By: David Erales
Compliance with the banking system in tax matters is regulated in articles 20 and 21 of the Law called Legal Provisions for the Strengthening of the Tax Administration, Decree 20-2006 of the Congress of the Republic, which has been considered by the SAT and the courts of justice as a necessary requirement to recognize the deductibility of costs and expenses for the determination of the Income Tax, as well as for the recognition and/or refund of the tax credit of the Value Added Tax.
The recitals of said legal body establish that these provisions were created with the purpose of reducing tax evasion and avoidance, through the traceability of the operation and payment and, in addition, to be able in this way to support the fight against money laundering. In other words, what should matter to the tax authorities at the time of verifying a payment, is that it is on a real commercial transaction that can be traced, it should not be considered as a formal requirement for the recognition of costs, expenses, tax credit or refund. Therefore, in an eventual tax dispute, the evidence should be aimed at documenting the substance (materiality) of the payment and not its form.
To this effect, it must be taken into consideration that, the banking system in tax matters has become one of the tools most used by the SAT to formulate adjustments, since, instead of verifying the materiality of the operation and the effectiveness of the payment, what it does is to look for any formal deficiency in the means of payment to disregard the same, and from this account, to disregard the cost, expense, credit or its refund.
Article 20 of the referred law regulates, in essence, that the payments made by taxpayers to support costs and deductible expenses or constitute tax credits and other expenses with tax effects, as from Q30,000.00, must be made by any means provided by the banks of the system, different from cash, in which the person to whom the goods are sold or the services object of the payment are rendered, are individualized. In this regard, the SAT and the Courts have interpreted this rule in the sense that the means of payment must be issued directly by the taxpayer in favor of the supplier, stating such situation in the support of the same. By way of example: if I pay for a service by check, the check must be from my personal account and must be issued and cashed by the person who rendered the service, who must be the same person who billed me for the service paid.
Notwithstanding how simple compliance seems to be, in practice and, above all, in the day to day business, there are cases in which the payment is not made in the limited form as interpreted by the courts of justice, even, this caused the Superintendence of Tax Administration to issue the institutional criterion No. 5-2021, in which, in a certain way, the possibility of flexibility in terms of the referred interpretation is expressed, giving priority to the substance over the form of the operation, to establish whether or not the bankization in tax matters is complied with or not.
The aforementioned institutional criterion establishes that there are cases in which taxpayers pay their suppliers, however, they do not do so directly, since it is done under the protection of commercial contracts or legal figures, in which the means provided by the banking system are used. To this effect it is expressly stated in said institutional criterion: “(…) it is not possible to overlook the existence of other legal ways to make the payment of an obligation and that also allow its verification by the Tax Administration, being that the spirit of the rule”.
At present there are a great number of adjustments formulated and confirmed by the Tax Administration, in which a cost or expense of the ISR, tax credit or VAT refund is unknown, under the estimation that it is not possible to prove by the taxpayers the payment of the same, in which the bankability in tax matters is complied with, among them the most common are:
- That the payment is made by a third party.
- That the payment is made through a trust.
- That the payment is made through a current account.
- The payment is not debited from the taxpayer’s bank account.
In the first cases the causes of the adjustment are varied, but they have a common denominator, that the payment was not made directly by the taxpayer, but by another person or by the trust, in many cases ignoring civil and commercial law institutions to deny the validity of such payments. In the third case, the argument is that the current account contract is not recorded in a public deed, when in accordance with the Code of Commerce (articles 734-743) this contract does not require such formality to have legal effects, however, the SAT in interpretation of the last paragraph of article 20 already mentioned, considers that for tax purposes it must be recorded in a public deed.
From the institutional criteria it is clear that SAT recognizes that there are cases in which, although the payment was not made directly by the taxpayer, it is possible to trace the payment. However, SAT continues with the formulation and confirmation of these adjustments, so the question arises: How to document the payment and thus generate the necessary proof to avoid or defend myself from an adjustment?
It is important to take into consideration that the documentation obtained to support the payment must remain as a backup in the taxpayer’s accounting (Art. 381 of the Commercial Code), for each payment made, so that, with this, the formulation of adjustments is avoided or, in the event that these are made against the taxpayer, there is a real factual evidentiary platform on which it can be defended both at the administrative level before the SAT, as well as before the courts of justice, and thus improve the chances of success in such dispute, avoiding having to pay tax, fine and interest unnecessarily, as well as in those cases, obtaining the refund of the VAT tax credit.
The institutional criterion obliges the SAT, when reviewing and auditing taxpayers’ compliance with their obligations, specifically, when analyzing a payment, to consider the substance over the form, that is, to verify the materiality of the payment instead of the form in which it was made, since, if the traceability of the payment can be established, the payment should be recognized. The problem with the criterion is that it is not expressly clear as to how the officers and employees of the SAT should carry out this interpretation, and therefore, by leaving to the discretion of the tax auditor the qualification of such operation, there is a lack of legal certainty and security as to how it will be interpreted.
On this account and taking into consideration what is indicated in articles 20 and 21 of Decree 20-2006 and the referred institutional criterion, it is advisable to document such transactions, leaving a record in the accounting of the payments and thus having the documentation of the means of payment, if they are required by the SAT, it is recommended to keep in the accounting:
1. Documentation evidencing that the payment was received by the supplier.
In this case, it can be checks, transfers, credit card vouchers, etc. If, for example, the payment is made by a third party or a trust, indicate on the means of payment (in which the funds are delivered to the third party) what the funds are for, i.e. “for payment of invoice number *** in favor of supplier ***”. Also request the third party or the trust to perform the same exercise at the time of payment to the supplier.
With the above, the payment is traceable, since it allows to verify the exit of the money from the taxpayer’s accounts to the accounts of the third party, and subsequently from the accounts of the third party in favor of the supplier. Note that the law does not require that it must necessarily be in that order, since the third party may pay and then be reimbursed by the taxpayer. Everything will depend on the agreement between the taxpayer and the third party making the payment.
Here you can obtain payment receipts, bank statements, tax withholdings, letters or e-mails from the supplier acknowledging that he received the payment, as well as letters or e-mails from the third party in which he informs the taxpayer of the transaction, indicating how, when and for what amounts he made the payments. All the above with the sole purpose of documenting the payment made.
2. The contracts (when they exist) that gave rise to the service rendered or good delivered.
In many cases, payments are derived from the rendering of services or delivery of goods on a periodic basis, in which it is usual for both the client and the supplier to sign a contract to document their relationship, in which they even detail the time, form and place of payment.
In these cases, as a starting point, it is advisable to verify the payment clause, in order to allow payment to be made in certain cases by a third party, including a trust. Likewise, it is recommended not to use clauses that tend to restrict the form and moment of payment, since this may lead to the SAT, when reviewing the contract, to analyze the substance of the transaction, to consider that the payment is not made in accordance with the contract and, therefore, not recognize the payment, since, in many cases, even though it is not its legal function since it is not empowered to verify the compliance of contracts or obligations between individuals, the SAT does not recognize the payments for such reasons.
Keeping contracts within reach allows the SAT to verify the substance of the payment, by being able to establish through them the commercial relationship that gave rise to it. It is recommended to complement the above, with mails or letters that are crossed during the term of the contract, which allow establishing that the provision of the service or delivery of goods is not only a formal document, but that there is materiality in the operation, which suggests that they are not only costs, expenses or credits that are intended to reduce the payment of taxes by the taxpayer and thus avoid or evade their tax obligations, but on the contrary, that they are real (have materiality) and are duly supported by documents.
3. The bank means of payment, which allow the traceability of the payment.
It is usual that during the verification, the Tax Administration requests the means of payment with which a certain good or service received was paid. If the payment is greater than Q30,000.00 and was made through one of the means provided by the banks in the system, it is recommended that (if possible) it be indicated to whom it was issued and what is being paid, for example: “payment of invoice 123 from *** supplier”. This allows the SAT to establish that the payment is made for that reason. If several invoices are included in the payment, it is worth indicating this and, at the time of verification by the SAT, to have an integration of the same at hand. All these means of payment, checks, electronic debit notes, etc., must always remain as backup documents in the client’s accounting, without exception.
Another important issue that is recommended in case of tax verification is to prove to the SAT the debit of the amounts paid, that is to say, that there was really an outflow from the taxpayer’s bank account to the supplier’s account. For this reason, it is important to have the bank statements in which it is evidenced that the payment made was indeed debited from their accounts, and with this, it is possible to show that the money left their bank account, so it must be presumed that the payment was made.
4. Letters or proof issued by the supplier that the payment was received.
The SAT in many cases has questioned the payment to the supplier, in its opinion, because the client’s accounts only show the debits for the delivery of the funds to the supplier, but it is not possible to establish that the supplier paid the supplier or how he did it.
From this account, it is advisable (to the extent possible) to request the supplier to periodically indicate the payments that have been made, on which invoices and that the supplier has received them, and also to state that the invoices for services rendered or goods sold have been duly paid.
5. Letter or proof of the third party that issued the payment.
In the same sense as in the previous case, it is advisable to request the third party that makes the payment to periodically indicate the payments that have been made in the name and on behalf of the client, in order to be able to link the payments made to the supplier with the invoices for the services rendered or goods sold, in order to leave material evidence that these have been duly paid.
6. Order to the third party or trust to make the payment to the supplier.
Likewise, in cases where the payment is made by a third party or a trust, have the corresponding orders in which the payment is requested, in which the invoices to which the payment refers should be individualized in as much detail as possible, so that there is a record of such instruction. It is also advisable to ask the third party or the trust for an acknowledgement of receipt of such instruction, as well as a record when the payment has been made.
By following the above recommendations, one should (to a certain extent) comply first, with the provisions of the law regarding banking in tax matters, and second, with the institutional criterion issued by the SAT, which would imply that the SAT official, upon performing the corresponding verification, would be “obliged”[i] to recognize such payment and, consequently, should refrain from formulating the adjustment of such payment, This would imply that the SAT official, upon performing the corresponding verification, would be “obliged”[i] to recognize such payment and, consequently, must refrain from formulating the adjustment for such reason or, in the event that it is formulated and confirmed, it allows the taxpayer to have the material evidence of such payment to prove before the courts of justice, which allows them, through the control of legality, to verify the materiality and substance of the payment and, therefore, to leave without effect the adjustments formulated by the SAT.
[i] SAT’s institutional criteria apply and are binding exclusively to SAT’s officers and employees, not to third parties outside said institution.