Guatemala changed its Income Tax law in 2012 with the approval of Decree 10-2012, which went into effect in fiscal year 2013. Few changes were made that can be described as “good”, but one of them is the regulation of interest.
This is why it is worth comparing the article that regulated the deductibility of interest in Decree 26-92, Income Tax Law, in force until 2012 and the new regulation of deductibility of interest contained in Decree 10-2012 in force since 2013. Let’s see:
ARTICLE 38: Taxable Income in the optional regime provided for in Article 72 of this law.
Taxpayers who opt for the regime established in article 72 of this law, shall determine their taxable income, deducting from their gross income, only the costs and expenses necessary to produce or conserve the source producing the taxable income, adding the non-deductible costs and expenses and subtracting their exempt income. The following are considered as costs and expenses necessary to produce or conserve the source producing the taxable income:
- Interest on credits and financial expenses directly related to such credits, obtained in banking, financial and other institutions legally authorized to operate as such in the country and which are subject to the surveillance and supervision of the Superintendency of Banks.
- Interest and financial expenses directly related to public offerings of securities registered in the Securities and Commodities Market Registry.
- Interest on credits and financial expenses directly related to such credits, obtained in legally constituted Savings and Credit Cooperatives,
- Interest on credits and financial expenses directly related to such credits, obtained from banking and financial institutions domiciled abroad, in all cases provided that such credits are destined for the production of taxable income. The deductible amount for interest may not exceed the amount corresponding to the interest rates applied by the Tax Administration to the obligations of taxpayers in default.
Interest paid or credited to individuals or legal entities not included in the preceding paragraph is not a deductible expense. Exceptions are interest paid by banking, financial and other institutions legally authorized to operate as such in the country and which are subject to the surveillance and supervision of the Superintendence of Banks and legally constituted Savings and Credit Cooperatives, to their account holders and investors, as well as interest paid to investors of securities registered in the Stock and Commodities Market, which do constitute deductible expenses, as well as interest paid to investors of securities registered in the Stock and Commodities Market, which are subject to the surveillance and supervision of the Superintendence of Banks.
Congressional Decree 26-92 established that interest on credits and financial expenses directly related to such credits were “deductible”:
- Obtained from banking (and other) institutions legally authorized to operate in the country, which are subject to the surveillance and supervision of the Superintendency of Banks.
- Those linked to public offerings of securities registered in the Securities and Commodities Market Registry.
- Those obtained in legally constituted Savings and Credit Cooperatives.
- Those obtained from banking and financial institutions domiciled abroad, in all cases provided that such credits are destined for the production of taxable income.
And in all cases provided that such credits are destined to produce taxable income. This is why the interest must be for credits that are destined to the production of taxable income and obtained from these 4 sources described above. If “THE CREDIT” is not linked to the production of taxable income, it is not deductible. This means that the loan money was used to produce income.
What has changed?
Article 21 of Decree 10-2012 reads as follows: “ARTICLE 21. Deductible costs and expenses. The following are considered deductible costs and expenses, provided they are useful, necessary, pertinent, or indispensable to produce or conserve the source producing taxable income:
Interest, price differentials, financing charges or yields paid derived from:
– Financial instruments.
– The opening of credit, documentary credit or money loans.
– The issuance of debt securities.
– Repurchase agreements.
– Financial leasing; factoring, securitization of assets or any type of credit or financing operations. All interest to be deductible must originate from operations that generate taxable income to the taxpayer and its deduction is established in accordance with the article referring to the limitation of interest deduction established in this book.”
The variation is in the origin of the money to pay the interest. Here it is no longer required that the credit money has been used to produce income, but that the money to pay the interest comes from operations that generate taxable income. The use of the credit money is no longer a requirement. See that there is no rule that indicates anything about the use of the credit.
The point of this, really, is to avoid the use of “back to back” and other similar types of financing, with the purpose of placing company cash flows in interest bearing accounts and requesting a loan for the same amount, in order to use an interest rate as an expense, when only a portion of the interest generated in the account and charged by the loan is really interest borne by the business as such.
I think the change is intelligent, in fact, there is already a sentence that confirms the application of the same, although sadly SAT has not changed its adjustments and continues to make them as if the current article was article 38 of decree 26-92.