There is a growing interest in suspending the application of the limit on the deductibility of debt interest due to the negative impact that tax operators foresee in the calculation of Income Tax. It would be of great value to accompany these judgments with numerical information, in harmony with what the legislator stated when enacting the rule (While financing increases, Income Tax falls).
We disagree with the position of suspending the rule; if it is perceived as harmful, its suspension would only delay the agony. Wouldn’t it sound more coherent to advocate for its repeal? Conversely, we propose reforming it. To this end, we formulate ten (10) measures that would make the rule reasonable relative to the reality of companies:
- Clarification of the EBITDA concept: Align the tax EBITDA more closely with the financial EBITDA used by banks.
- Exclusion of strategic sectors: Consider special treatments for sectors with high capital intensity.
- Carry Forward improvement: Introduce a “unused interest capacity” concept to balance the tax burden when businesses have volatile income.
- De-minimis threshold: Establish a minimum amount of interest that is always deductible regardless of EBITDA.
- Clear definition of debt: Eliminate uncertainty between debt and equity to prevent the recharacterization of financing as capital contributions. … (and other technical measures focused on fiscal equity).
ADDENDUM:
Impact on General Sales Tax (VAT/IGV): Regarding IGV, we believe it is essential for every tax operator to establish the position that interest classified as business expenses (i.e., causal) does not trigger the loss of the IGV tax credit, even if it exceeds the Income Tax Law (LIR) limit for deductibility. We dissent from the literal reading of the Tax Court in RTF No. 4903-9-2019, as the reference to IR rules should be understood as merely conceptual regarding causality.
Originally published on 10.07.2020 by Thomson Reuters Global Resources
