As of the amendments to the income tax law of 2020, there is an important change for those taxpayers or group of companies who deduct interest.
According to the authorities, one of the reasons for limiting this deduction is a consequence of the guidelines of Action 4 of the BEPS project of the OECD, which mentions that it has been demonstrated that a high level of debt is concentrated in countries with high tax rates, and that inter-group loans are generated to accrue interest in excess of expenses, among other reasons.
A mechanism is contemplated to limit the deduction of accrued interest expense in excess of the amount indicated in Article 28, Section XXXII. The limitation of this interest will apply to;
- Legal entities that are part of a national or multinational group
- Legal entities that are not part of a national or multinational group
The mechanism provided for in the law is to compare the total interest expense against the cumulative interest income plus the amount of $20’000,000 pesos, if the interest expense is greater than the cumulative interest and the twenty million pesos, this result will be called net interest for the fiscal year. It is clarified that exchange gains and losses will not be considered as interest.
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NET INTEREST DETERMINATION FOR THE FISCAL YEAR |
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| Accrued interest expense | 32,000,000 | |
| (Less) | Cumulative interest (income) | 1,000,000 |
| (Lesss) | Accrued Interest Limit | 20,000,000 |
| (Equals) | Net Interest for the Fiscal Year | 11,000,000 |
If the net interest for the fiscal year is equal to or less than zero pesos, then all interest expense will be deductible.
The same tax provision states that if the legal entity is part of a group as mentioned above, the $20’000,000 pesos will be distributed among the members of the group or related parties, in the proportion of the cumulative income of the previous fiscal year by the taxpayers to which this section applies.
The result mentioned in the previous paragraph must be compared against a second calculation provided for in the law, where deductible interest, depreciation or amortization of fifixed assets, as well as expenditures made in pre-operating periods, are added to the profit or loss for the fiscal year. The result obtained will be Adjusted Tax Profit.
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DETERMINATION OF ADJUSTED TAXABLE INCOME |
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| Taxable income of the fiscal year | 2,000,000 | |
| (Plus) | Accrued interest expense (expenses) | 32,000,000 |
| (Plus) | Depreciation, amortization, other | 500,000 |
| (Equals) | Adjusted Taxable Income | 34,500,000 |
The adjusted taxable income will be multiplied by 30% to determine the amount of the Deductible Interest Limit.
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DEDUCTIBLE INTEREST LIMIT |
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| Adjusted Taxable Income | 34,500,000 | |
| (Multiplied by) | 30% | 30.00% |
| (Equals) | Deductible Interest Limit | 10,350,000 |
Finally, the net interest for the year should be compared against the deductible interest limit, if an excess of net interest for the year is incurred, the exceeding amount will be nondeductible.
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NON- DEDUCTIBLE INTEREST AMOUNT |
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| Net Interest for the Fiscal Year | 11,000,000 | |
| (Less) | Deductible Interest Limit | 10,350,000 |
| (Equals) | Non-Deductible Interest | 650,000 |
This non-deductible amount could be deducted in the following 10 years through the statutory mechanism.
If the result is zero or negative, then the full interest expense will be deductible.
It will be important for taxpayers who deduct interest to carry out the analysis, with special attention to those who are part of a group, for which it will be necessary to know the equity of the partners and/or shareholders in other companies.
The drafting of this calculation does not mean that the determination of interest earned with related parties abroad (thin capitalization) should no longer be made, in fact, it is established
in the law that the determination of non-deductible interest explained in this bulletin will only be applicable when this non-deductible amount is higher than the amount determined in
accordance with the calculation of thin capitalization.
In view of this change, at Nuñez Rosas y Asociados, we offer our services to review the implications that this tax provision may imply for all taxpayers in the preparation of their annual tax returns. We would be pleased to review these issues with you.
