Theft of Tax Credit

Continuing with the line of comments already made regarding the reforms undergone by the VAT in Guatemala, which have led to eliminating the right to claim tax credit, we now address the reforms to art. 16.

Let’s start with the original article:

ARTICLE 16. Inadmissibility of tax credit.

The right to tax credit does not apply: To the importation or acquisition of goods or the use of services that apply to untaxed acts or exempt transactions by this law or that have no relationship with the taxpayer’s economic activity unless proven otherwise.

 Taxpayers who carry out operations referred to in article 7, numeral 10) shall be entitled to the total tax credits resulting from the importation or acquisition of goods or the use of services directly applied to exempt operations.

This article indicated the cases in which the tax credit was not admissible. It is a rule that regulates the exception. Article 15 contained the definition of tax credit, and article 16 indicates the exceptional cases in which it did not apply. From the perspective of VAT neutrality, as we have already discussed in previous sections, this is how that principle was guaranteed: with an exception to the general rule that “The tax credit is the sum of the tax charged to the taxpayer for the taxable operations carried out during the same period” (art. 15) and only cases of article 16 denied that right.

The rule was that the tax credit did not apply when it was imports or acquisitions applied to exempt operations and operations unrelated to the economic activity. That is, if goods were purchased for sale with a VAT exemption, then the tax credit did not apply, and likewise, when acquiring goods unrelated to the economic activity, for example, buying jewelry when I am at a gas station. The rule was very simple and allowed, I believe, to maintain neutrality as a principle, since it excluded those cases in which VAT had to be borne as the final tax consumer.

However, in 1994 this article was reformed, and it reads as follows:

“Article 16.- Inadmissibility of tax credit.

The right to tax credit does not apply, for the importation or acquisition of goods or the use of services, which apply to untaxed acts or exempt transactions by this law, or which are not directly related to the production, distribution, and sale process of the taxpayer.

 The right to tax credit also does not apply to the importation or acquisition of capital goods or fixed assets that are not directly related to the production, distribution, and sale process of the taxpayer or the provision of services. The tax borne by the taxpayer on the acquisition of capital goods or fixed assets that according to this law do not generate the right to tax credit shall be integrated into the acquisition cost of such goods or fixed assets, and consequently, said acquisition cost shall be depreciated applying what is established by the Income Tax Law”.

An addition is made to clarify the treatment of VAT amount in acquiring assets that do not generate the right to credit – those that are not linked to economic activity – to indicate that they are part of the value to be depreciated. I consider it an unnecessary and anti-technical reform, as it affects the ISR regime for depreciation calculation, when there was already, in that law, a rule indicating that the VAT value was deductible when it was a cost.

Two years later, in 1996, a subsequent reform was made to art. 16, so that it reads as follows:

“ARTICLE 16. Admissibility of tax credit.

The right to tax credit applies, for the importation or acquisition of goods and the use of services, which apply to taxable acts or transactions subject to this law, which constitute costs and expenses necessary to produce or maintain the income-producing source of the taxpayer, unless proven otherwise.

 In the case of taxpayers engaged in exportation and those who sell or provide services to exempt persons in the domestic market, they shall be entitled to the refund of the tax credit generated by the acquisition of goods and services they use directly in their respective activity. For this purpose, the provisions of article 23 of this law shall be followed.”

The first change is that we no longer have a rule of exception, but a general rule. The article goes from being the rule of “non-admissibility” to the rule of admissibility. In this sense, it omits art. 15, since the VAT charged on purchases is no longer a tax credit, but tax credit will only be what art. 16 indicates. We can affirm that, due to incompatibility, art. 15 is not in force.

In this reform, again with poor legislative technique, terms are used that are not natural for the VAT regime, such as “acquisition of goods … that constitute costs and expenses necessary to produce or maintain the income-producing source of the taxpayer.” The generation of income or the maintenance of the income-producing source has nothing to do with the VAT law and regime since it is evident that they are concepts specific to the ISR regime. This opened the door for the Tax Administration of that time to say that an acquisition or expense did not meet any requirement to be deductible and, therefore, also deny the VAT tax credit.

The “amusing” thing about this text is that it remains in the minds of tax auditors and some advisors who indicate that VAT credit is not applicable because the acquisition is not necessary for income generation. A serious mental error, since one cannot use norms of one tax to interpret another (file 78-2005, Constitutional Court: “This Court considers that in the present case, the challenged authority, by applying art. 29 of the Value Added Tax Law to integrate the insufficiency of literal b) of art. 39 of the Income Tax Law that refers to “legal documentation”, is undoubtedly using analogical integration, which is expressly prohibited in tax matters; that is to say, if the Income Tax Law speaks of “legal documents”, any legal document recognized as such under our legal system must be accepted as support, which in this case would be the checks issued as payment, as well as the cash receipts issued, otherwise, with this criterion all public, authentic, and private documents recognized by laws, conventions, and commercial treaties would be circumvented.

Therefore, there has been an improper application of rules that violates the guarantee of due process of the appellant, since the challenged authority erroneously applied the article of the Value Added Tax Law through analogical integration that makes use of two different tax norms, which is a null act of full right for being against an expressly prohibitive norm”).

This wording led, at the time, to ideas that the ISR and VAT regimes should coincide, which resulted in what is called “cross control”, a situation that was corrected in several court judgments: “This Court, when making the respective analysis and especially the audit based on a cross-reference of information from the Value Added Tax with the Income Tax, by what is logical to establish that the adjustment is based on the totals declared within the VAT regime, with the amount of the adjustment being equivalent to the difference found between the declarations of the Value Added Tax with the declaration of the Income Tax.

As this Court has already stated, in various judgments issued, in cases similar to the one that motivates this matter, the prevailing criterion is that there is inconsistency in the adjustments made because it is not legally actionable to base a series of objections or adjustments derived from the comparison of sales according to the registry book carried out in relation to the Value Added Tax, with the total of the same ones that, as annual income, contains the Annual Sworn Declaration of the Income Tax, since the latter is based on the technical and general operational process of the respective accounting records, so it is inappropriate and not legally permissible for the total sums contributed to coincide.

Therefore, it is not legally feasible that due to the non-coincidence of the total sums reported, it necessarily involves tax evasion, since we are facing two taxes of very different nature…” (Administrative Litigation Judgment, Second Chamber, file 386-2000, official 2nd, of August 20, 2001).

By the year 2000, Congress amended that error (although in the minds of many that reform has still not happened) and modified that first paragraph to read as follows:

“ARTICLE 16. Admissibility of tax credit.

The right to tax credit applies, for the importation or acquisition of goods and the use of services, which apply to taxable acts or transactions subject to this law, except in the case of importation or acquisition of fixed assets, when they are not directly linked to the productive process of the taxpayer. The tax paid by the taxpayer on the importation or acquisition of fixed assets for which no tax credit is recognized shall be integrated into the acquisition cost of the same, for the annual depreciation in the Income Tax regime.”

It now includes the concept of “directly linked to the productive process of the taxpayer”, which continues to be valid, with some modifications, which we will address in the following article.

For now, we can conclude how the legislative journey has gone from a general rule of admissibility with an exception, to a specific rule of authorization for the admissibility of credit. We went from a right with some exceptions to end up with a specific authorization rule. Strictly speaking, the right was eliminated, which constitutes a violation of VAT neutrality.