Reflections About Neutrality: How The Government Taxes Productivity
by Xavier Duran, Hellen Guerra
Published: February, 2018
Submission: February, 2018
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Neutrality is a basic concept in tax policy which establishes that a tax system should not interfere in the decision-making process, so that the decision should be taken based on its economic merits and not in its tax implications. Of course, this is not an absolute principle because it is understood that absolute neutrality is impossible to achieve. Nonetheless, there are some scenarios where it is clear that the Guatemalan tax system lacks neutrality and therefore affects companies when making business decisions.
Let’s get practical and talk about numbers!
Suppose that you work for a company that needs to acquire a software license to be implemented on its Guatemalan subsidiary for its productive activities. For that purpose, you have been presented with two viable options on how to acquire said software license and you must make the final decision on which one to buy. In order to make that decision, your Guatemalan coworkers provided you with the following information:
*If the subsidiary were in the optional and simplified income tax regime over the income of lucrative activities (income tax rate of the 5% and 7%), the subsidiary would not be able to use this deduction and, therefore, the effective cost of the Software´s license considering the tax implications would be of US$ 50,000 for Software A and US$ 58,823.53 for Software B. Through this document such regime will be referred as “optional income tax regime”.
Which Software would you choose? Are you basing your decision on the economic merits (Criteria No. 1) or are you taking into consideration the tax implications (Criteria No. 2 to No. 7)?
Based on the example provided before, I want to share with you the following reflections:
1. How can this particular difference in tax treatment be possible? As illogical as it may seem, the difference in tax treatment derives from Criteria No. 1 which is also the criteria that provides the economic merit. Even if the provider of Software B´s License offers an easier way to obtain its license (which is the true economic merit that differentiates Software A´s License from Software B´s License), the fact that the CDs of Software A´s License shall pass through customs allow us to consider such software as a good being imported into Guatemalan territory. Consequently, we can apply the rules pertinent to imported goods to Software A´s License instead of applying the withholding tax rules.
2. Legislators should take into to consideration that most of the time the withholding tax is absorbed by the Guatemalan entity. The “price plus taxes” provision is very common when contracting with foreign providers. Therefore, the one that is being financially affected by the withholding tax is the Guatemalan entity and not the foreign provider.
3. After comparing the tax treatment of Software A´s License versus the tax treatment of Software B´s License, we may safely conclude that the reasoning behind the tax treatment of Software A´s License makes more sense in the Guatemalan context. Guatemala is a developing country. Therefore, it should be of utmost importance for the Guatemalan Government, to enact laws that incentivize the productivity of the Guatemalan companies. This is one of the best routes towards sustainable economic growth that will not only benefit local companies, but also the government and the Guatemalan population in general. By allowing the deduction mentioned in criteria No. 6, the Guatemalan Government is incentivizing productivity by generating a 0% tax impact on companies subject to the optional income tax regime (income tax rate of the 5% and 7%), when acquiring software´s Licenses that improves their competitiveness in this globalized world. In similar manner, by allowing more deductions to companies subject to the general income tax regime (deductions contained in criteria No. 6 to No. 7), the Guatemalan Government is equalizing the conditions for said companies due to the fact that the applicable tax rate for them (25%) is much higher than the one applicable to the optional regime.
4. At the moment of publishing this article, the Tax Authority of Guatemala has issued an institutional criterion regarding this matter. From the example previously analyzed, we can conclude that such criterion may make the tax scenario less neutral in the general income tax regime. If such criterion is applied, it would be more difficult for companies to comply with all the requirements necessary to make all or part of such expense deductible. This could lead to the interpretation that the Tax Authority may be trying to collect more taxes without taking in to consideration the future consequences of the decision. I will further discuss this criterion in a future article.
 This article was written to express a point of view and should not be considered as a legal advice.
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