The recurrent audits of royalty expenses for using trademarks owned by the shareholders of the same company have brought to the jurisdictional field different criteria that do not always coincide.
Different Criteria
Due to the audits and these proceedings, the SUNAT (Superintendencia Nacional de Aduanas y de Administración Tributaria – National Superintendence of Customs and Tax Administration) has been observing it as a potentially elusive transaction, and, therefore, the taxpayer must support the expense.
Given this, there are two criteria to prove causality:
- Support that the mark has potential revenue-producing value.
- Support that the trademark generates effective income.
The following states the positions outlined in Cassation No. 23232-2023-LIMA and RTF No. 05946-1-2019, reflecting these criteria, respectively.
Cassation No. 23232-2023-LIMA
Cassation No. 23232-2023-LIMA was published recently, analyzing the case of a taxpayer who used the trademark of one of its shareholders but took the royalties paid to the shareholder for using this trademark as a deductible expense when INDECOPI registered it.
Given this, the Administration considered that since the trademark was already being used, the taxpayer had already been enjoying the benefits of the trademark, and, therefore, its registration did not increase its income. Thus, it concluded by repaying the expenditure, considering the income-generating source unnecessary.
On the other hand, regarding the controversy, the Tax Court pronounced through RTF No. 02638-4-2021, considering that the registration of the trademark changed its legal situation, the mandatory payment of royalties to use it.
Likewise, the criteria determined by RTF No. 02422-5-2006 and 04971-1-2006 argued that the trademark should not necessarily generate an income, but it must be capable of producing it. Therefore, it concluded by revoking the objection determined by the Administration.
In the same line, both the first instance and the appellate instance agreed that the expense for the royalties paid to use the trademark was necessary and had an objective link with the taxpayer’s activity.
On the other hand, the Supreme Court expressly agreed with the Tax Court criterion, i.e., the expense will be deductible to the extent that it has a potential value to produce income. In addition, the subsequent registration and the consequent payment of royalties would be a business management decision that does not conflict with any legal prohibition. In this regard, the Collegiate Court concluded by declaring unfounded the appeal filed by the Administration and not to classify the hearing judgment.
Ruling No. 05946-1-2019
Tax Court in RTF No. 05496-1-2019 takes cognizance of the controversy raised by the royalty expense for using a trademark deducted by a taxpayer; thus, the referred trademark was also owned by one of the taxpayer’s shareholders.
Thus, the Administration proceeded to audit the expense, questioning its causality. Given this, the taxpayer provided several documents to support the expenditure. Conversely, the Administration repaired the expense given that the taxpayer did not prove that such a trademark had generated specific benefits nor increased its income.
The Tax Court, in the resolution of this controversy, agrees that it must demonstrate the taxpayer generates effective income through the use of the trademark to deduct the expense and adds that the trademark contracted must have a previous value. This last requirement, which agreed with the application of the DEMPE analysis, would allow us to identify the actual owner of the trademark, which in turn resolves the dilemma of whether the expense is necessary to produce and maintain the income. Given the above, the Court decided to confirm the objection imposed by the Administration.
Recommended Criteria
Thus, the taxpayer is not sure about how to support the expense. Conversely, according to Cassation No. 16618-2023-Lima, the rulings of the Supreme Court are binding for the SUNAT and the Tax Court.
Given this, the criterion taken by the Supreme Court in the analyzed cassation will prevail, i.e., the royalty expense for using a trademark must be supported by the fact that the trademark offers the company a potential value to produce income to the taxpayer.
Conversely, the reality reveals that both the SUNAT and the Tax Court do not fully follow the pronouncements of the Supreme Court, so the taxpayer’s management should opt for the position that best suits its reality and always prepare a defense file to support its position.
Recommendations
The analyzed expenses are under constant scrutiny by the Administration since the Tax Administration may consider that companies pay lower taxes through this. Therefore, the contracted brand should not be owned by one of the company’s shareholders.
If the company has already contracted the brand owned by the shareholder, although the criteria to be followed are still quite dispersed, the former should have specialized reports on the effects of the brand on the business, implement the DEMPE analysis, and have supporting documentation to prove that the expense is necessary to produce and maintain the source of income.
Given the above, companies must have adequate tax and legal advice, which allows them to foresee eventual audits and face possible tax procedures. At VAG GLOBAL, we have tax lawyers who will provide your business with the solutions you need.
Sources: El Peruano / Tribunal Fiscal / MEF