Legal Alert/ Circular Nº 53 – 2020 published by Internal Revenue Service

Monday August 17th, 2020

On Monday, August 10th, the Internal Revenue Service published Circular Nº 53, which approach instructions regarding the application of the amendments introduced by Law Nº 21.210 (“Tax Reform”) on expenses that may be deducted for the determination of taxable net income affecting first category tax.

1. A new general requirement for the deduction of expenses. Introduction of the new concept of “necessary expenditure” and the element “capability to produce income” (general rule).

2. New understanding of the concept of assets that are not intended for the conduct of the business or enterprise.

3. Additional rules concerning presumed expenses in Article 21 of the Income Tax Act.

• Expenses related to the company’s fixed assets used for the personal purposes of the owners and their relatives.

• Expenses related to the purchase and lease of automobiles and similar items that do not correspond to the usual line of business.

• Expenses in supermarkets and commerce when they are not necessary for the development of the habitual line of business.

4. Interest expenses. It complies with the new General Rule.

5. Business losses, including those from property crimes.

• Bear in mind the incorporation of rejected expenses affected to the sole tax of Article 21 of the Income Tax Law for the voluntary destruction of raw materials, inputs, or processed or finished goods that are susceptible to be delivered free of charge to non-profit institutions.

• Remember that with the Tax Reform, the possibility of charging withdrawals or dividends from other companies to the losses of the receiving company is gradually eliminated.

• For losses carried forward corresponding to fiscal years before January 1st, 2020, the Circular indicates that the loss carried forward must be examined and credited considering the legal requirements and instructions in force during the fiscal year corresponding to the deduction as an expense of such loss carried forward since the deduction of the loss carried forward as an expense in the respective fiscal year corresponds to the fact whose occurrence is referred to by the law.

6.Uncollectible receivables. Among other things, an important novelty is the introduction of an objective rule that allows for the write-off, without any further formality, of those credits that have not been entered into between related parties and that are unpaid for more than 365 days from their due date.

7. Depreciation. Although the general rules remain unchanged, the Circular deals with the implementation of special depreciation for taxpayers with an annual average income equal to or less than 100,000 UF.

8. Wages, salaries, and remunerations.

• The rule is ordered and some substantive changes are introduced, such as the elimination of the limit that previously existed concerning the owners of sole proprietorships, EIRL and partnerships in general, in that remunerations could only be deducted up to the amount that would have been subject to compulsory social security contributions.

• Severance payments at the end of the employment relationship are regulated in the case of business reorganizations that contemplate the transfer of workers

9. Donations in educational matters are required

10. New special expenditure is introduced on account of environmental requirements, measures, or conditions imposed for the implementation of a project or activity and other cases of accepted expenditure incurred by the community.

11. Disbursements or discounts ordered by auditing entities; the replacement or return of products or bonuses or refunds of amounts paid to clients or users; and disbursements between unrelated parties in compliance with a transaction or penalty clause are introduced as a new special expense.

12. New rules are established for the application of proportionality concerning expenses related to income that is exempt or not taxed with first category tax, granting two alternatives among which the taxpayer may choose.

13. New rules are established about the amendments made to Article 21 of the Income Tax Law. In this respect, it is worth noting the elimination of the application of the single tax for the cases of acquisition of own shares when they are eliminated due to the expiration of the terms required for their disposal.

For more information contact Juan Andrés Larrondo