Current Context and Legislative Developments
The management of tax losses becomes especially relevant for the fiscal year 2024 closing, particularly considering the recent C that proposes to extend the carryforward period significantly under the A system. This legislative initiative intends to broaden the compensation period up to 10 years for losses generated in 2020, 2021, and 2022, representing a significant opportunity for companies’ tax planning.
Understanding Loss Carryforward Systems
System A: Short-Term Offset
This system allows 100% of losses to be offset against the net income of the following four fiscal years. The main advantage is the possibility of applying the entire loss without percentage limitations, although the limited term may be insufficient for companies with longer recovery cycles.
System B: Graded and Extended Offsetting
Under this system, companies can offset their losses without a time limit but restrict the application to 50% of the annual net income. This alternative is particularly interesting for companies that foresee a gradual recovery or have longer operating cycles.
Strategic Considerations for System Selection
The selection of the carryforward system should be based on a comprehensive analysis that considers:
- Financial projections: It is crucial to evaluate the future profit generation capacity to determine if the full losses can be realized within the four-year timeframe of System A.
- Effects on cash flow: System B, although it allows an indefinite carryforward, implies paying taxes on 50% of the annual net income, affecting the company’s cash flow.
- Time value of money: The deferred application of losses has a financial cost to be considered when evaluating both systems. For example, inflation can erode the real value of uncompensated tax losses. The Timeliness of Bill 9433/2024
The legislative proposal introduces significant additional flexibility:
- Extension of the term to 10 years for 2020, 2021, and 2022 losses.
- Option to switch to System B between years 2024-2026.
- The special benefit of post-pandemic recovery. The project aims to improve companies’ cash flow by reducing the tax burden through this mechanism.
Recommendations for 2024 Closing
- Perform a detailed analysis of the financial and tax projections.
- Evaluate the effects of Bill 9433/2024 on the tax strategy should it be officially published in El Peruano.
- Adequately document losses and their origin to support their carryforward.
Choosing the loss carryforward system is a strategic decision that requires a thorough analysis of multiple variables. At VAG Global, we have specialists to assist you in evaluating the best option for your company, considering both the current regulatory framework and the potential legislative amendments underway.