Chile Tax Update: Changes to Expenses
Written by Karem Duffoo, Senior Tax and Corporate Lawyer.
New regulation of “bad or uncollectible debts” to be accepted as necessary expenses under the new definition introduced by the tax reform in Law Nº21.210.
With the tax reform that was passed in March of this year, the regulation about necessary expenses to produce income has been modified with respect to certain expenses that will be accepted, in particular, being able to write off “bad or uncollectible debts¨.
The concept of tax deductible expense before the reform, established the concept of deductible expenses as those “…that have not been reduced by virtue of article 30, paid or owed, during the corresponding business year, provided that they are duly accredited or justified before the Tax Office (Chilean tax office, hereinafter SII)”.
In addition, the SII had indicated that an expense had to meet certain requirements in order to be considered necessary. The SII have consistently shown that expense deductions will only be allowed where the following requirements are met:
- Expenses must be necessary to produce the income;
- They must be directly related to the business activity of the company;
- They cannot be already deduced as forming part of the costs of the goods or services required to produce the income;
- The taxpayer must have effectively incurred the expense during the relevant period (paid or due), and;
- The taxpayer must be able to prove the authenticity and provide evidence to backup the incurred expense.
After the tax reform came into force, the concept of necessary expenses has been redefined to the following: “expenses that have the “ability” to generate income, in the same or future commercial years and are associated with the interest, development or maintenance of the business…”.
What does the change mean?
If we compare the two definitions, we can conclude that the new concept of expenses is more flexible than the previous one, since it speaks of having the “ability” to generate income even when in fact it does not generate it immediately. The result is that we can claim (as necessary) more expenses than we could before because the definition is broader. We will be providing examples of these in future blogs.
Bad or Uncollectible Debts
In addition to a broader definition, one of the expenses which was modified in particular was the rule about writing off bad debts as an expense (Article 31 N°4 Income Tax Lax o ITL.). Although the first part of the article was not altered, a new subsection was added, which establishes that when a company has a bad debt that has went unpaid for more than 365 days (from its maturity) with an unrelated party, it can deduct as an expense or a percentage thereof, defined by the SII.
With these new changes, we can say that this modification stands as a benefit for companies because it considers a new particular case of tax -deductible expenses while also dealing with an important issue of bad or uncollectible debts.
The changes introduced by the tax reform which define what expenses can be accepted as tax deductible are extremely helpful to companies as it will consider a broader range of expenses. Previously, companies were not able to write off many expenses because they fell under the old definition. Chilean companies will need to review their accounting records, in order to analyze the possibility of using these new legal modifications as a benefit in their own tax situation.
The modifications incorporated by this law to the ITL are effective as of January 1st, 2020.
Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Mexico, Peru, Ecuador, Brazil, and Argentina. Over the last 19 years, our team of English speaking Lawyers and Attorneys have been supporting foreign companies with their growth in Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.
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