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Bad debts and their discretion.
[/vc_column_text][us_separator][vc_column_text] Article 11, paragraph g) of the Income Tax Law, indicates the possibility for taxpayers to deduct from gross income, the "accounts that are considered uncollectible", for these purposes, the related regulations express two specific requirements: 1) That the sales of goods or services on credit made have beenduring the fiscal period in question, with which a provision has been established to amortize uncollectible or doubtful accounts. 2) The debt will be presumed uncollectible when it is proven that more than twenty-four (24) months have passed since its due date. Therefore it is observed that there is a legal vacuum as to whether the sales of goods or services must be depending on the activity of the taxpayer, by virtue of the fact that the numeral was drafted in a general manner, in addition to this, the concept of "uncollectibility of the debt" remains in a broad sense and this harms the taxpayer, by virtue of that the amount that was charged in an invoice must be recorded as income, even when the amount has not been effectively paid, this as long as the accrual criterion governs, instead of the received, so that although the invoice has not been paid (what is known as received), as long as it has been issued, the invoiced amount must be recognized as income (what is known as accrued), for Income Tax purposes. Therefore, "uncollectible accounts" are a very difficult deductible to prove, given the discretion with which the Tax Administration operates. Although the law does not specify it, the tax authority requires that for the deductibility of "uncollectible debt," these must derive from the taxpayer's usual business. Furthermore, the Tax Authority requires that collection efforts have been made to recover them (administrative collection). In other words, a coercive collection process is required for "uncollectible accounts" to be considered as such, and even if this procedure were carried out, the tax authority could not consider them as such. Consequently, the legislator's discretion becomes very broad in determining which "legal efforts" are relevant to consider an account as a "uncollectible account," as well as whether the requirement of linking the company's purpose to sales must be linked. Therefore, in a strict sense of the law, we could consider that the principle of legality established in Article 11 of the Tax Code has been violated. Similarly, not being certain of what is truly considered "legal management" is a serious detriment to the taxpayer, since we are unsure of what evidence we can consider to support this deductible expense under the law. For comprehensive advice on the subject, please contact us at the following email address: nfugon@lexincorp.com. *Legal Notice: The general information contained in this document is provided for informational purposes only and should not be construed as legal advice on any of the topics discussed. You should not act or refrain from acting based on any content included in this document without seeking legal or professional advice. All liability for any actions you take or refrain from taking based on any content in this communication is disclaimed. [/vc_column_text][us_separator][vc_column_text]Written by: Lic. Nicole Fugón [/vc_column_text][/vc_column][/vc_row]
