Suspended interest according to regulatory financial rules
Peruvian financial entities (banks) are required to prepare regulatory financial statements that comply with supervisory authority regulations (Banking Regulations). These rules usually require banks not to recognise uncollected accrued interest on a loan as income and to reverse any uncollected interest previously recognised as income if certain conditions are met. The most common requirement is that the principal or interest payment is default. Banks characterise any payment received on that non-accrual loan receivable as a recovery of principal, accrued interest and expenses. According to Banking Regulations, such recovery is acknowledged as income. Banks determine taxable income in their regulatory financial statements by using the accrual method of accounting states and file their income tax returns in the same way.
Since January 1 2008, the Peruvian Tax Law (PTL) has had special regulations for suspended interest, which are determined according to Banking Regulations. According to Legislative Decree N° 979, suspended interest is not considered as accrued for tax purposes and should be recognised as income when recovered.
The applicable laws do not cast much light on the aforementioned situation. Banks argue that, for tax purposes, they should apply the accrual criteria and the method of income recognition stated by the Banking Regulations. However, the tax authority considers that suspended interest is accrued when accounting of provision has to be made. This is the most important tax litigation issue for banks at the moment.
Although it seems to be only a temporary difference, in our case we have to consider that taxpayers must pay monthly income tax advance payments during the calendar year and, therefore, banks should consider it all as accrual interest. So, if their income tax returns are filed with a lower amount of advance payments, then the tax authority requires interests to be calculated from the omission date until the payment date. Also, the PTL prescribes a penalty for filing tax returns with false information, which is 50% of the omitted advance payment along with the corresponding interest.
We have information pending to solve 2011 income tax cases, so the contingency is huge. The tax authority and the tax court considered that suspended interests are accruals for tax purposes, but the judicial branch as a last resort has stated that taxation applies when suspended interests are recovered.
Applicable income tax rate for interest paid to non-residents
The PTL states that interests paid by banks for using their 'lines of credit' abroad are subject to a 4.99% tax rate and banks are described as withholding agents for that income tax. However, financial contracts state that the borrower always pays every applicable tax in their country. Therefore, the PTL considered the tax assumed by banks as deductible.
The PTL does not have a definition for 'line of credit', so the tax authority has interpreted for their audits that, to apply this tax rate, banks should have signed a line of credit contract agreement with non-resident lenders. The tax authority has determined that if banks do not have that kind of contract then a 30% tax rate must be applied.
The Peruvian tax authority does not seem to understand that every bank or equivalent entity has a line of credit with their counterparties (the maximum amount that you can borrow). Also the PTL does not mention any line of credit 'contract' or 'agreement', so the term 'line of credit' is defined as a financial term. On the other hand, the accepted practice for international loans is not to submit this kind of agreement because it implies a guarantee of loan for the borrower (if the borrower pays an additional fee to the lender). Also, the line of credit could change at any moment according to several circumstances, so the lender would not feel motivated to sign an agreement with a maximum amount to be borrowed.
|Ramón Esquives Espinoza is head of tax processes in the management and tax advisory unit of BBVA's Finance area. He is a qualified lawyer from the Pontificia Universidad Católica del Perú. He is a member of the Peruvian Institute of Tax Law (IPDT). He has eight years' experience as counselor on tax matters in the Peruvian financial sector, which he has accumulated while working at both HSBC and BBVA Bank Perú. He has experience advising corporate and institutional companies on tax solutions for their business, as well as on capital markets and financial transactions. He has also served as counsel on tax procedures with the National Tax Administration, the Municipal Tax Administration and the Judiciary.|