Presidential Decree No. 2.163 published in Special Official Gazette No. 6,210 of December 30, 2015 ("Decree-Law"), partially amended the Income Tax Law published in Special Official Gazette No. 6,152 of November 18, 2014 ("Amended Law"). The most relevant aspects of the Decree-Law are the following:
1. Recognition of income and timing of expenses' deduction
The Decree-Law modified Article 5 of the Amended Law and established as a general rule that income must be recognized in the fiscal year in which the transactions giving rise to such income are performed. By virtue of the referred to modification, those categories of income that since the creation of the income tax in Venezuela in 1942 were subject to income tax liability on a cash basis (i.e., income arising from the alienation of real estate property, royalties, dividends and income derived from the execution of professional/non-commercial activities, among others), must be recognized, as of the entry into force and application of the Decree-Law, in the fiscal year in which the income producing transaction is executed.
The exceptions to the general rule are:
- Income arising from assignments of credits and/or discount transactions recovered on an annual basis, which will be recognized by the assignee, proportionally on the basis of the amount accrued in each fiscal year.
- Income arising from credits (e.g., interests) and derived by banks, insurance companies, other credit and financial institutions, corporations and other legal entities; which will be recognized on an accrual basis in the relevant fiscal year.
- Income arising from the lease or sub-lease of personal or real estate property, which will also be recognized on an accrual basis.
- Income arising from labor relationships and windfall gains, which will be subject to income tax liability in the fiscal year in which they are actually paid.Therefore, salaries, wages and other remunerations of labor nature along with income corresponding to windfall gains will be, as of the entry into force and application of the Decree-Law, the only income to be recognized on a cash basis.
On the other hand, the Decree-Law modified the sole paragraph of Article 32 of the Amended Law, thus allowing taxpayers to deduct their expenses on an accrual basis. Furthermore, the Decree-Law eliminated the taxpayer's obligation to revert or recognize as income in the subsequent fiscal year, those unpaid but deducted expenses in the prior fiscal year.
2. Increase of the tax rate applicable to income arising from banking, financial, insurance and re-insurance activities
The Decree-Law modified the tax rate applicable to net operating income arising from banking, financial, insurance and re-insurance activities performed by legal entities domiciled in the country, increasing it from a progressive 34% to a 40% flat rate.
3. Income tax withholding
The Decree-Law modified Article 86 (now Article 84) to include the definition of constructive payment for withholding purposes. In this regard, Article 84 of the Decree-Law defines as constructive payment "the amounts that the debtors or payors credit in their accounting or records." As opposed to the definition provided for in Article 82 of the General Regulations to the Income Tax Law, published in Special Official Gazette No. 5,662 of September 24, 2003, the Decree-Law: (i) expressly included payors in the definition of constructive payment and, thus, eliminated the mention formerly made to creditors of the corresponding income; and (ii) eliminated the legal enforceability of the relevant income as of the date of the accounting record, for purposes of the existence of the constructive payment.
4. Exclusion of special taxpayers from the adjustment for inflation system
The Decree-Law modified Article 173 of the Amended Law (now Article 171) addressing taxpayers subject to the adjustment for inflation system. In this regard, the Decree-Law excluded special taxpayers appointed by the Tax Administration from the adjustment for inflation system.
As a consequence of the referred to above exclusion, the Decree-Law modified Article 195 (now Article 193) for purposes of (i) broadening the scope of taxpayers subject to special regulations on accounting records based on the exclusion of the adjustment for inflation system; and (ii) excluding the effect of the adjustment for inflation on the net taxable income corresponding to the prior fiscal year, for purposes of the estimated income tax returns that such taxpayers must file after the entry into force of the Decree-Law.
5. Elimination of investment tax credits
The Decree-Law eliminated Chapter I of Title IV of the Amended Law ("Investment Tax Credits"). Based on the elimination of such chapter and its Articles 56 and 57, the Decree-Law: (i) abrogated the investment tax credits corresponding to industrial, agro-industrial, construction, electricity, telecommunications, science and technology, tourism, agricultural, livestock and fishery related activities; and in our opinion (ii) cleared out any doubt on the enforceability of such investment tax credits under prior amendments to the Income Tax Law.
6. Entry into force
The Decree-Law entered into force on December 31, 2015, that is, the day after its publication in the Official Gazette, and will become applicable to those fiscal years beginning after the date of its entry into force, in accordance with the decision of the Constitutional Chamber of the Supreme Court of Justice (case: José Andrés Romero Angrisano, of June 30, 2004). Regarding individuals and/or legal entities with a fiscal year equivalent to the calendar year, the Decree-Law will apply to the fiscal year beginning on January 1, 2016.
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