Tax Newsletter January 2019

Santiago’s Court of Appeals
Ruling N° 2395, of 11.19.18
Ruling N° 2386, of 11.19.18
Ruling N° 2393, of 11.19.18
Ruling N° 2394, of 11.19.18
Ruling N° 2413, of 11.20.18
Tax Schemes Catalogue
Ruling N° 2543, of 12.04.18
Ruling N° 2587, of 12.07.18
Ruling N° 2545, of 12.04.18
Ruling N° 2546, of 12.04.18
Ruling N° 2805, of 12.28.18

NOVEMBER 2018

Santiago’s Court of Appeals

Ruling No. 44-2018 issued by Santiago’s Court of Appeals on November 13^th of 2018, has generated quite controversy, since it has been considered that it applies the principles of the general anti-avoidance rule to events that took place before such norm enters into force, by including the requirement of proving a “legitimate business reason” in the concept of “necessary expenses”.

In simple terms, this case is about a taxpayer that, according to the tax law of the time, deducted as an expense the goodwill generated as a result of a merger. The Court considered that, in order to solve the case, it was not necessary to apply the figure of “avoidance” – which was no enforceable when the events occurred – but that, being the goodwill an expense, the taxpayer is therefore required to prove its necessity and that this last concept includes the legitimate business reason.

The Court estimated that, given that the taxpayer was unable to irrefutably prove the legitimate business reason to execute the merger that lead to the goodwill, the expense should be considered rejected.

Como el contribuyente no fue capaz bajo el criterio de la Corte, de acreditar de manera irrefutable la legítima razón de negocios que lo llevó a realizar la fusión que originó el goodwill, la Corte estimó que este gasto debía ser rechazado.

VAT

Ruling N° 2395, of 11.19.18.  

Article 27 bis of the VAT Law allows that taxpayers that have, for six or more months, remainders of VAT credit as a result of investments in fixed assets, to request a reimbursement of such VAT credit.

It is precisely the fact that the investments have to be made in fixed assets that causes conflict with the IRS when requesting the reimbursement, given that in certain cases, such as in construction projects, the taxpayer could consider certain goods or services to be incorporated in the fixed asset, while the IRS could estimate that they are not. Classic examples are services to prepare the construction site, security services, prefeasibility studies, etc.

Ruling No. 2395 of 2018 is a great contribution in this matter, since it confirms a criterion not always applied by the IRS, by establishing that in lump sum construction contracts the value of the fixed asset is the price agreed on the contract, not having the IRS to analyze each of its elements to determine which are or not part of the fixed asset.

INCOME TAX

Ruling N° 2386, of 11.19.2018

Ruling No. 2386 of 2018 confirms the IRS’s criterion that is it not possible to divide a company that has a negative financial equity,  but it solves certain doubts regarding income tax registers in the case of the division of a company that has a positive financial equity but a negative tax equity.

In this context, the IRS concludes that income tax registers must remain the same in the divided company, except for the one that records the difference between normal and accelerated depreciation (DDAN), which follows the assets that generated such difference, and that such conclusion is not altered if the company that results from the division has a positive tax equity.

Ruling N° 2393, of 11.19.2018

Ruling No. 2393 of 2018 deals with the concept of up-front fee in the payment of services, specifically in the case of insurance companies that pay in advance for the right to access, for a 15-year period, to information supplied by the provider. The IRS concluded that such payment must be registered as a differed expense, which means that is must be deducted in equal amounts throughout the 15 years that the contract will last.

Ruling N° 2394, of 11.19.2018  

Ruling No. 2394 of 2018 ratifies a criterion that had already been published by the IRS, establishing that the payment made to acquire the contractual position in a lease-to-purchase contract is an intangible asset, which must be activated and can only be amortized when transferred or when it loses its quality of intangible asset, for example, by exercising the purchase option.

Ruling N° 2413, of 11.20.2018

Ruling No.2413 of 2018 resolves in quite a friendly way a common situation, by allowing, in the case of a project where companies of a same group are involved, that the expenses made in the evaluation of a project and that are to be deducted by the company that incurred in them, may then be transferred to the company of the group that will actually execute the project, through a service provided by the first company to the second one, service that precisely consists in the evaluation of the project.

DECEMBER 2018

Tax Schemes Catalogue

Already an end-of-year tradition, on December 2018, the IRS published the third version of the Tax Schemes Catalogue, incorporating 15 new schemes, including, for instance, reorganizations to avoid badwill, income tax or VAT in the sale of real estate, contributions made at cost value in family companies, disproportionate profit sharing, the use of current accounts to distribute profits, etc.

It is important to point out that the published schemes do not necessarily constitute actions that are deemed to be tax avoidance, but rather are structures that contain certain elements that the IRS will take into consideration in a potential audit, and that could be considered or not tax avoidance depending on the arguments given by the taxpayer in order to explain the use of such scheme.

It is also important to bear in mind that the published schemes are not only cases to which the general anti-avoidance rule could be applied to, but also constitute situations where specific anti-avoidance rules could result applicable, such as the IRS’ power to asses an operation or to reject an expense.

VAT

Ruling N° 2543, of 12.04.2018

When returning merchandise, a delivery order must be issued and the buyer is entitled to a reduction of the VAT debit for the returned goods, provided that no more than three months have gone by between the delivery and the return of the merchandise; if a longer period has elapsed, the reduction of the VAT debit must be claimed through a tax return request.

Ruling 2543 of 2018 confirms that, in the case of a taxpayer that issues an invoice with anticipation to the delivery of the goods, the period of 3 months must be computed from the delivery and not from the issuance of the invoice, even if the IRS’s system associates the credit notes with the corresponding invoices, considering their issuance date and not the delivery order that was used to deliver the goods.

Ruling N° 2587, of 12.07.2018

In the sale of real estate levied with VAT, it is possible to deduct the acquisition value of the land from the taxable base of such tax, but if less than three years have gone by between its purchase and the sale, the deduction is limited to double of the tax appraisal.

Ruling 2587 of 2018 clarifies that, in the sale of real estate subject to real estate co-ownership, the 3-year term must be computed unit by unit, being possible, for example, that in the same building, taxpayers will be able to deduct the whole value of the land for the sale of some apartments, while others might only be allowed to deduct up to double of the tax appraisal.

Note. Tax Modernization Project: The Project proposes to allow taxpayers to deduct from the taxable base of the VAT, in the sale of real estate, the commercial value of the land, instead of its readjusted acquisition cost, and to eliminate the limit of two tax appraisals.

INCOME TAX

Ruling N° 2545, of 12.04.2018

Through Ruling 2545 of 2018, the IRS is consulted if an individual that is dedicated in a habitual way to the purchase and sale of real estate, is able to make use of the benefits established in article 17 No. 8 b) of the Income Tax Law, which consist of an exemption of UF 8.000 (1 UF is approximately USD 41) and a Sole Tax of 10%.

The IRS concludes that, even if the taxpayer has not initiated activities before the IRS under the quality of an “Individual Entrepreneur”, given that the purchase and sale of real estate is an activity levied with the First Category Tax upon effective incomes, the taxpayer is therefore subject to the general tax regime, in a way that the incomes are deemed to belong to its equity as Individual Entrepreneur and not to its individual one, not being able to benefit from article 17 No. 8 b).

Note. Tax Modernization Project: The Project establishes that the benefits in the sale of real estate are only for individuals, as long as the properties have not been assigned to its Individual Company, which widens the application of the benefit in respect to the current legislation, under which such benefits are lost by the mere fact of being a First Category taxpayer upon effective income. However, given that through Ruling 2545 of 2018, the IRS states that the activity developed by the taxpayer is what determines its quality of Individual Entrepreneur, even if he has not initiated activities as such before the IRS, it is difficult to anticipate to which extent this criterion would result applicable if the Tax Modernization Project is approved.

Ruling N° 2546, of 12.04.2018

Through Ruling 2546 of 2018, the IRS determines that the purchase below par of bonds issued by foreign companies constitutes a document discount, and therefore, is to be considered an income under the concept of interests, which will have to be recorded when perceived, in the case of taxpayers that only have incomes under article 20 N° 2 of the Income Law (incomes of capital assets), or when accrued or perceived, whichever happens first, in the case of taxpayers that develop other activities levied with the First Category Tax.

What particularly draws attention to this Ruling is that is makes no reference to article 12 of the Income Tax Law, which establishes that foreign incomes, which would be the case of the discount of documents issued by foreign entities, have to recorded upon perception.

Note. Tax Modernization Project: The Project proposes to modify article 29 of the Income Tax Law, in order to establish that this type of income must always be taxed upon perception, except in the case of operations between related parties.

Ruling N° 2805, of 12.28.2018 

Ruling 2805 of 2018 modifies the criteria that the IRS had establish in Ruling 283 of 2013, which determined that, in the case of corporate spin-offs, credit for taxes paid abroad could only be used by the company that had indeed received the foreign income, not ever allowing the new company to use such credits.

The new criteria set forth in Ruling 2805 of 2018 determines that, in the case of a spin-off, credits for taxes paid abroad must be distributed between both companies according to the proportion of the tax capital assigned to each company in the division.