Peru: An evaluation of recent regulation of the derivative financial instruments

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2) Beginning in 2006, an important variation in the position of the Sunat came about with respect to the results (losses) obtained in operations with IFDs contracted outside Peru, in which the deduction of the losses generated by coverage IFDs is accepted.

Nonetheless, in order to demonstrate IFD contracting and its character of coverage, one not only had to present documentation that is not common in this type of transactions, but also had to prove that the IFD was highly effective. “Effectiveness” is a requirement of the International Accounting Norm N° 39 for an IFD to be considered coverage, and it basically establishes maximum and minimum yields of the derivative in relation to the market price of the covered good or service.

In addition to this conditionality for the “loss” generated by an operation with IFDs to be deductible, the Sunat adopted the criterion to tax the income obtained by the non-resident organization or person with whom the IFD was contracted, as Peruvian income. We understand that the reasoning for taxing this income is that if the resident taxpayer loses in an operation with IFD contracted with a foreign organization, he who obtains a similar economic benefit must pay taxes in Peru.

As can be appreciated, while the Sunat’s way of thinking changed, the new criteria were also not correct, and had the same effect of taxing the loss generated by the transactions with IFD on the non-resident at 30%, instead of not allowing the deduction that lets the taxpayer who contracted the IFD to take the protection (30%) granted by it.

The new criteria adopted by the Sunat in this second stage are incorrect for the following reasons:

a) Effectiveness is a criterion contained in an accounting standard for the IFD, and it is not based on their nature, which is what must be determined if we are or are not before a coverage IFD. That is, to determine if it is a coverage IFD, one must analyze its purpose, analyzing the operation as a whole. It cannot be established by means of a formula that measures whether the yield is reasonable, as the Sunat tries to do.

b) No norm now exists, nor did any exist in 2006, with a linkage criterion that allows establishing a motive to contract an IFD outside the country that generates income from a Peruvian source.

As a consequence, it was hoped that a study of the real nature of IFD contracts would lead the legislators to correct the erroneous interpretations of the Sunat, making it clear that:

I. The results generated by the IFD contracted abroad are, for the resident taxpayer who contracts them, a result of a Peruvian source. Still more so in those cases that concern coverage IFD.

II. It is not required that the IFDs fulfill requirements contained in accounting standards to determine how they must be entered, with the object of establishing whether they are coverage IFDs; this takes place even more so if it is a condition for accepting the deduction of the loss.

III. The non-resident person or organization with which a resident taxpayer contracts an IFD does not obtain income from a Peruvian source by producing the loss for the resident taxpayer.

What was achieved with Legislative Decree N° 970

Legislative Decree Nº 970, which modified the TUO and has been in force since January 1, 2007, has correctly defined two of the three points that it was hoped it would correct:

I. It has been made clear that the results generated by the IFDs contracted by people or organizations outside the country are of a Peruvian source, although should a loss occur, it will be deductible only if it is a coverage IFD.

II. It has been made clear that the non-resident person or organization who celebrates a contract for an IFD with a resident taxpayer does not obtain Peruvian source income.

However, the greatest defect of the norm under consideration is to have included as a requirement for an IFD to be considered coverage, that it be highly effective. Thus, with the new law, the companies must take special care in their transactions of IFD in case of a possible loss, since in order to be deductible for purposes of Income Tax, the IFD must be highly effective. Thus the long-awaited regulation of the IFD is far from favoring the contracting of these instruments.

It is indispensable that the Executive authority correct the norm within the time frame that the Congress of the Republic has granted for tax legislation, since the last thing that is wanted is to go against promoting the use of the capital markets and more advanced instruments.

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