THE GROSS UP AND ITS REGULATION IN BOLIVIA

TAX LAW

Víctor Manuel Vásquez Alfaro

12/12/20244 min read

In commercial practice, it is common for some companies to need to contract services that are executed from or abroad, as well as acquire services from local suppliers that do not issue invoices. In these cases, a payment method known as Gross Up is used, the objective of which is to ensure that the provider receives their full fees, that is, tax-free.

The Gross Up is a mechanism that adjusts the amount to be paid to the supplier to include the taxes that the company must withhold, such as the Complementary Value-Added Regime Tax (RC-VAT), the IUE Tax – Foreign Beneficiaries (IUE-BE), Transaction Tax (IT) and Value Added Tax (VAT). This adjustment seeks to ensure that the supplier receives the net amount it expects, without being affected by tax withholding.

However, a common mistake that many Bolivian companies make is considering withheld taxes as deductible expenses. That is, in addition to deducting the cost of the service in the Corporate Income Tax (IUE), they also include as deductible the taxes that have been withheld, being an erroneous accounting practice as developed by Jurisprudence

In this sense, the Bolivian legal framework does not contain an express provision that establishes that taxes withheld in transactions with suppliers that do not issue invoices, or for services contracted from abroad, are not deductible from the Corporate Income Tax (IUE). However, the resolutions issued by both the Tax Challenge Authority (AIT) and the Supreme Court of Justice base their decision on the provisions of article 47 of Law No. 843 and article 14 of the Supreme Decree. No. 24051, to declare non-deductible expenses for withheld taxes; This means that the amount corresponding to withheld taxes cannot be considered a deductible expense to reduce the tax base of the Corporate Income Tax. Below, I leave you the understanding developed by the Plenary Chamber of the Supreme Court of Justice through Sentence No. 204/2016 dated April 21, 2016, on the deductibility of Gross Up:

“In that sense, art. 47 of Law 843 establishes: “The net taxable profit will be the result of deducting from the gross profit (income less sales expenses) the expenses necessary to obtain and preserve the source. Thus, for the purposes of determining the net income subject to tax, as a general principle, all expenses that meet the condition of being necessary to obtain the taxable income and conservation of the source that generated it will be admitted as deductible generates…sic…sic. To determine the taxable net profit, the profit resulting from the financial statements of each annual management, prepared in accordance with accounting principles... (sic) will be taken as a basis.” Under this regulatory context, for the determination of the Net Taxable Income, only the direct expenses of the taxpayer are considered and not the indirect expenses, that is, indirect taxes are not considered, as provided in the aforementioned regulations, enshrined in art. 14 of DS 24051, pointing out that the Value Added Tax, the Specific Consumption Tax and the Special Tax on Hydrocarbons and their derivatives are not deductible because they are indirect taxes, which are not part of the income achieved by the Tax on Business Profits, since an indirect tax is one that is imposed and collected for the consumption or use of something; Therefore, it will be up to the person who consumes, uses or buys said product pay the tax. Consequently, from the documentation examined in the administrative background, it can be seen that the petitioning company actually attributed to the payment accounts, the expenses of third parties, regardless of the redundancy, that is, of the dependents or the sellers of inputs, who benefit from payment for the service provided, It was noted that the plaintiff took additional withholdings on behalf of the aforementioned third parties, as the company's own expenses, showing that all the withholdings made for RC-VAT, IT, IUE and IUE-BE, were incorporated into the own expense amount. carried out, thus increasing the cost of the service and consequently the expense; Therefore, the expenses declared as deductible by the Company ARCHER DLS Corporation do not apply; since, they are not deductible for the IUE based on the regulations detailed above, concluding that the interpretation and application of regulations by the defendant Authority, regarding this point, is correct.”

To better understand how Gross Up is applied and the correct way to account for withheld taxes, let's look at the following case:

A company acquires a Vehicle Tire from a natural person who does not comply with the formal requirements to issue an invoice. In this operation, both parties agree on a net price of Bs. 5,000.00, which is tax-free, as agreed. The company, following the Gross Up modality, assumes the cost of withholding and payment of the corresponding taxes: the Corporate Profits Tax (IUE) of 5% and the Transaction Tax (IT) of 3%.

Victor Manuel Vásquez Alfaro
Litigation and Corporate Lawyer

Now, the mistake that many companies make is to deduct the total cost of Bs. 5,434.78 in their Corporate Profits Tax (IUE) declaration, without considering that, according to Bolivian tax regulations, only the amount net of the good, that is, Bs. 5000.00, is deductible, and the amount of Bs. 434.78, corresponding to the withheld taxes, should not be considered as an expense deductible.

If the company erroneously deducts the total of Bs. 5,434.78, it will face observations from the tax administration that will result in the application of Sanctions for Omitted Tax, plus interest and updates. Therefore, it is essential that companies correctly manage their accounting records, differentiating between deductible expenses and withheld taxes that, under the Gross Up regime, are not deductible.