By Report No. 000010-2024-SUNAT/7T0000, published on February 29, 2024, the Tax Administration responds to the consultation regarding whether foreign source income obtained by a company domiciled in the country as interest on a loan granted to its non-domiciled related party along with the dividends received as a shareholder of the latter should be allocated to the taxable year in which these took place, according to paragraph d) of the second paragraph of Article 57 of the Income Tax Law.
Allocation Criteria
The Income Tax Law determines that first and third-category income are ruled by the accrual criterion, while second-, fourth-, and fifth-category income are ruled by the receipt criterion. These criteria determine when the economic effects of such income will be recorded, thus recognizing accrued income when the transaction occurs, regardless of its payment and received income when paid.
This difference in the allocation significantly affects the determination of income tax due to transactions differing from the payment, varying the tax liability from one year to another depending on the applicable allocation criterion.
Consultation Resolution
In this report, SUNAT (Superintendencia Nacional de Aduanas y de Administración Tributaria – National Customs and Tax Administration Superintendence) explains the regulation of paragraph c) of Article 57 of the Income Tax Law, particularly pointing out that the accrual criterion applies when the foreign source income “proceeds from the operation of a business or enterprise abroad.”
In this regard, this paragraph refers to business income; therefore, when the foreign source income obtained by a domiciled person derives from a business activity, the accrual criterion will be applied.
Based on this analysis, the allocation criterion applicable to foreign source income from interest and dividends, either accrued or received, will depend on whether it comes from the joint organization of the productive factors of capital and labor, i.e., whether it comes from active operations of a business abroad by the company domiciled in the country; otherwise, the received criterion will be applied.
Regulatory Considerations
Interest and dividends under the scope of Income Tax Law are considered passive income; conversely, in its analysis, the administration suggests that this income should come from a business activity.
Opinion
Although the administration drafted a definition of a business activity where the concurrence of capital and labor is imperatively verified, the resolution to the consultation was quite generic, concluding with “It depends.”
Due to gray areas in the qualification of foreign source income among related parties, the administration missed the opportunity to develop the assumptions further that a related party transaction could qualify as business income.
Source: SUNAT 13/03/24