LOSS IN THE LOSSES
Tributary income is understood to be the income that comes from profits or benefits produced by a thing or activity, as well as all the benefits, utilities and increases of patrimony that are received or accrued, whatever their nature, origin or denomination is. As a general rule, this increase in assets must correspond to a period of time that is usually one year.
In summary, income is the positive difference between what the taxpayer had at the beginning of the period and what he has at the end of it.
However, it may happen that instead of an increase in equity there is a decrease. So in such situation, the individual has no tax obligation in that respective period.
This sounds logic but the question is: what happens in the following periods? Should a tribute be paid on the increase of the diminished patrimony?
If the answer is positive, it results in a tax payment without an increase in equity, which does not seem reasonable. An example can clarify the subject: a company starts with a patrimony of 100 and ends the first period with 70, with which there is no taxation. If in the following year it ends up with equity of 100 again and must pay taxes on a fictitious equity increase of 30, it turns out that he is being taxed without having income.
When the income is determined according to accounting, summing or abstracting the tax adjustments that the law establishes, it is possible to identify the traces year after year of the patrimonial detriments. Here, the issue of losses comes up and several issues must be resolved.
First of all, there is the question of whether the compensation between losses and rents should have a time limit in terms that if the losses are maintained without imputation for a time, the compensation could no longer operate. As the exit of projects in certain sectors may demand more time than the legal term, there would be a disadvantage. Therefore, in Chile there is no such limitation today.
The second issue is to determine if the losses can only be imputed to future profits, or first, to retained earnings.
In Chile, the company’s tax is credit, total or partial with the reform, against distributions to final taxpayers. In these circumstances, our legislation allowed that the tax paid on retained earnings compensated with losses can be returned to the company to avoid that such tax is not recovered.
In addition, there is also the problem of whether the losses can be compensated only with own revenues or also according to the dividends and distributions of profits received. This issue was not addressed in the law. Nevertheless, due to the instructions given by the fiscal authority, the compensation was accepted in the indicated cases.
In summary, until before the Tax Reform companies could apply the system without temporary limitation and first compensate the losses of one year with the retained profits obtaining the refund of the tax on the next one, as a provisional payment. In case of excess of losses, these can be imputed to future rents.
In addition, due to official instructions rather than express legal text, companies with losses could make these imputations when they received dividends that had paid the tax in its origin. It is clear that the absence of law made this restitution more questionable than the return for the compensation of losses and own profits.
This situation changed with the reform, when authorizing the return of taxes paid according to dividends and distributions from other companies, but not from own retained income. Therefore, the regime for the dividends received was established by law and was eliminated, also by law, for own profits and losses.
In this sense for the latter there is a loss in the system regarding the failure to return taxes for own profits, which is rare because this situation had an express ground in the law and not the dividends and distributions received.