Mining Corp had deducted interest payments on an intra-group syndicated loan of $200.000.000 of which it stated an amount of $94,500,000.00, had been used, that is, a part of the syndicate $200,000,000.00, which was the subject of the loan, had been used to prepay the same loan for $65,000,000.00 and $29,500,000.00.
Following an audit the tax authorities issued an assessment where, among other issued, deductions of interest payment on the loan had been adjusted. According to the tax authorities the accounting record of the credit or income from financing or the Cash Flow Statement was not sufficient to support the financial expenditure, especially if this does not demonstrate the movement of the money and its use in acquisitions, payments to third parties and other activities related to the line of business. In order to prove the use of the resources obtained, it was necessary to have the supporting documentation to prove the use of the resources obtained, and verify the link of the financing with the obtaining of taxable income or the maintenance of the source, such as a permanent control of fixed assets that would allow to verify the investments made in such item, investment plans and/or projects, contracts that accredit the investments made or loans made to its related parties, sample analyses documented with payment vouchers that support such acquisitions, among others, which has not occurred in the present case.
In the audit of the current financial year 2009, the company had indicated that the loan was used for: (i) loans to subsidiaries and related parties for $149 379 000.00, (ii) time deposits for $33 753 884.00, and (iii) prepayments of the principal debt for $100 000 000.00 totalling $283 132 884.00; however, in this regard the Administration left the following observations:
The earmarked amount of $283 132 884.00 exceeds the loan amount of $200 000 000.00.
Despite the fact that this is the same loan is observed in the audit of the 2008 financial year, the purposes supported by the appellant are different.
According to the tax authorities The loans to subsidiaries and related parties are only supported by the audited financial statements for 2009; however, no documents are presented to prove that the transfers were made to the aforementioned companies during the 2008 financial year, nor have the contracts for the loans with related parties been presented, nor have the reasons for these loans been indicated.
For the fixed-term deposits, it shows a table of the deposits made, indicating the balances at the end of 2009; however, the balance of the statement of account sent by magnetic media does not coincide with this balance; furthermore, it did not document the link between the loan received and the deposit received in the bank.
For the prepayments to the principal debt made on June 2, 2009, he did not document that after almost one (1) year of having received the loan, it is the same money that was indebted, which serves for the prepayment of the same.
That for this reason, the Administration observed the amount of S/8,718,744.83 as it considered that the financial expenses generated by the loan received were not deductible, as there was no documentary evidence of their use for the company’s investments.
An appeal was filed by Mining Corp.
Judgement of the Tax Court
The Tax Court revoked the appealed decision and order the Administration to recognise the deduction of the expenses for non-domiciled withholdings related to the financial charges related to the amount of S/428,298.27 and the proportional part of the $100,000,000.00, as established in the resolution, confirming it in the rest of the points of the present objection..
“That, as stated by this Court in Resolutions No. 10813-3-2010 and 13080-9-201O, among others, the so-called “causality principle” is the relationship between the expenditure and the generation of taxable income or the maintenance of the producing source, i.e., all expenses must be necessary and linked to the activity carried out, a notion that must be analysed considering the criteria of reasonableness and proportionality, according to the nature of the operations carried out by each taxpayer.
In accordance with the criteria adopted by this Court in Resolutions Nº 02607-5-2003 and 08318-3-2004, for an expense to be considered necessary there must be a causal relationship between the expenses incurred and the income generated, and therefore the necessity of the expense must be assessed in each case and, likewise, in Resolution Nº 06072-5-2003 it was established that it is necessary to analyse whether the expense is duly supported by the corresponding documentation and whether its use is accredited.
That in the present case, it can be seen that the Administration has concluded that the non-domiciled Income Tax that the appellant assumed is not deductible, inasmuch as it did not support the causality of the financial expenses that originated the payment of said tax, according to the principle of causality contained in article 37 of the Income Tax Law.
It is clear from the foregoing that the Administration refused the deduction made by the appellant on the grounds that the latter had not substantiated the causality of the financial charges repaired in the proceedings; However, this instance has concluded that the assessment for financial charges related to the syndicated loan for $30,000,000.00 is not in accordance with the law, and that the financial expenses related to the amortisation of $100,000,000.00 are only partially deductible; consequently, the position put forward by the Administration to maintain this assessment is unfounded and, consequently, it is appropriate to lift this assessment.
As for the non-domiciled income tax that the appellant assumed in relation to the syndicated loan obtained of $200,000,000.00, in the part whose causality was not supported, it should be noted that the appellant alleges that it was directly liable for the payment of the interest, under Article 47 of the Income Tax Law, and that therefore the tax assumed corresponding to third parties was deductible as an expense.
In this regard, article 47 of the Income Tax Law regulates a case that the law considers as a non-deductible expense, i.e. the Income Tax that has been assumed and that corresponds to a third party; however, the same law establishes that, exceptionally, the Income Tax that has been assumed and that corresponds to a third party may be deducted, when said tax is levied on interest in favour of foreign beneficiaries for credit operations from non-domiciled persons, a deduction that will be acceptable if the taxpayer is the direct obligor to pay said interest, specifying furthermore that the tax assumed may not be considered as a higher income of the recipient of the income.
That said rule regulates, in certain cases, the deductibility or non-deductibility of the Income Tax that has been assumed and that corresponds to a third party, however, such regulation does not exclude in any way the other requirements that an expense that intends to be deducted must fulfil, such as the principle of causality regulated in article 37 of the Income Tax Law, that is to say, the cases regulated in article 47 of the Income Tax Law are not excluded from the fulfilment of the other requirements necessary for deductions from third category income. Consequently, it is concluded that in order for the exception case regulated in the aforementioned article 47 to be considered deductible, the appellant must prove, among others, the fulfilment of the principle of causality.
That, in accordance with the foregoing, as regards the non-domiciled income tax that the appellant assumed in relation to the syndicated loan of $200,000,000.00 obtained, in the part whose causality was not substantiated, it is concluded that the part of the same linked to said unsubstantiated amount is not deductible, as compliance with the provisions of article 37 of the Income Tax Law has not been accredited.
That, consequently, it is appropriate to revoke the appealed decision on this point and order the Administration to recognise the deduction of the expenses for non-domiciled withholdings related to the financial charges related to the amount of S/428,298.27 and the proportional part of the $100,000,000.00, as established in the present resolution, confirming it in the rest of the points of the present objection.
That with regard to the criteria established in the Reports No. cited by the appellant, it should be noted that what is indicated in said reports is not binding for this Tribunal, but only for the Administration, according to the provisions of Article 94 of the Tax Code.”