Mexican Supreme Court rules on relief of tax losses derived from alienation of shares

The MSCJ ruled that the restriction to deduct tax losses derived from the sale of shares only against the profit obtained from the same transaction does not constitute a violation to the tax proportionality principle under the Mexican Constitution.

The ruling sets a precedent for all federal tax courts involved in appeals filed against this tax provision, having been approved by the majority of the MSCJ’s ministers.

Background

In 2002, Article 32, Section XVII, of the MITL stated that taxpayers where authorised to deduct the tax losses derived from the sale of shares only against the profits obtained from the same transaction.

As a result of being unable to characterise such deduction as an ordinary expense during the fiscal year, taxpayers filed several appeals of constitutional rights against Article 32, XVII, of the MITL.

Such appeals were resolved by the First Courtroom of MSCJ; the judges considered that the provision contravened the proportionality principle in the Mexican Constitution, considering that the losses should be deemed as an ordinary expense for taxpayers.

Consequently, losses from the alienation of shares could not be characterised as a deductible item only against the corresponding profits from the same transactions.

In 2008, Article 32, Section XVII, of the MITL was amended, among other aspects, by extending the period of time in which taxpayers were authorised to carry forward the losses derived from the sale of shares to deduct them against profits obtained from the same transaction.

This extension was from five to 10 years. However, the amended tax provision failed to characterise such losses as an ordinary expense despite the MSCJ’s resolution in 2004 that declared Article 32, Section XVII, of the MITL unconstitutional.

Taking into account the MSCJ’s 2004 resolution regarding the unconstitutionality of Article 32, Section XVII, of the MITL, taxpayers filed several appeals of constitutional rights expecting to obtain a favourable resolution, as was the case with appeals filed in 2002.

MSCJ’s 2013 ruling

In April 2013, despite the MSCJ’s ruling in 2004 through which Article 32, Section XVII, of the MITL was declared unconstitutional, the MSCJ resolved that such provision does not contravene the proportionality principle established in the Mexican Constitution by failing to allow taxpayers to deduct the losses derived from the sale of shares as an ordinary expense.

In general terms, the MSCJ decision states that these losses are not deemed as ordinary expenses but as deductible items within the same tax regime – that applicable to the alienation of shares. Therefore, the tax losses from the sale of shares should only be allowed as a tax relief against the revenue obtained from the same transaction.

The MSCJ’s ruling also said:

· The alienation of shares is an extraordinary transaction since it is not ordinarily executed by the taxpayers;

· The time in which the revenue is accrued and the losses are applied is highly variable;

· The calculation of the cost of shares takes into account several factors different from those which are taken into account at the time of the alienation; and

· It prevents the tax base from being eroded.

This decision is definitive and unchallengeable and will therefore have an important impact on sales of shares carried out in 2008 and subsequent fiscal years.

Consequently, we highly recommend analysing the tax treatment that was applied to sales of shares to avoid any tax contingencies within the corresponding fiscal year.

By principal Tax Disputes correspondent for Mexico, Karina Perez (karina.perez.delgadillo@mx.pwc.com) of PwC.

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