTH COLLEGIATE COURT IN ADMINISTRATIVE MATTERS OF THE FIRST CIRCUIT.

 

In accordance with the definitions set out above, that court considers that the costs incurred by 'advertising and publicity' consist in making something known in order to attract followers or buyers through the means used to disseminate or spread the news of things or facts; however, those acts are directed at the mark being advertised and not at the article.

 

Therefore, this advertising and propaganda function favours the implementation of profit maximisation for companies, in the case of the owner of the brands that the actor uses to sell its products, while increasing their value, as they are intangible and are mostly recognised in the market.

 

In this regard, Article 882 of the Industrial Property Law states that a trade mark is any visible sign which distinguishes goods or services from others of the same kind or class on the market.

 

This Court has issued various criteria aimed at establishing what should be understood by the concept of a trade mark, such as the jurisprudence I.4o.A. J/91 and I.4o.A. J/93, relating to the classification of trade marks and their components, respectively:

 

2 Article 88.- A trade mark is any sign which is perceptible by the senses and capable of being represented in such a way as to enable the clear and precise subject-matter of the protection to be determined, and which distinguishes goods or services from others of the same kind or class on the market.

 

TRADE MARKS. THEIR CLASSIFICATION. In general terms, trade marks are classified into: a) Nominal, that is, those that allow a product to be identified by means of a word or a group of words; these must be distinguished phonetically and may consist of the names of natural persons, which may be registered as a trademark, provided that they are not confused with a registered or published trade name, and may be meaningless and capricious or fanciful, have a meaning and be suggestive of the nature and characteristics of the product or service, or even be arbitrary; b) Unnamed, they are figures that fulfil the function of a brand and can be recognised visually but not phonetically, since their peculiarity consists of being symbols, designs, logos or any figurative element that is distinctive;

c) Mixed, which combine words with figurative elements showing the mark as an element or as a distinctive whole; and, d) Three-dimensional, those which protect the wrappers, packaging, containers, the shape or presentation of the products themselves, if they are distinctive from others of the same species or class.

 

TRADEMARKS. THEIR COMPONENTS. Trademarks are intangible goods and their components are: a) products or services with peculiarities, advantages or characteristics that make them valuable or famous in the market, whose ownership is sought to be claimed for their commercial exploitation with claims of exclusivity; b) distinctive sign that is associated as a particular and exclusive, in relation to that product or service, which does not necessarily have to be original or unpublished; c) a sign - word, graphic or mixed - which requires materialisation in a packaging, product or advertising expression, which psychologically links to an idea or concept of a product or service and evokes in the consumer the characteristics, business origin, level of quality or reputation; and d) a link or correlation between the product or service and the sign which consumers perceive and retain in their memory, which is creative, attributable to the business person and is the subject of protection and claim. Therefore, the trade mark is the mechanism that makes possible the identification and subsequent selection of goods or services and an instrument that is used and contributes to the partitioning of markets, to provide exclusivity to the trader who manages to prove the goods he offers as protection and protection against unfair competition.

 

From the foregoing, it can be seen that trademarks are not isolated ideal constructions, devoid of material content, but are signs that distinguish goods or services from others of the same species or class in the market. At present, the development of commercial relations between the various economic operators and the consumer public has meant that trade marks are no longer simply distinctive and representative elements of goods and services, but have become intangible assets with an intrinsic value.

 

In accordance with the above, the value of a brand is made up of the following components3:

 

a) Marketing value: brands influence customer behaviour. This is the component of brand value that is of most interest to the company's commercial and marketing management.

 

b) Economic-financial value: brands can be the object of economic transactions (sale, rental in the form of franchises or licences, stock exchange quotations). The economic-financial value of the brand consists of its potential to be the object of a sale or other type of contract (licence or franchise), i.e. to be a negotiable intangible asset.

 

c) Legal value: trademarks can be protected and be the subject of compensation. This refers to the costs of protecting the trademark and the quantification of the damages arising from the limitation or illegality of its use.

 

The values described are closely linked.

 

The economic value is naturally linked to the strategic value, while a brand will have greater economic value if more units are sold on its market.        The legal value, on the other hand, increases as the other two components do.

 

3 Belío Galindo, José Luis and Ana Sáinz Andrés, Keys to Managing Price, Product and Brand. Cómo Afrontar una Guerra de Precios, 1st ed., Especial Directivos/Grupo Wolters Kluwer, Spain, Madrid, 2007, p. 171.

 

 

To confer value to a brand or to increase the value of the one it already has, strategies related to the general communication orientations of the company that owns it can be implemented, such as advertising and propaganda expenses, which tend primarily to confer value to the brands, insofar as they directly or indirectly support the sales or information activities of the company that owns it.

 

Therefore, the purposes of advertising and propaganda are not limited, in the strict sense, to attracting potential buyers or users of the goods and services offered by the economic operator, which are normally marketed through trade marks; the ultimate aim is to confer value on the trade marks and to position them on the market.

 

From the above, it can be seen that advertising and propaganda expenses tend primarily to position brands in the market, in order to give them notoriety, fame and recognition among the consumer public, while the sustained implementation of that communication strategy will seek to create and maintain a psychological climate of knowledge and trust between the company and the public to which the brand is addressed.

 

The foregoing shows that the advertising of a brand will mainly benefit its owner, since it is in his interest that it is disseminated among the consumer public, in order to maintain its value or increase it.

It is primarily for the proprietors of the trade marks to maintain their value by implementing the communication strategies which they consider appropriate, precisely because they are the main beneficiaries of the maintenance or increase in value of the trade marks, whereas the advertising of the trade marks will benefit any licensees in a subsidiary manner, in so far as that strategy actually helps to increase the volume of sales.

 

Therefore, the applicant's expenditure on 'advertising and publicity' is not considered to be strictly indispensable to its activity, since it benefits only the proprietor of the marks, since the purpose of the advertising and publicity is precisely to increase the commercial value of the marks; Therefore, since the applicant is not the proprietor of the trade marks with which it sells its goods, it is clear that the advertising costs incurred by it do not satisfy the requirement of strict indispensability referred to in Article 31(I) of the Ley del Impuesto sobre la Renta, since the maintenance of their commercial value is a matter for the proprietor alone.

 

In this regard, the Second Chamber of the Supreme Court of Justice of the Nation, in deciding the appeal in review number 1386/2004, on the issue of deductions in terms of Article 31, section I, of the Income Tax Law, held, on the one hand, that the guiding principle is indispensability, which is generic in nature and to determine it, it will be necessary to take into account the number of cases that in each specific case can be described as "strictly indispensable". "On the other hand, that expenses are understood to be the outlays or outflows of money or goods from a company's assets, without recovery, as noted:

 

PROTECTION IN REVISION 1386/2004.

COMPLAINT: **********, SOCIEDAD ANÓNIMA DE CAPITAL VARIABLE.

RAPPORTEUR: MINISTER JUAN DÍAZ ROMERO. SECRETARY: CÉSAR DE JESÚS MOLINA SUÁREZ.

Mexico, Federal District. Resolution of the Second Chamber of the Supreme Court of Justice of the Nation corresponding to November 5, 2004.

COUNTERFEIT:

VIEWS; and

RESULTING :

(…)

Thus, it follows from the content of Articles 29 and 31, section I, of the Income Tax Law that all taxpayers under the Income Tax Law who are in this situation have the possibility of deducting, among other items, the expenses strictly indispensable for the purposes of the taxpayer's activity.

 

Regarding the provision contained in section I of Article 31 of the Income Tax Law, the doctrine has stated

 

"In tax law, particularly in a law relating to income tax, the 'strictly necessary' criterion is the principle of proportionality in tax matters with regard to the deductions that may be made by the taxpayer. While every expenditure made by a person, whether or not it is indispensable, reduces his economic capacity, because it inevitably reduces his assets (...)".

 

As indicated in the paragraph above, the guiding principle for deductions is the indispensability of these in terms of Article 31, section I, of the law on the matter, and the deductible expenses allowed by law to the taxpayers in question must comply with certain requirements, among which is that they are strictly indispensable for the purposes of the business activity; The generic conception of this requirement, which the legislator established in the legal precept in question, is justifiable in view of the number of cases that may be described as "strictly indispensable" in each specific case. Therefore, since it is impossible to provide a definition that covers all the possible cases or to establish general rules for their determination, it is necessary to interpret the concept of "strictly indispensable", taking into account the purposes of each company and the specific expense in question.

 

Thus, expenditure is understood as the outlay or output of money or goods from the assets of an enterprise, without recovery.

 

Thus, the deductible expenses allowed by law to the subjects of the tax in question must comply with certain requirements, among which is that they are strictly indispensable for the purposes of the business activity, for which it will be necessary to take into account the particular circumstances of the taxpayer.

 

Consequently, taking into account the corporate purpose of the claimant, which consists of the sale, distribution and general trade of beer. and to the specific circumstance that it is not the exclusive licensee of those brands, the fact that the payments it made for advertising and publicity are indispensable in respect of brands which it does not own are not justified, since they are not closely connected with the achievement of its corporate purpose, Although it is true that this payment was made in order to make the consumer public aware of the brands it offers, it is also true that it is not a necessary expense that affects your activities as a legal entity and that brings you a benefit, so that if you do not make it, the company's activities would have to be suspended or they would necessarily decrease.

 

In short, the payment of advertising and propaganda regarding brands that are not owned by the company and of which it is not the exclusive licensee, if it is not carried out, does not mean that its activity will not be stimulated, otherwise it would be that its income would be focused exclusively on the realization of that advertising and propaganda activity and, for that reason, it would be required to make those expenses to fully comply with its activities as a legal entity, bringing it some benefit.

Therefore, it is now the owner of the trademarks who obtains an economic benefit due to their intangible value, and not the company to which their use is licensed, so their positioning in the market through their advertising will only be of interest to the former. Thus, increasing the value of a trade mark through advertising and publicity expenditure could even be detrimental to the licensee, since he might have to pay higher royalties for its use.

 

This is so, because for the authorised user of a brand, the licence constitutes the instrument through which he exploits the strength, notoriety and market positioning of that brand, in exchange for the payment of royalties for its use, which translates into the possibility of marketing the products and services it offers, without the need to develop his own brand and position it in the market, thus avoiding the technical, operational and legal difficulties that this may imply.

 

Through the license agreement, the licensee takes advantage of the economic and marketing benefits of using a strong brand that is recognised by the consumer public.

 

In the case in point, the licence agreement for the use of the trade marks granted the applicant their use in order to market its products through them, so that the applicant is entitled to offer the products covered by those trade marks as if it were the owner of those marks. Thus, by means of that licence agreement, the applicant exploits the strength, reputation and market position of the marks for which it pays royalties.

 

In view of the foregoing, it must be concluded that if the plaintiff did not incur expenses for the advertising and publicity of the licensed brands, this would not affect its activities or hinder its normal operation or development, since its corporate purpose is the sale, distribution and general trading of beer and not the positioning of brands in the market; moreover, the purpose of the license agreement was to grant the plaintiff the rights to use and exploit the brands already positioned in the market.

 

Likewise, it is considered that the advertising and publicity of the services offered by the plaintiff is ensured through the granting of the use of the trademarks referred to, derived from the license agreement entered into with the holder of the trademarks, since they are trademarks positioned in the market, so that it is sufficient for them to be incorporated into the products and services offered by the plaintiff to obtain the preference of the consumer public, thus being able to continue with its activities normally, without reducing its income.

 

In other words, since the marks are recognised on the market as being distinctive for the goods, thanks to the fact that they were originally advertised by their creator and proprietor, the dissemination of the goods offered by the applicant is ensured by the mere incorporation of the marks into those goods.

 

Therefore, the costs incurred by the applicant in respect of advertising and publicity are not strictly necessary for the conduct of its business, in accordance with Article 31(1) of the Law on Income Tax.

 

The conclusion reached by this Court is supported by the following theses issued by the Judicial Power of the Federation:

Thesis with registration number 248095, Seventh Period, Collegiate Circuit Courts, published in the Judicial Weekly of the Federation, Volume 205-216, Sixth Part, page 431:

INCOME TAX LAW, IN FORCE IN 1972, 1973 AND 1974. DEDUCTIONS OF EXPENSES FOR PROMOTION AND ADVERTISING SERVICES. REQUIREMENTS THAT MUST BE MET BY THOSE THAT ARE FORMULATED WITH THE SUPPORT OF THE PROVISIONS OF SECTION I OF ARTICLE 26. With regard to deductions, those formulated with the support of the provisions of article 26, section I, of the specific tax law in question must meet two types of requirements: The first, implicitly considered, is to prove that the amounts deducted were actually spent on the items declared; and the second, that said item may be qualified as ordinary and strictly indispensable for the purposes of the business, a normal consequence thereof and in proportion to the transactions of the taxpayer; this is so because first the item to which an expenditure was applied must be known with certainty, and then it must be possible to determine whether that item is ordinary and indispensable for the business. In these terms, it is demonstrated that it is up to the taxpayer to prove that the amounts deducted were actually spent on the concepts declared; however, it should be noted that the legislator did not indicate in what form such expenditures should be accredited, nor through what evidence, so it is up to each case to determine whether such extremes have been proven.

 

THIRD COLLEGIATE TRIBUNAL IN ADMINISTRATIVE MATTERS OF THE FIRST CIRCUIT.

 

Precedent VII-CASR-2HM-25 of the Second Regional Chamber Hidalgo-Mexico, published in the Magazine edited by this Court, Séptima Época, Year V, No. 43, February 2015, page 185:

 

INCOME TAX. THE EXPENSES INCURRED BY TAXPAYERS FOR ADVERTISING ARE STRICTLY INDISPENSABLE, PROVIDED THAT THEY ARE MADE FOR THE DEVELOPMENT OF THEIR ACTIVITY WITH THE PURPOSE OF REPORTING PROFITS. According to the provisions of section I of Article 31 of the Income Tax Law in force in 2008, deductions must be strictly indispensable for the purposes of the taxpayer's activity. In relation to this, the First Chamber of the Argentine Supreme Court of Justice, in its ruling 1a. XLVI/2009, under the heading: "INCOME. THE ORIGIN OF THE DEDUCTIONS IN THE RELATIVE TAX IS NOT CONDITIONED TO THE FACT THAT THE RESPECTIVE EXPENDITURES ARE NECESSARILY LINKED TO THE PREDOMINANT ACTIVITY OF THE TAXPAYER. "The Court held that such requirement should not be understood in the sense that each taxpayer can only engage in one line of business, since since the object of the tax is to obtain income, it is clear that the expenses incurred to obtain such income must be deductible, regardless of whether the taxpayer has more than one activity.  In accordance with the above, when taxpayers make various expenses for advertising, seeking to develop their activity in order to report profits, these expenses should be considered deductible for income tax purposes, since regardless of whether they have a close link with the predominant activity of the taxpayer, these may be aimed at positioning their product or service in the market, which in turn would result in obtaining a profit, which in the end would be taxed by the treatment tax. In other words, if the purpose of the tax is to obtain income, if the taxpayers make various expenditures to promote their activity in order to obtain a greater profit, it must be understood that those operations are strictly indispensable, since they would result in an increase in the taxpayer's profit and therefore also in the taxable base, and it would be appropriate to deduct them.

 

By virtue of the above, this Section considers the concepts of challenge FIRST and SECOND of the claim to be partially FOUNDED, and therefore it is appropriate, on the one hand, to declare the nullity of the tax assessment resolution insofar as it makes deductions for marketing expenses in terms of Articles 51, section IV and 52, section III of the Federal Law on Contentious Administrative Procedure, in force before July 18, 2016, for the purpose that the respondent authority issues a new resolution in which it addresses the reasoning contained in this ruling and analyse, verify and detail the items that were considered as marketing expenses by the plaintiff, in order to determine the origin of the respective deduction, based on the strict indispensability of such expenses.

 

And on the other hand, recognise the validity of the settlement decision with respect to the expenses for advertising and publicity, in accordance with Article 52, section I of the aforementioned legal system.

 

This Court has not overlooked the fact that the plaintiff offered as evidence in this trial expert evidence on advertising, propaganda and marketing (see pages 588 to 607 and 640 to 676 of the file); However, it is not assessed, as it is not suitable for resolving the dispute raised by the parties, since, on the one hand, it conceptualizes and differentiates between marketing and advertising expenses, as well as those incurred by way of royalties and, on the other hand, it addresses the impact on a company's sales when incurring marketing, advertising and publicity expenses, as well as royalties and the benefits of brand positioning.

 

However, the point of contention in this recital concerned whether or not marketing, advertising and publicity expenses are strictly indispensable for the development of the applicant's activity and, consequently, deductible in accordance with Article 31(1) of the Income Tax Law, which was determined in the light of that part of the legislation; In other words, in order to determine the origin of the deductions made by the plaintiff, the interpretation of the applicable legal provisions should be used. Therefore, the expert evidence in question is unnecessary to resolve the dispute.

 

The previous determination is supported by the thesis I.1o.A.E.45 K (10a.), issued by the Judicial Power of the Federation, published in the Gazette of the Judicial Weekly of the Federation Book 24, November 2015, Volume IV, page 3605:

 

SCIENTIFIC EXPERT EVIDENCE. ITS OBJECT AND PURPOSE. The purpose of the expert evidence is to help in the administration of justice, consisting of an expert in a certain science, technique or art to provide the judge with knowledge of his or her own expertise, which the judge lacks, because it is beyond the scope of an average person's cultural level, and which is also essential to solve a certain controversy. Thus, the use, primarily, of expert opinion, and with it scientific methods, implies the use of specialized knowledge, which is indispensable to appreciate and qualify certain facts or evidence and to be able to attribute or deny them meaning with respect to a certain practice, hypothesis or conjecture that is intended to be accredited. It is also useful to determine what circumstances or evidence are necessary, according to the methodological framework, to validly reach a certain conclusion. In this way, both the evidence and the methods must be relevant and reliable for the result, end or purpose that the evidence is intended to achieve. For this reason, the specialized knowledge that can be obtained from scientific methods or expert procedures makes the judges participate in the information that derives from laws, theories, explanatory models, maxims of experience and skills, even from presumptions, all corresponding to the various sciences that are governed by different methodologies, so that the evidence they provide includes facts, behaviors, practices, states of affairs or particular circumstances, in general, that according to a theory or method, are relevant to the purpose or objective that the test is intended to accredit and requires a specialized qualification.

 

FIRST COLLEGIATE CIRCUIT COURT IN ADMINISTRATIVE MATTERS SPECIALISING IN ECONOMIC COMPETITION, BROADCASTING AND TELECOMMUNICATIONS, WITH RESIDENCE IN THE FEDERAL DISTRICT AND JURISDICTION THROUGHOUT THE REPUBLIC

 

As well as the thesis I.7o.A.508 A, issued by the Federal Judicial Power, Ninth Epoch, published in the Federal Judicial Weekly and its Gazette Volume XXV, April 2007, page 1804:

 

EVIDENCE IN THE FEDERAL CONTENTIOUS-ADMINISTRATIVE TRIAL. IN THE CASE OF THOSE THAT MUST BE EVALUATED ACCORDING TO THE HEALTHY CRITICISM, THE FEDERAL TAX AND ADMINISTRATIVE JUSTICE COURT MUST RULE ON THEIR SUITABILITY TO PROVE THE POINTS TO BE PROVED BEFORE EXAMINING ANY OBJECTION FROM THE BIDDER'S COUNTERPART. According to Article 230 of the Federal Fiscal Code, in force until 31 December 2005 (similarly worded in its part leading to paragraph 40, second subparagraph of the Federal Law on Administrative Litigation Procedure), in federal administrative litigation all kinds of evidence are admissible, except for the confession of the authorities by way of acquittal and the request for reports, unless the latter are limited to facts contained in documents in the possession of the authority. For its part, Article 234 of the same code and validity (the content of which shares the precept 46 of the aforementioned law), provides that full proof is given by the express confession of the parties, legal presumptions that do not admit evidence to the contrary, and facts legally affirmed by the authority in a public document, but if the latter contain statements of truth or declarations of facts by individuals, the documents only fully prove that before the authority that issued them the statements or declarations were made, without demonstrating the truth of what was stated or manifested. The rules described above show the existence of two systems of evaluating evidence, one assessed for the express confession of the parties, legal presumptions that do not admit evidence to the contrary and public documents; and the other in accordance with healthy criticism, for testimony, expert opinion and other means of evidence. In the latter system, the judge must rule on the suitability of the evidence and define, first, its effectiveness in order to prove the points to be proved and, subsequently, examine accessory aspects such as the existence of any objection by the offeror's counterpart.

 

SEVENTH COLLEGIATE TRIBUNAL ON ADMINISTRATIVE MATTERS OF THE FIRST CIRCUIT.

 

In addition, this Court warns of the documents that make up the trial, as well as the administrative records from which the resolutions challenged and appealed were derived, that the plaintiff did not offer expert evidence on advertising, propaganda, and marketing during the inspection procedure or in the appeal for revocation. Therefore, this Court would not be able to assess this evidence, in accordance with the provisions of case law 2a. /J. 73/2013 (10a.), of the Second Chamber of the Supreme Court of Justice of the Nation, Tenth Period, published in the Judicial Weekly of the Federation and its Gazette, Book XXII, July 2013, Volume 1, page 917:

 

CONTENTIOUS-ADMINISTRATIVE LAWSUIT. THE OPEN LITIS PRINCIPLE THAT RULES IT DOES NOT IMPLY FOR THE ACTOR A NEW OPPORTUNITY TO PROVIDE THE PROOF, WHICH, ACCORDING TO THE LAW, SHOULD BE EXHIBITED IN THE ORIGINAL PROCEDURE OR IN THE PROCEDING ADMINISTRATIVE APPEAL, BEING IN THE LEGAL POSSIBILITY TO DO SO [MODIFICATION OF THE JURISPRUDENCE 2a. /This Second Chamber of the Supreme Court of Justice of the Nation modifies the above-mentioned case law, considering that the principle of open conflict derived from Article 1 of the Law on the Protection of Personal Data (LOPD) is not applicable in the case of the protection of personal data. of the Federal Law on Administrative Litigation is applicable only when the decision given in administrative proceedings is challenged through the appropriate administrative appeal, before going to the Federal Court of Tax and Administrative Justice, and results in the possibility for the plaintiff to formulate concepts of challenge not expressed in the appeal, but such prerogative does not imply the opportunity to exhibit in court the means of evidence that, according to the law, should have been presented in the original administrative procedure or in the respective administrative appeal to distort the facts or omissions noticed by the administrative authority, being in legal possibility to do so. If that had been the intention of the legislator, it would have been expressly stated, as it did in the case of the revocation appeal provided for in the Federal Fiscal Code in which, by exception, the taxpayer is granted the right to offer the evidence that for any reason was not presented before the controlling authority, to seek the resolution of the tax disputes in the administrative seat as quickly as possible and avoid their challenge in the jurisdictional seat, This is because the administrative authority can exercise any of the actions inherent in its powers of verification and supervision, such as, among others, requesting information from third parties to verify it with that provided by the appellant or reviewing the opinions issued by the certified public accountants, which implies having the necessary legal competence and the human and material elements that are specific to the public administration. Therefore, such prerogative cannot be understood as extended to the contentious-administrative trial, since it would not be legally valid to declare the nullity of the challenged resolution based on the analysis of evidence that the individual did not present in the original proceeding or in the administrative appeal, being obliged to do so and legally able to do so, as prescribed by Article 16 of the Political Constitution of the United Mexican States, which indicates that the governed must keep the documentation indispensable to demonstrate compliance with the tax provisions and to exhibit it when required by the administrative authority in the exercise of its powers of verification. To consider the contrary would mean to sustain that the Federal Court of Fiscal and Administrative Justice can substitute itself in the powers of the fiscal authority and declare the nullity of its acts by causes attributable to the individual.

 

In accordance with the above criterion, the principle of open litigation does not imply the opportunity to present in court the evidence that, according to the law, should have been presented in the original administrative proceeding or in the respective administrative appeal to distort the facts or omissions noticed by the administrative authority, being in legal possibility to do so 4.

 

Consequently, it is appropriate to declare the nullity of the liquidation resolution as to the deduction for marketing expenses, as well as the resolution challenged in the part that confirms such determination, in terms of article 51, section IV of the Federal Law of Contentious Administrative Procedure, in force before July 18, 2016.

4 As confirmed by the Supreme Court of Justice of Argentina, when resolving the Contradiction of thesis 288/2018 raised between the Seventh Collegiate Court in Administrative Matters of the First Circuit and the First Collegiate Court in Administrative Matters of the Second Circuit.

 

NINTH - Based on the provisions of Article 50 of the Federal Law on Administrative Litigation Procedure, this Section proceeds to study the concept of challenge THREE of the lawsuit, in which the plaintiff argues the illegality of the settlement decision in terms of the deduction for uncollectible accounts.

 

In that concept of challenge, the applicant maintains the following:

 

 

(See transcript)

 

 

 

SUMMARY OF THE GROUNDS FOR CHALLENGE

 

It should be noted that the claimant argues that it is illegal for the tax authority to reject the deduction for uncollectible accounts since such a determination is based on an incorrect assessment of the facts, considering that the deductions made by the claimant do not comply with the requirement set out in section XVI of Article 31 of the Income Tax Law.

 

That the aforementioned portion of the regulations in force for 2008 provides that in the case of losses due to uncollectible receivables, these will be deductible in the month in which the corresponding statute of limitations expires, or earlier if the practical impossibility of collection is known.

 

That by using the disjunctive conjunction "or", the legislator expressed in that provision two normative hypotheses which, if they occur, would result in an uncollectible account being deductible.

 

That it provides for the possibility of deduction when, on the one hand, in those cases where the limitation period operates, meaning the updating or configuration of said limitation or loss due to uncollectible credit in the month in which the limitation period is reached.

 

That as regards the notorious practical impossibility of collection, it corresponds to the assumptions that the law indicates in an enunciative, but not limitative way, remaining at the power of the taxpayer, whether to take the deduction when said requirements are fulfilled, prior to the consummation of the period of limitation.

 

That it must attend to different requirements, depending if the credits are lower or higher than 30,000.00 UDI's.

 

That in this case it is evident that the practical impossibility of collection is updated, insofar as it supported with sufficient documentation the improbability and reasonability of the pr inconstestable uncollectibility of the reference accounts, likewise, that sufficient collection and notification procedures were carried out for each credit deducted as uncollectible.

 

That does not prevent the authority from stating that the plaintiff did not prove that it had complied with each and every one of the aforementioned requirements, since the assumptions of Article 31, section XVI of the Income Tax Law are enunciative and not limitative.

 

That the practical impossibility of collection can be accredited according to standards of probability and reasonableness in relation to the reality and customs of our country.

 

That there has been an undue assessment of evidence, namely: the promissory notes which were the source of the bad debt, claims for which payment of the credit was demanded, letters stating that the debtors could not be located, death certificates of the debtors, notices to the debtors stating that the bad debt deduction would be taken, statements of account of the debtors, rulings on uncollectibility, certificates issued by the Public Registry of Property.

 

That the working paper lists those uncollectible accounts over 30,000.00 UDI's, specifying the name of the individual or company in its capacity as debtor, the amount of the credit deducted, and the date and age of the balance.

 

That the deductions made by the claimant are supported by the debt securities known as promissory notes, which expire in 3 years.

 

That the promissory notes for which the claimant has made deductions will be payable on demand, and therefore their maturity is 6 months from their issue, with the statute of limitations running after 3 years.

 

SUMMARY OF THE EXCEPTIONAL ARGUMENTS

 

Articles 29 and 31 of the Income Tax Act give rise to three presumptions, namely: (1) claims whose main purpose does not exceed 30,000.00 UDI's, (2) the claim is considered irrecoverable in the month in which one year has elapsed since the default occurred, and (3) the obligation to report by 15 February of each year the irrecoverable claims made in the immediately preceding calendar year.

 

That from the working paper provided with the document dated December 5, 2013, as Annex V, by the claimant, it is noted that all its uncollectible accounts exceed the limit established in the aforementioned paragraph a), section XVI of Article 31 of the Income Tax Law.

 

That another requirement established in subsection a), section XVI of Article 31 of the Income Tax Law is that in the case of losses due to uncollectible receivables, these shall be deemed to have been incurred in the month in which the corresponding statute of limitations expires or earlier if the practical impossibility of collection is known.

 

In addition, the last paragraph of section XVI of Article 31 of the Income Tax Law establishes that taxpayers who apply the provisions of this paragraph must report by 15 February of each year the uncollectible credits deducted under the terms of this paragraph in the immediately preceding calendar year.

 

In this regard, the claimant failed to submit during the audit process such information statement or, if applicable, the document submitted to the Tax Administration Service in accordance with the second paragraph of Article 18 of the Federal Tax Code in force in 2008, in which it reported the uncollectible credits it intends to deduct.

 

That the tax provisions establishing charges to individuals and those indicating exceptions to these charges, as well as those establishing infractions and penalties, are strictly applied, in accordance with the provisions of Article 5 of the Federal Tax Code, and therefore it is not left to the discretion of the individual which requirements must be met in order to take a deduction for uncollectible loans.

 

That the plaintiff in this lawsuit does not demonstrate that she complied with the requirement established in paragraph a), section XVI, last paragraph of the Income Tax Law, nor does she even refer to it in her claim, to which she was obliged even when the credits exceeded 30,000.00 UDI's.

 

The dispute in this recital is limited to determining whether the plaintiff met the requirements for making the deduction for uncollectible claims, in accordance with Article 31, section XVI of the Income Tax Law.

 

DECISION OF THE SECOND SECTION OF THE SUPERIOR CHAMBER

First, it is necessary to know the part of the winding-up decision in which the authority wrongly determined the applicant's deduction for non-recoverable debts.

 

(See transcript)

 

In accordance with the above, the authority determined that in relation to the deduction of uncollectible accounts in the amount of $25'000,000, some of these accounts exceeded the limit established in paragraph a), section XVI of Article 31 of the Income Tax Law; It also warned that the age of the balances referred to exceeds the year of maturity referred to in that portion of the regulations, i.e., that the petitioning company allowed its debtors to increase the uncollectible account without filing any arbitration proceedings to prove the notorious practical impossibility of collecting from its creditors.

 

Similarly, the authority learned that the legal representative of the plaintiff failed to submit during the audit process, the information statement or, if applicable, the document submitted to the Tax Administration Service, in accordance with articles 31, section XVI, subsection a), last paragraph and subsection b) of the Income Tax Law and second paragraph of article 18 of the Federal Fiscal Code in force in 2008, in which it reported the uncollectible receivables it intended to deduct.

 

By virtue of the foregoing, the tax authority considered that the claimant did not provide the documentation with which it could prove that it had complied with the requirements referred to in Article 31, section XVI of the Income Tax Law, and therefore rejected the income tax deduction for uncollectible accounts in the amount of $25,000,000.

However, it is necessary to analyze the content of Article 31, section XVI, paragraphs a) and b) of the Income Tax Law, in force in 2008:

 

Income Tax Law

 

 

Article 31. The deductions authorized in this Title must meet the following requirements:

(…)

In the case of losses due to uncollectible receivables, these are considered to have been incurred in the month in which the limitation period expires, or earlier if the practical impossibility of recovery is known.

 

For the effects of this article, it is considered that there is a notorious practical impossibility of collection, among others, in the following cases

 

a) In the case of loans whose principal amount on the due date does not exceed thirty thousand investment units, when within one year from the date on which the loan became due, collection has not been achieved. In this case, they shall be deemed to be uncollectible in the month in which the first year of default has elapsed.

 

When two or more credits are held with the same individual or legal entity as those indicated in the previous paragraph, the total of the credits granted shall be added to determine whether they do not exceed the amount referred to in said paragraph.

 

The provisions of subsection a) of this section shall be applicable in the case of loans contracted with the general public, the main purpose of which on the due date is between five thousand pesos and thirty thousand investment units, provided that the taxpayer, in accordance with the general rules issued by the Tax Administration Service, reports such loans to the credit information companies which obtain authorization from the Ministry of Finance and Public Credit in accordance with the Law on Credit Information Companies.

 

Likewise, the provisions of paragraph a) of this section shall be applicable when the debtor of the credit in question is a taxpayer who carries out business activities and the creditor informs the debtor in question in writing that it will make the deduction of the uncollectible credit, so that the debtor accumulates the income derived from the debt not covered under the terms of this Law. Taxpayers who apply the provisions of this paragraph shall inform by 15 February of each year of the bad debts they deducted under the terms of this paragraph in the immediately preceding calendar year.

 

b) In the case of claims whose main lot on the due date is greater than thirty thousand investment units, when the creditor has demanded payment of the claim from the judicial authority or when the agreed arbitration procedure for collection has been initiated and the provisions of the final paragraph of the previous subsection are also complied with.

 

c) It is proved that the debtor has been declared bankrupt or in insolvency proceedings. In the first case, there must be a judgment declaring the bankruptcy concluded by payment of the bankruptcy or by lack of assets.

 

In the case of credit institutions, they may only make the deductions referred to in the first paragraph of this section when so ordered or authorized by the National Banking and Securities Commission and provided they have not opted to make the deductions referred to in Article 53 of this Law.

 

For the effects of Article 46 of this Law, the taxpayers who deduct credits for uncollectible amounts shall consider them cancelled in the last month of the first half of the fiscal year in which they are deducted.

 

In the case of accounts receivable with a mortgage guarantee, only fifty percent of the amount shall be deductible when the assumptions referred to in subsection b) above occur. When the debtor pays the debt or the amount of the auction is applied to cover the debt, the deduction shall be made from the balance of the account receivable or if applicable the accumulation of the amount recovered.

 

It follows from the Article transcribed that the deductions authorised in this Title must comply with the requirements referred to therein.

 

That in the case of losses due to uncollectible receivables, these shall be considered to have been made in the month in which the period of limitation is reached, or earlier if the practical impossibility of recovery is known.

 

That it is considered that there is a notorious practical impossibility of collection, among others, in the following cases

 

a) In the case of loans whose main purpose on the due date does not exceed thirty thousand investment units, when within one year from the occurrence of the delay in payment their collection has not been achieved. In this case, they shall be deemed to be uncollectible in the month in which the first year of default has elapsed.

 

That when two or more credits are held with the same individual or company as those indicated in the previous paragraph, the total of the credits granted must be added up to determine whether they do not exceed the amount referred to in said paragraph.

 

That the provisions of subsection a) of this section shall be applicable in the case of loans contracted with the general public, the main purpose of which on the due date is between five thousand pesos and thirty thousand investment units, provided that the taxpayer in accordance with the general rules issued in this respect by the Tax Administration Service reports such loans to the credit information companies which obtain authorization from the Ministry of Finance and Public Credit in accordance with the Law on Credit Information Companies.

 

That the provisions of subsection a) shall also be applicable when the debtor of the credit in question is a taxpayer engaged in business activities and the creditor informs the debtor in question in writing that it will make the deduction of the uncollectible credit, so that the debtor accumulates the income derived from the debt not covered under the terms of this Law.

 

Taxpayers who apply the provisions of the previous paragraph shall inform by 15 February of each year of the bad debts they deducted under the terms of this paragraph in the immediately preceding calendar year.

 

b) In the case of claims whose main lot on the due date is greater than thirty thousand investment units when the creditor has demanded payment of the claim from the judicial authority or when the agreed arbitration procedure for its collection has been initiated and in addition the provisions of the previous paragraph are complied with.

 

c) It is proven that the debtor has been declared bankrupt or in insolvency proceedings. In the first case, there must be a judgement declaring the bankruptcy concluded by payment of the bankruptcy fee or by lack of assets.

 

However, the plaintiff maintains that with the documentation it provided in the inspection procedure, as in the appeal for annulment and in the present trial, it proves that there is a practical impossibility of recovery of the claims from which it seeks to be deducted, by virtue of the fact that they are adapted to the assumption established in paragraph b) of section XVI of article 31 of the Income Tax Law, insofar as the amount of the same exceeds thirty thousand investment units and also complies with the other requirements established in said legal precept, such as having sued the payment of the credit before the judicial authority.

 

However, as the defendant argues, the plaintiff does not prove that it has complied with the requirement to inform the Tax Administration Service by 15 February of each year of the bad debts it deducted in the previous calendar year in order to prove the existence of the practical impossibility of collection, in the understanding that this is the pre-budget for deducting bad debts.

 

Without prejudice to the foregoing, the plaintiff in the present lawsuit exhibits the promissory notes from which the bad debts originated, the claims for which payment of the credit was demanded, letters stating that the debtors could not be located, death certificates of the debtors, notices to the debtors stating that the bad debts would be deducted, statements of account of the debtors, rulings on uncollectibility, certificates issued by the Public Registry of Property, in order to prove the existence of the practical impossibility of collection, since for this purpose it had to demonstrate that it had demanded payment of the credit from the judicial authority or that it had initiated the agreed arbitration procedure for its collection, and furthermore that it had informed the Tax Administration Service, by 15 February of each year, of the uncollectible credits it had deducted in the immediately preceding calendar year.

 

Therefore, by not accrediting that it complied with this requirement, it is in accordance with the law that the tax authority has unduly determined the deduction for uncollectible accounts in the amount of $25,000,000.00.

 

The above is supported by thesis 2a. CXVI/2008, of the Second Chamber of the Supreme Court of Justice of the Nation, Ninth Period, published in the Semanario Judicial de la Federación y su Gaceta, Volume XXVIII, September 2008, page 278:

 

RENT. ARTICLE 31, SECTION XVI, OF THE RELATIVE TAX LAW DOES NOT VIOLATE THE PRINCIPLE OF TAX LEGALITY (LEGISLATION IN FORCE UNTIL DECEMBER 31, 2007). The aforementioned provision, which establishes that the deduction of losses on uncollectible receivables may be made when they are deemed to have been incurred in the month in which the applicable statute of limitations expires or before, if the practical impossibility of recovery is known, exemplifying cases in which such impossibility may exist, does not infringe the principle of tax legality contained in Article 31, fraction IV, of the Political Constitution of the United Mexican States, since it delimits the essential elements of income tax and leaves no room for arbitrariness on the part of the tax authorities or for the payment of an unforeseeable tax, nor does the taxable person know, with such a provision, the certain way to contribute to public expenditure.  This is so, since the parties to the tax relationship must consider that the existence of the practical impossibility of collection occurs, among other assumptions: in the case of credits whose principal fate on the due date does not exceed $20,000. In this case, if two or more credits are owed to the same individual or entity, they must be added together to determine whether they do not exceed the indicated amount. This applies to credits contracted with the general public whose principal amount on the due date is between $5,000.00 and $20,000.00. 00, provided that the taxpayer, in accordance with the general rules issued by the Tax Administration Service, reports such credits to the credit information companies authorized by the Ministry of Finance and Public Credit, and when the debtor is a taxpayer with business activities and the creditor informs him in writing that he will make the deduction of the uncollectible credit, so that he may accumulate the income derived from the uncovered debt. The debtor must report by February 15 of each year the uncollectible credits deducted in the immediately preceding calendar year;  for loans whose principal amount at maturity is greater than $20,000. 00, when the creditor has demanded payment from the judicial authority or has initiated the agreed arbitration procedure for collection and complies with the duty to inform the debtor in writing so that he may accumulate the income derived from the unpaid debt, and the taxpayer must inform by 15 February of each year of the uncollectible claims which he deducted in the immediately preceding calendar year; when it is proven that the debtor has been declared bankrupt or has filed for bankruptcy, and when the first alleged judgment declares the bankruptcy concluded due to bankruptcy payment or lack of assets; In the case of credit institutions, these may only deduct when ordered or authorized by the National Banking and Securities Commission, if no deduction has been previously made under the terms of Article 53 of the Income Tax Law, which provides for deductions from the amount of the global preventive reserves that are established or increased in accordance with Article 76 of the Law on Credit Institutions; In the case of corporations which must determine at the end of each year the annual adjustment for inflation, deductions for bad debts must be considered as cancelled in the last month of the first half of the year in which they are deducted; and, in the case of accounts receivable secured by a mortgage, only 50% of the amount may be deducted, and when the debtor pays the debt or applies the amount of the auction to cover the debt, the deduction must be made from the balance of the account receivable or, if applicable, the accumulation of the amount recovered.

 

Consequently, the concept of a third party challenge to the claim is UNDERLINED.

TENTH: Based on the provisions of Article 50 of the Federal Law on Contentious Administrative Procedure, this Court shall analyse the arguments of the plaintiff in the FOURTH concept of challenge to the claim, in which it controls the legal validity of the settlement resolution contained in official letter number 900- 07-04-2015-55504 dated 19 October 2015:

 

(See transcript)

 

 

SUMMARY OF THE GROUNDS FOR CHALLENGE

 

The plaintiff refers to the fact that the liquidation resolution is illegal because the authority acted outside the provisions of Article 50 of the Federal Fiscal Code.

 

This is so because in said resolution, the authority did not determine contributions, but rather imposed the obligation to inform its controlling company during fiscal year 2008,******* ********* ****** ** ***** about the modification of its profit in the consolidable part, so that the latter would present a complementary declaration for fiscal year 2008, in which it would modify its fiscal result, considering the profit in the amount of $3,082,309,114.

 

This does not constitute a determination of contributions as provided for in Article 50 of the Federal Tax Code, but rather a different type of allocation, which the authority is not empowered to make.

 

That in order for an authority to issue a resolution in terms of Article 50 of the Federal Fiscal Code, the facts known during the visit or review must necessarily imply the existence of an omitted contribution and therefore, the determination of a tax credit. Therefore, since this was not the case in this case, the authority issued a resolution imposing obligations on the plaintiff, without the authority to do so.

 

That issue has already been resolved in Case 7223/13-17-9 by the Sixth Regional Metropolitan Chamber, by judgment of 14 August 2014, which declared the contested decision to be void.

 

SUMMARY OF THE EXCEPTIONAL ARGUMENTS

 

The defendant authority, in its response to the complaint, argued that Article 50 of the Federal Fiscal Code does not establish the competence of the tax authorities, in addition to the fact that in the revised fiscal year its controlling company participated in 100% of the plaintiff's fiscal result, which makes it impossible for it to settle any contribution on behalf of the latter.

 

DETERMINATION OF THE DISPUTE

 

The dispute is limited to determining whether by issuing the resolution contained in the official letter number 900-07-04-2015-55504 dated October 19, 2015, the tax authority violated the provisions of Article 50 of the Federal Fiscal Code.

 

RESOLUTION OF THE SECOND SECTION OF THE SUPERIOR CHAMBER

 

In order to resolve the point of dispute, the provisions of Article 50 of the Federal Fiscal Code will be analysed:

Article 50. - The tax authorities which, when carrying out visits to the taxpayers or when exercising the powers of verification referred to in Article 48 of this Code, become aware of facts or omissions which involve a breach of the tax provisions, shall determine the contributions omitted by means of a resolution which shall be personally notified to the taxpayer, within a maximum period of six months from the date on which the final report of the visit is drawn up or, in the case of a review of the taxpayers' accounts carried out in the offices of the tax authorities, from the date on which the periods referred to in sections VI and VII of Article 48 of this Code expire.

 

 

In accordance with the article transcribed, the tax authorities that, when carrying out visits to taxpayers or when exercising the powers of verification referred to in Article 48 of this Code, become aware of facts or omissions that involve non-compliance with the tax provisions, shall determine the contributions omitted by means of a resolution that shall be notified personally to the taxpayer, within the period established therein.

 

In this regard, this Court considers that the plaintiff is not correct in that it maintains that the aforementioned provision only authorises the tax authorities to determine contributions through resolutions issued under the terms of that article; since the aforementioned paragraph does not establish any aspect of the competence of the tax authority, but rather refers to the manner in which the latter must inform the taxpayers of the contributions omitted, if any, resulting from the exercise of their powers of verification.

 

That is to say, the provision under analysis does not in any way establish the obligation of the tax authorities to determine contributions through the resolution they issue by virtue of their powers of verification, but rather establishes that if, as a result of the facts or omissions known to them in the exercise of their powers of verification, there are contributions omitted, these must be determined by means of a resolution brought to the attention of the taxpayers in the terms established therein.

 

Therefore, the arguments of the plaintiff are unfounded, since Article 50 of the Federal Fiscal Code does not provide the tax authorities with any jurisdiction, but rather establishes the manner in which the tax authorities must determine and make known to the taxpayers the omitted contributions derived from the exercise of their verification powers.

 

However, in the resolution contained in official letter number 900-07-04-2015-55504 dated 19 October 2015, the authority resolved the following

 

From the foregoing, it is noted that since the authority determined that of the total authorized deductions in the amount of $31,954,849,360.00 were unduly considered deductions made up of advertising and publicity in the amount of $526,660,963.00, marketing expenses in the amount of $1,304,856,468. In addition, the Company was charged with $25,000,000.00 in uncollectible accounts, which amounted to $1,856,517,431.00, determined as a result of the authority's audit of the Company in fiscal year 2008:

 

Once the authorized deductions that the plaintiff should have considered were determined, with respect to the non-consolidable part, it was determined that the tax profit corresponded to the amount of $3'082'309,114.00.

Considering that the tax authority determined a difference in the tax result of the plaintiff, in the amount of $1'856,517,431.00, the part of said difference that corresponds to its controlling company ******* ********* **** ** ****, while the plaintiff determines its consolidated tax result, amounts to $1'856,517,431.00, corresponding to 100% of the tax profit determined related to the consolidable participation.

 

Consequently, considering that the controlling company's participation in the plaintiff's tax result was 100% and that the plaintiff determined a tax profit in the amount of $3'082'309,114.00, which turns out to be greater than the tax profit in the amount of $1'856'517,431. 00, derived from the non-deductible items, ******* ********* ********* **** ** ***** had to file a complementary declaration for income tax correction, modifying the taxable income declared by the taxpayer for the purpose of reflecting the profit in the amount of $3'082'309,114.00, determined by the auditing company.

 

That the tax assessment resolution only refers to the contributions to which the plaintiff was subject as a direct income tax payer for the 2008 fiscal year, not including compliance with obligations derived from entering into transactions with related parties, considered as such under the terms of the Income Tax Law, considering the prices and amounts of consideration that would have been used with or between independent parties in comparable transactions, resulting from obtaining income from sources of wealth located in Mexico, those derived from the tax consolidation regime to which the plaintiff was subject; nor those relating to the origin of goods, as well as their entry into and exit from national territory.

 

In accordance with the above, the authority determined undue deductions for advertising and publicity in the amount of $526,660,963.00, marketing expenses in the amount of $1,304,856,468.00 and for the concept of uncollectible accounts in the amount of $25,000,000. 00, so it is clear that the defendant complied with the provisions of Article 50 of the Federal Fiscal Code, as it became aware through the exercise of its verification powers that the plaintiff did not comply with the requirements of law to deduct such amounts, and therefore made it known to the plaintiff through said resolution.

 

This does not preclude the tax authority from not expressly determining omitted contributions, since the amounts referred to are not deductible and should be considered as cumulative income for income tax purposes and paid in full to the Federal Tax Authority. In other words, the authority determined that the plaintiff failed to consider these amounts as income for the calculation of the aforementioned contribution.

 

The fact that the authority determined that ******* ********* ********* **** ******* had to file a complementary declaration for income tax correction, modifying the tax profit declared by the taxpayer for the purpose of reflecting the profit in the amount of $3'082'309,114.00, determined by the auditing company, does not prevent the conclusion reached, since as it is stated in the liquidation resolution, this is due to the fact that the plaintiff determines its consolidated tax result, so its controlling company must correct its declaration regarding income tax.

 

Consequently, the concept of challenge FOUR of the lawsuit is UNfounded.

 

Based on the provisions of Article 50 of the Federal Law on Contentious Administrative Procedures, this Court will analyze the concept of challenge SEVENTH of the lawsuit, in which the plaintiff maintains that in 2003, 2004 and 2006, the origin of the deductions for the concepts of marketing, advertising and publicity expenses was analyzed, determining their origin, and therefore it is improper that the defendant authority has rejected them.

 

In this concept of challenge, the plaintiff argued the following:

(See transcript)

 

SUMMARY OF THE GROUNDS FOR CHALLENGE

 

It should be noted that the plaintiff maintains that the decision to settle the case is unlawful because in 2003, 2004 and 2006 the appropriateness of the deductions for marketing, advertising and publicity expenses had already been reviewed and it was determined that they were appropriate.

 

The defendant's decision infringes the human right to legitimate expectations.

 

By means of official letter No 900-05-04-2013-83606 of 9 December 2013, the Fiscal Administration of Companies that Consolidate Taxes observed the non-deductibility of marketing, advertising and publicity expenses, however, by means of various official letters No 900-05-2014-45798 of 9 July 2014, having challenged those observations, it determined that those concepts were deductible.

 

That by means of official letters numbers 900-07-2008-29842 of 08 December 2008 and 900-07-04-2008-29851 of 10 December 2008, the audit authority did not reject the deductions for the concepts of marketing, propaganda and advertising expenses.

 

SUMMARY OF THE EXCEPTIONAL ARGUMENTS

 

The defendant, when answering the complaint, stated that the arguments of the plaintiff are unfounded, because the fact that in previous years the authority has resolved the same issue in a different way, does not imply that it should continue to apply the same criteria in subsequent reviews.

 

That the actions of the International Taxation Authority "4" do not oblige it to act exactly the same in a different fiscal year, as the circumstances may not be identical to those reviewed previously or it may decide to change its mind regarding the appropriateness of deductions derived from a new reasoning.

 

It is not apparent that the circumstances of the financial years 2003, 2004 and 2006 were the same as those of the financial year revised by the defendant, or that the same concepts are to be deducted.

DETERMINATION OF THE DISPUTE

 

The dispute consists in determining whether the fact that in previous years the tax authority had determined that the deductions for marketing, advertising and publicity expenses were appropriate, obliges the defendant authority to act on the same terms in the present case.

 

DECISION OF THE SECOND SECTION OF THE SUPERIOR CHAMBER

 

The Court considers that the applicant is not correct inasmuch as it argues that the authority should have considered the deductions for marketing, advertising and publicity to be appropriate, since in 2003, 2004 and 2006 the appropriateness of the deductions for those concepts had already been reviewed and it was determined that they were appropriate.

 

That is so because the tax authorities, in exercising their powers of verification, determine the tax position of taxpayers on the basis of the specific circumstances of the tax year in question, that is to say, the authorities will analyse the specific aspects of the activities or operations carried out by the taxpayer in order to determine whether or not it complies with its tax obligations, in relation to the documentation and information which the taxpayer provides to them for the revised year.

 

Therefore, the tax authority reviews taxpayers by tax year, since it must specifically analyse the information and documentation referring to the operations that the taxpayer carried out during the tax year, in order to determine whether in that year, in particular, it complied with its tax obligations.

 

Therefore, what is determined by the authority in relation to a tax year does not go beyond the considerations arising from the review of a different year, since the authority must take into account the documents and information provided to it during the audit procedure in question and in the light of the transactions carried out in the year under audit and not in a previous year, in order to ascertain the taxpayer's tax position, the fact that the defendant in the year under review reaches a different conclusion from that of a previous year does not therefore imply that it acted unlawfully, since the authority is required to consider only those aspects which are relevant to the transactions carried out by individuals in the year under review.

 

Therefore, if the tax authority had determined that the deductions for marketing, advertising and publicity expenses were appropriate and, in the present case, found them to be improper, that does not constitute an unlawfulness of the tax assessment, since the tax position of the claimant is determined in the light of the particularities of each financial year, It may be that in one case the applicant exhibits the documentation from which the deduction of those costs is derived and then, in respect of another year, determines that they are inappropriate because the necessary evidence that they meet the requirements for that purpose is not produced.

 

The foregoing reasoning is corroborated by the provisions of article 48, sections IV and IX of the Federal Fiscal Code, in force in 2015:

When the tax authorities request from the taxpayers, jointly and severally liable parties or third parties, reports, data or documents or ask for the presentation of the accounting or part of it, for the exercise of their faculties of verification, outside a home visit, the following shall apply

 

(…)

 

IV. As a consequence of the review of the reports, data, documents or accounts required from the taxpayers, jointly liable parties or third parties, the tax authorities shall issue an official letter of observations, in which they shall state in detail the facts or omissions that have come to light and that involve a breach of the tax provisions of the taxpayer or jointly liable party, who may be notified in accordance with the provisions of Article 134 of this Code.

 

(…)

 

IX.- When the taxpayer does not fully correct its fiscal situation in accordance with the official letter of observations or does not distort the facts or omissions set forth in said document, the resolution determining the contributions or uses omitted shall be issued, which shall be notified to the taxpayer in compliance with the provisions of section I of this article and in the place specified in said section.

 

From the precept transcribed, it is noted that when the tax authorities request from the taxpayers, jointly and severally liable or third parties, reports, data or documents or request the presentation of the accounts or part of them, for the exercise of their powers of verification, as occurred in the case, they shall comply with the guidelines established in said article.

 

That as a result of the review of the reports, data, documents or accounts required from the taxpayers, jointly and severally liable parties or third parties, the tax authorities shall issue an official letter of observations, in which they shall state in detail the facts or omissions that have come to their attention and that involve a breach of the tax provisions of the taxpayer or jointly and severally liable party, who may be notified in accordance with the provisions of Article 134 of the Code.

 

That when the taxpayer does not fully correct its fiscal situation in accordance with the letter of observations or does not distort the facts or omissions consigned in said document, the resolution that determines the contributions or uses omitted shall be issued, which shall be notified to the taxpayer in compliance with the provisions of section I of said article and in the place specified in said section.

 

As we can see, it follows from the above provision that in the case of a cabinet review, the tax authorities will issue an official letter of observations, derived from the review of the reports, data, documents or accounting required from the taxpayers, in which they will state in detail the facts or omissions that were known and that involve a breach of the tax provisions, which will be notified to the taxpayer so that it can correct its tax situation, and if it does not do so, the corresponding resolution will be issued determining the tax situation of the individual.

 

Thus, for the purpose of determining the taxpayer's tax situation, the authority must review the reports, data, documents or accounts provided by the taxpayer in respect of the tax year under review.

 

Therefore, the authority must take into account the specific case or the particular fact in order to determine whether or not the taxpayers complied with their tax obligations, in respect of a specific period. Consequently, in the present case, there was no obligation on the defendant authority to act on the same terms as in previous years, in respect of the deductions made by the shareholder for marketing, advertising and publicity.

 

Nor is the applicant correct, as regards the argument that the authority infringed the human right to legitimate expectations by deciding that the deductions it made for marketing, advertising and publicity costs were undue, even though those costs had been considered appropriate in previous years.

 

That is because, in tax matters, legitimate expectations are protected by the protection of the expectations legitimately created in the taxpayer by the activity of the State, which includes the possibility that such expectations may be created by the tax rules, the purpose of which is to prevent an untimely change by the issue of new rules which could have harmful retroactive effects, such as making them more burdensome for taxpayers.

 

However, in the present case we are not faced with any legitimate expectation created in the taxpayer by the activity of the State, since it is insisted that, for the purpose of determining the tax situation of a taxpayer, in respect of a given period, the tax authorities must review the documents, data and information provided to them by the taxpayers during the audit and which relate to the activities or transactions carried out in the year under review or which have an impact on that year, on a case-by-case basis; Therefore, what was determined by the authority in a fiscal year prior to the audited one should not necessarily be considered in the conclusion reached regarding the latter, since the particularities of the case should be taken into account.

 

Moreover, in the eighth recital of this judgment, it was determined that the expenses incurred by the shareholder for marketing concepts are deductible, in terms of section I of Article 31 of the Income Tax Law.

 

Therefore, the concept of challenge FOUR of the lawsuit is UNfounded.

 

By virtue of the fact that there are no concepts of challenge pending, it will be appropriate to declare the challenged resolution null and void, as well as that originally appealed under the terms described in Recital E of this ruling.

 

In view of the foregoing and based on Articles 49, 50, 51, Section IV and 52, Sections I and III of the Federal Law on Contentious-Administrative Procedure - in force before June 13, 2016, in accordance with the Second Transitional Provision of the Decree that amends, adds and repeals various provisions of the aforementioned law, this Section:

 

RESOLVES

 

I.- The plaintiff has PARTIALLY proved the facts of its action, consequently;

 

II.- The contested decision is declared null and void, as well as that originally appealed, detailed in Result 1 of this ruling, under the terms and for the purposes specified in Recital 8 of this decision.

 

III. The validity of the contested decision is recognized, as well as that of the appealed decision, with respect to the other concepts that were not declared null and void.

 

IV.- BE NOTIFIED.

 

This was resolved by the Second Section of the Superior Chamber of the Federal Court of Administrative Justice, in session on April 11, 2019, by a majority of three votes in favor of Magistrates Carlos Mena Adame, Juan Manuel Jiménez Illescas and Víctor Martín Orduña Muñoz, and one vote against by Magistrate Alfredo Salgado Loyo, who reserved his right to formulate an individual vote. Magistrate Magda Zulema Mosri Gutiérrez was absent.

 

The rapporteur in this case was Judge Víctor Martín Orduña Muñoz, whose paper was approved.

 

The present report was formulated on 15 April 2019 and based on the provisions of Articles 27, section III, and 48, section III, of the Organic Law of the Federal Court of Fiscal and Administrative Justice, - applicable in terms of the provisions of the sixth paragraph of the Fifth Transitory Article of the Decree issuing the General Law of the National Anti-Corruption System; the General Law on Administrative Responsibilities and the Organic Law of the Federal Court of Administrative Justice, published in the Official Gazette on 18 July 2016, are signed by the Presiding Judge Víctor Martín Orduña Muñoz and Judge Alfredo Salgado Loyo, President of the Second Section of the Superior Chamber, before Ms Andrea Guadalupe Aguirre Ornelas, Assistant Secretary of Agreements of the same Section, who authorises and attests.

 

SPEAKER

 

JUDGE VÍCTOR MARTÍN ORDUÑA MUÑOZ

 

PRESIDENT OF THE SECOND SECTION

 

MAGISTRATE ALFREDO SALGADO LOYO

 

ASSISTANT SECRETARY FOR AGREEMENTS

 

ANDREA GUADALUPE AGUIRRE ORNELAS

 

APGV

 

"In accordance with the provisions of Article 116 of the General Law on Transparency and Access to Public Information; 113, sections I and III of the Federal Law on Transparency and Access to Public Information, and Thirty-eighth, sections I and II, and Fortieth of the General Guidelines on the classification and declassification of information, as well as for the preparation of public versions, the name of the plaintiff, its legal representative, the plaintiff's domicile and data from third parties related to the plaintiff, information legally considered as confidential, were removed from this public version, as it updated what was indicated in these normative assumptions. ”