Recent Administrative Doctrine: IRS official letters from August 23rd to 27th

by | Sep 8, 2021

Fischer y Cía.’s Tax team prepared a summary with the official letters issued by the Internal Revenue Service, between August 23rd and 27th. Among the most relevant, we highlight: 

Official Letter N ° 2164 – Application Agreement to pay an insurance policy contracted with an insurance company domiciled in the United Kingdom. Change of criteria for permanent establishment: 

The taxpayer requests a ruling on the application of the agreement to avoid double taxation (“CEDT”) signed between Chile and the United Kingdom regarding the income generated for an insurance company domiciled in the United Kingdom for a policy that covers storage, transit and imports of machinery. 

Based on this consultation, the IRS refers to the special hypothesis of permanent establishment in the case of insurance companies, when it insures risks located in the other contracting country through a representative who is not an independent agent (article 5, paragraph 6 of OECD model of CEDT). 

After carrying out an analysis of the regulations of the Convention, the Service explicitly establishes that there is a change of criterion with respect to Official Letter No. 986 of 2007, in the sense that, in order to constitute a permanent establishment under paragraph 6 of Article 5 of the Convention, it is not a requirement that the activity must be carried out in the country with some kind of presence in the country. 

Official Letter No. 2162 – Credit for first category tax and for taxes borne abroad associated with dividends received in the event of tax loss: 

A Chilean parent company receives dividends from Chilean subsidiaries, which have associated IDPC credits and credits against final taxes for taxes borne abroad (“CIE”). The parent company determined a tax loss that absorbs the dividends received, for which it is entitled to the PPUA according to the percentage determined in Law 21,210. In view of the intention to remit the dividends received abroad, the taxpayer inquires about how to use and register the indicated credits. 

The IRS establishes that: 

a) CIE: In that part that is associated with the dividend absorbed by the loss, it is extinguished, since its purpose is to avoid international double taxation and in this case there is no taxation in Chile, so it is not incorporated into the SAC.

Regarding the credit associated with the part of the dividend not absorbed by the loss, it is incorporated separately into the SAC, as a credit without the obligation of restitution and without the right to return. 

 b) IDPC credit: Part not recovered as PPUA for exceeding the percentage limit of each year must be registered in SAC, distinguishing if it is a credit with or without the obligation of restitution and, in each case, if it is a credit with or without right of return.

The IDPC credit without the right to a refund associated with the dividend that is absorbed by the tax loss constitutes PPUA. This provisional payment may be imputed in the company’s annual income tax return, but its surplus is not entitled to a refund and cannot be reincorporated into the SAC registry, but it is extinguished. 

Official Letter No. 2163 – Determination of the effective rate of the credit associated with the registration of the taxable profits fund when withdrawals or dividends are received from other companies: 

Company under the regime of article 14, letter A), of the LIR, which does not have profits pending tax at December 31st, 2019, receives during 2020 dividends that in the source company were allocated in full to the accumulated profits in registry STUT, with its respective credit, whose effective rate was determined according to the rules established for it (TEF rate). The dividends received were distributed in the same business period (2020) to natural person shareholders. 

Faced with this situation, the taxpayer requests to confirm that, prior to the allocation of withdrawals or distributions for the year, the TEF must be determined at the end of the year, including the previously indicated distribution received, otherwise, when distributing the income received In the same year in which they were received, a TEF rate equal to 0 would have to be assigned to withdrawals. 

The IRS, taking into consideration the provisions of the third paragraph of No. 9 of the eleventh transitory article of Law No. 21,210 and the provisions of Circular No. 73 of 2020 in this regard, confirms that: “to calculate the TEF rate at the end of the year, The total balance of the IDPC credit (STC) and the total balance of taxable profits (STUT), in addition to the balances as of December 31st, 2019, must consider the withdrawals or dividends received during the year charged to STUT from other companies. “ 

Official Letter No. 2168 – Treatment of bad debts as expenses of article 31, fourth paragraph, No. 4, of the Income Tax Law: 

Taxpayer requests to confirm that there is no order of priority with respect to the three modalities that currently exist to recognize bad debts as necessary expenses, and that therefore a loan from 2018 that has not been punished, despite having initiated collection efforts. 

The IRS confirms that overdue and unpaid credits as of December 31st, 2019, which have not been written off in 2020, may be deducted in 2021 according to any of the hypotheses described in article 31, fourth paragraph, No. 4. By virtue of the foregoing, unpaid credits may be punished as uncollectible and deducted from the RLI for which more than 365 days have passed since they became enforceable, even though legal proceedings have been previously initiated to obtain compliance. 

Official Letter N ° 2243 – Society of professionals of second category that is subject to a change in the composition of its partners: 

The only two partners in a professional partnership that are taxed according to the second category sell their social rights in June. Since the income of the company is fully taxed with final taxes, which must be met by the respective partners in proportion to the personal services provided at the time they were received and not considered withdrawals of profits from a first-class company , the taxpayer asks if it is possible to determine a taxable base of the IGC until the date of the sale and another from June to December, having to pay the old partners for the first and the new ones for the second. 

The IRS indicates that there is no legal provision that allows separating the results of a professional society classified in the second category, whenever, during the year, there is a change in the composition of its partners. The tax result of the professional society is determined annually, at the end of the business year and, on that occasion, said result is assigned to the partners for taxation with final taxes, considering as partners only those who are in force at that date. 

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