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Tax treatment of losses by uselessness of baskets used in the production or marketing process


Gary Salazar Paz1

Nowadays, we observe that in Tax Administration’s control processes, taxpayers cannot prove the tax deduction originated by the registration of the expense of the baskets (for breakage or wear among others), resulting in the imposition of sanctions by the Tax Administration. Those sanctions may be avoided if we generate a procedure according to the provisions of our tax code. Here is our position about it:

Baskets are assets that qualify as part of the fixed assets of the company, which corresponds to the maximum annual percentage rate of depreciation of 10% on the cost of acquisition, production or construction, or the value of equity income, until the total extinction of the good value (within a period of 10 years, correspondingly).
However, if the baskets are obsolete or out of use at the end of the first exercises (no longer being used by the company), and still have book value, you can choose between two options:

(a) Depreciate the baskets until their useful life and expire cost, for this the maximum rate of the corresponding 10% must be taken into account.
(b) Cancel the baskets, being an obsolete asset, for the value not yet depreciated at the disuse date. This discharge must be duly verified by means of a technical report.

From now on we will develop in the reason of our position:

I. Baskets as fixed assets

From the tax perspective, there is no definition of what should be understood as fixed assets. In this sense, in accordance with Tax Administration’s pronouncements and the Tax Court, it is valid to use International Accounting Standard No. 16 to give content to that term. Then, a fixed asset should be understood as the tangible asset that: (i) a company owns to be used in the production or supply of goods and services, to be rented to third parties or for administrative purposes; and (ii) expected to be used for more than one period.

In addition, the Revised General Accounting Plan defines fixed assets as the set of durable goods that a company owns to be used in regular business operations.

Now, in the present case, we understand that baskets are drawers or cases of thick rods where different types of goods are stored and /or transported. In fact, these elements are use in the activities of harvesting and transportation of every kind of goods. In addition, the same basket can be use more than one time, which is its main characteristic (not dealing with goods that are exhausted or disposed of with only one use).

Therefore, the baskets are part of the fixed assets of the company; and the wear or exhaustion they suffer will be offset by the deduction for the depreciation allowed in the Income Tax Law (hereinafter, ITL) and its Regulation.

II. Baskets depreciation in the framework of the ITL

Assets depreciation is the systematic distribution of the depreciable amount of an asset over its useful life. According to article 38 of the ITL, the loss or depletion of fixed assets that the taxpayers use in business, industry, profession or other activities producing third-class taxable income will be offset by the deduction of the depreciations allowed in this law.

Nevertheless, according to article 40 of the ITL, property other than buildings and constructions are depreciated in accordance to the percentage established in that Regulation. Then, under Article 22 of the Regulation, baskets qualify as “other goods of fixed assets”, corresponding to the maximum annual percentage depreciation of 10% over its acquisition, production or construction cost, or the equity value, until the total extinction of the good value (within a period of 10 years, correspondingly).

It is important to specify that the taxable depreciation accepted will be the one which could be recorded within the taxable year in the books and accounting records, in concordance with the aforementioned Article 22 of the Regulation.

III. Obsolescence or disuse of baskets

In the depreciation regime of our tax system, article 37, paragraph f) the ILT states deductions are “depreciations for wear and tear or obsolescence of fixed assets and losses and loss of duly accredited stocks, according to the established rules”. For its part, article 43 of the ITL establishes that “depreciable assets, other than real estate, that are obsolete or out of use, may, at the option of the taxpayer, be depreciated annually until its cost is extinguished or derecognized, for the value still not depreciated at the date of disuse, duly proven”.

Likewise, Article 22 (i) of the Regulations states that:

I) For the purposes of Article 43 of the Law, in case any depreciable asset is out of use or obsolete, the taxpayer may choose:

  1. Continue to depreciate it annually until the total extinction of its value by applying the percentages of depreciation provided in the table referred to in subparagraph b) of this article; or
  2. To derecognize the asset for the value not yet depreciated to the date the taxpayer withdraws it from its fixed assets. SUNAT will dictate the rules for the registration and accounting control of the assets that are written off.

The disuse or obsolescence must be duly accredited and supported by a technical report issued by a competent and collegiate professional.
In no case SUNAT shall approve the application of higher depreciation rates due to disuse or obsolescence.
In sum, if the company maintains one or several depreciable assets that are obsolete, as the case with baskets at the end of the first use exercise (which would no longer be used), and which still have book value, you can choose between two options:

a. Continue to depreciate it until its useful life expires and its cost, for this must take into account the maximum tax rates for the deduction of depreciation expense; or,
b. Declining the obsolete asset at the value not yet depreciated at the date of disuse. However, this discharge must be properly verified by a technical report.

Finally, respect to the technical report, through Resolution No. 10504-1-2013, the Tax Court has provided that it must contain the detailed and technical presentation of the causes that give rise to the decrease, not being fulfilled when the report does not contain the detailed description of the property or explain in a technical way the reasons why the state of abandonment of the property is qualified. Furthermore, the administrative organ indicated the document signed by a collegiate engineer in charge of the maintenance of the assets, it merely mentions the reasons for abandonment using general expressions such as “changed by expansion”, “material out of use”, “obsolescence”, “out of service”, or “uselessness”.

1 Public Accountant and Lawyer. Masters of Business Administration; Postgraduate in Taxation and Finance; Postgraduate in International Taxation and Transfer Prices from the Universidad Austral in Buenos Aires, Argentina. Associate of IPIDET and IFA – Peruvian Group. Managing Partner of Ecovis Perú.