Tax Implications of Bonuses and Promotions
We continuously observe that the business sector uses, interchangeably, Bonuses and / or Commercial Promotions; modalities that, although they intend to retain and increase sales, they also have different tax treatments. Recognizing the importance of correctly applying one and / or other commercial strategy, we will then develop the tax treatment related to Income Tax and the General Sales Tax for Bonuses and Promotions.
I. TAX ANALYSIS
1.1. Income Tax (“IR”)
Deductibility of expenses by the Company
The deduction of expenses for tax purposes is governed by the principle of causality established in Article 37 of the IR Law, according to which the expenses necessary to generate taxable income or maintain its production source are deductible, as long as they are not prohibited or limited by law.
Although the aforementioned precept could be interpreted as only expenses, those directly linked to the generation of taxable income or the maintenance of the source, the Tax Court has interpreted the principle of causality in a broad sense.
Thus, through repeated jurisprudence, such as resolutions No. 814-2-1998 and No. 710-2-1999, the said body has indicated that:
“The principle of causality is the relationship of necessity that must be established between expenses and the generation of income or maintenance of the source, a notion that in our legislation is broad, since the subtraction of expenditures that do not keep such relationship is allowed directly. Despite this, the Causality principle must be taken care of, so to be determined additional criteria must be applied such that the expenses are normal to the business or they maintain a certain proportion with the volume of operations, among others”. (emphasis added)
Precisely, the need for an expense will depend on the circumstances and characteristics of each business, complying with the causality requirement those concepts that are normal for the commercial activity of the company, such as, for example, bonuses or promotional expenses ( or marketing), which clearly allow the continuity of the business or its progression (even if they do not automatically or directly derive a taxable income).
At this point, we must mention that, both promotions and bonuses constitute one of the incentive instruments created with the purpose that companies, in a short time or to a greater extent, manage to increase the demand of their customers, make consumption more attractive of the goods or services they sell, and consequently lead to higher sales. However, in the case of a bonus, what is intended is to deliver goods to customers who maintain a business relationship with their supplier.
Consequently, in the case of bonuses, it is clear that there is a commercial link or relationship between the supplier and the customer, which is intended to strengthen or retain. Precisely, unlike the bonus where a prior sale is required, in the case of the promotion it is not necessary, since what you are trying to achieve is to attract new customers, who – in the future – could be buyers of the goods or products offered under this modality.
In this regard, Ruiz de Castilla and Robles Moreno point out that “[…] bonuses can only occur when there is a specific sale. In other words, it constitutes an essential requirement for a bonus as such, that it be given jointly with a sale of a good in a real way. In relation to the opportunity of the promotion, these are made before the sale of merchandise. Thus, promotions constitute deliveries of goods prior to sale. Instead, bonuses are made at the time of sale”.
Regarding the objects that taxpayers can deliver to their clients, it should be borne in mind that Article 20 of the IR Law establishes that the total net income resulting from the disposal of goods will be established by deducting gross income from returns, bonuses, discounts and similar concepts that respond to the customs of the square.
In line with the above, considering that the deliveries of the goods by the taxpayer in favor of their clients will qualify as bonuses, said deliveries must correspond to customs of the place. On the contrary, if not, the Tax Administration could object to them, proceeding to determine a greater tax base, as well as the commission of an infraction for declaring false figures or data linked to the determination of the tax obligation (equivalent to 50% of the tax tribute omitted).
Therefore, in order to avoid possible contingencies in the event of a possible SUNAT audit, it is necessary that the taxpayers have a duly documented bonus policy that proves that the goods are granted in general and according to the customs of the market, in favor of Customers who meet certain requirements.
On the other hand, subsection q) of the aforementioned article 37 of the IR Law indicates that the expenses of representation of the business line are deductible in the part that does not exceed 0.5% of the gross income, with a maximum limit of forty (40) Tax Units (“ITU”). In turn, the second paragraph of article 21 (subparagraph m) of the Regulation states that, they are not included in the concept of representation expenses and, therefore, are not subject to the limit established for said provision, travel expenses and Disbursements directed at the mass of real or potential consumers, such as advertising expenses.
From the aforementioned it is understood that the expenses of (i) representation and (ii) promotion meet the principle of causality and, therefore, are deductible. However, we must take into account the differences between the two concepts. Thus, the representation expenses are those incurred by the company in order to be represented outside its offices, premises or establishments and those intended to present an image that allows to improve your market position, including gifts or entertainment to customers. While, in the words of the Tax Court, the promotional expenses are those that are carried out massively to consumers (advertising and sales promotion), which can be real or potential customers. Such expenses, unlike those of representation, are not subject to quantitative limits.
Therefore, regarding the goods that taxpayers could deliver to real, potential customers and the general public in order to spread the publicity necessary to increase their sales, the expenses would also be deductible and will not be subject to limitation. This, precisely, because such expenses constitute an important tool for generating higher income.
We reiterate, as long as the aforementioned objects are delivered by the taxpayers in order to inform, persuade and remember about themselves or about the products that they sell, aimed at the mass of real or potential consumers, these will be deductible without any limitation.
Documentation of expenditure (trustworthiness)
As we have mentioned, the expenses incurred by the taxpayers would be deductible for IR purposes. However, said expenses must be duly supported in order to avoid any type of questioning by the Tax Administration.
Note that, through various Resolutions, the Tax Court has established that expenses must be sustained not only with proof of payment, but with additional documentation and information that attests the credibility of the activity that originates the expense and also allows to determine the nature of the operation.
For its part, through Cassation 12744-2017-LIMA, the Judiciary indicated the following:
“[…] FIFTH. – Based on the foregoing, the causality principle is included, by virtue of which any company that deducts an expense for the purposes of the Third Category Income Tax must be in a position to demonstrate that it is reasonably necessary and that it is intended to contribute with the generation of the taxed income of said company and with the maintenance of its source. For this reason, the accreditation or support of the need for the expense turns out to be essential, since, although an expense by its nature can be qualified as deductible due to the turn of the business, it must be sustained. The presentation of the payment receipt and / or the accounting entry is not sufficient, but also other documents that prove that the expense was actually necessary for the generation of income or maintenance of the source of income.” (emphasis added)
Taking into account the foregoing, the granting of assets by the taxpayer should be based on its commercial policy (approved by management or the competent area), where the assumptions and conditions for it are indicated. Likewise, on the occasion of the delivery of the goods, there should be a document that indicates which goods are delivered, as well as a reference on the recipients of the goods (for example, have a delivery or receipt certificate).
1.2. General Sales Tax (“IGV”)
The Law of the IGV in its article 1 refers that it is taxed with said tax, among others, the sale in the country of movable property. For this purpose, “sale” means any act whereby goods are transferred for consideration, regardless of the designation given to the contracts or negotiations that originate that transfer and the conditions agreed by the parties, as well as to the withdrawal of goods with the exception of those indicated in the Law and its Regulations.
However, in relation to the goods of the taxpayers that are delivered to the customers once the sale has been finalized, we consider that these have the nature of bonuses. In that area, article 2 (numeral 3) of the Regulations of the IGV Law specifies that the amount of the assets will not be part of the tax base, provided that: (i) it is usual practices in the market or that respond to certain circumstances such as prepayment, amount, volume or others; (ii) are granted in general in all cases where the same conditions occur; and, (iii) it appears on the respective payment receipt.
On the other hand, regarding the goods that are delivered by the taxpayers to the general public, Article 2 (numeral 3) of the Regulation establishes that it is not considered a sale:
“The free delivery of goods made by companies in order to promote the sale of movable, immovable property, provision of services or construction contracts, provided that the market value of all such goods does not exceed one percent (1%) of your average monthly gross income of the last twelve (12) months, with a maximum limit of twenty (20) UIT. In cases where this limit is exceeded, only such excess will be taxed, which is determined in each tax period.
It is understood that for the purpose of calculating the average monthly gross income, the corresponding monthly income must be included for which said limit will apply”.
As noted, as long as the market value of the goods that the taxpayers deliver for the purpose of promoting themselves does not exceed the aforementioned limit, their delivery will not be affected by the IGV. In contrast, if the above limit is exceeded, their delivery will be taxed (18% rate), since the taxpayers would assume the respective amount.
II. Conclusions and Recommendations
- Regarding the IR, the objects that taxpayers give to their clients would qualify as bonuses. Thus, it should be borne in mind that Article 20 of the IR Law establishes that the total net income resulting from the disposal of goods will be established by deducting returns, bonuses, discounts and similar items that meet the customs of the place from gross income. In that line, deliveries must correspond to customs of the square. Otherwise, the Tax Administration may object to them.
We consider it necessary for taxpayers to have a duly documented bonus policy that proves that the goods are granted in general and according to the customs of the market, in favor of customers that meet certain requirements.
- In relation to the goods that taxpayers could deliver to real, potential clients and the general public in order to disseminate the publicity necessary to increase their sales, the expenses would be deductible for the IR determination and will not be subject to limitation.
- As for the IGV, the assets of the taxpayers that are delivered to the customers once the sale has been completed have the nature of bonuses. In that area, the rule specifies that the amount of the assets will not be part of the tax base provided that: (i) it is usual practices in the market or that respond to certain circumstances such as prepayment, amount, volume or others; (ii) are granted in general in all cases where the same conditions occur; and, (iii) it appears on the respective payment receipt.
As long as the market value of the goods that taxpayers deliver for the purpose of promotion does not exceed the limit of 1% of their average monthly gross income of the last 12 months (with a limit of 20 UIT), their delivery will not be found It affects the IGV. If the above limit is exceeded, the delivery of the goods will be taxed (18%), with the taxpayers assuming the respective amount.
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