Banking Sector: Details with an Impact on Compliance

The CIAT Consultation Service is a useful tool to accompany the strategic and urgent tax administrations issues, and to open a space for discussing small details whose impact can be significant in a specific area of action.

On this occasion, I refer to a consultation made by a tax administration, through the CIAT Consultation Service, last April. This consultation drew my attention because it dealt with a very specific but highly relevant issue, and a certain complexity, linked to the banking sector. It referred specifically to documents or procedures that are required by tax administrations in order to justify the deduction by local banks of the costs incurred for services provided to them by non-resident correspondent banks. In the country of the tax administration that made the consultation, the banking sector states that it is impossible to receive invoices or equivalent documents from foreign correspondents. In addition, the consultation enquired as to whether the provenance statements received through SWIFT, issued by correspondent banks not resident in the country, can be used as supporting documents for tax purposes.

This issue deserves to be analyzed and can be approached in several ways, since it involves banking institutions from different countries and governed under different regulations. This situation would be similar to other expenses incurred abroad, which do not generate invoices or approved tax documents that support transactions with greater security. Ultimately, the relevance of this issue is highlighted by the fact that the way transactions are documented for tax purposes conditions the control mechanisms.

The tax administrations of Portugal, Chile, Costa Rica and Mexico have shared their experiences, which allow us to reflect on how to deal with the issue.

In the light of Portuguese tax legislation, in determining tax revenue, the normative[1] indicates that all expenses and losses incurred or supported by taxpayers who are “legal entities” are deductible in order to obtain or guarantee their income. In this regard, expenses of a financial nature are considered deductible if they are supported by transfers and are documented. Expenses that meet the following requirements are considered to be documented:

  • name or corporate name of the supplier of goods or service provider and the buyer or recipient;

  • tax identification numbers of the supplier of goods or service provider and the buyer or recipient. This requirement would not apply to the case under analysis, as it is required only if the entities are resident or permanently established in the national territory,

  • quantity and name of the goods acquired or services rendered,

  • value of the consideration, (e) date on which the goods were acquired or services rendered.

The Portuguese tax administration considers that the statements received through SWIFT are valid only if they are supplemented by other documents of external origin (e.g. contracts or other documents concluded between the source bank and its correspondent bank), such external origin[2] being associated with the above-mentioned requirements, which give them the presumption of authenticity.

The Chilean[3] regulation states that the taxpayer must use documents, accounting books or other means established by the law as necessary or mandatory, to prove the truthfulness of their statements or the nature of the antecedents and amount of operations to be used for the calculation of the tax. The normative[4] also states that the tax administration may require the presentation of other documents such as books of accounts, details of the profit and loss accounts, documents or explanatory statement and others that justify the amount of the declared income and the items recorded in the accounts. It is therefore left to the respective auditing body to determine the sufficiency of the documentation for the accreditation of the costs or expenses charged by the taxpayers.

The SWIFT documentation may be one of the relevant elements to evaluate, but not the only one to consider a cost or expense as validated. Regardless of the type of taxpayer in question, the so-called self-determination of taxes applies in Chile. In this sense, it is the taxpayers who are responsible for crediting to the Internal Revenue Service (or SII for its acronym in Spanish) the information presented in their tax returns. The SII may require various types of information or documentation for accreditation, this material must comply with current legal regulations.

According to the Mexican tax provisions, in order for a resident bank to deduct correspondent service fees provided by a bank resident abroad, the transaction must be covered by a tax voucher[5], which in turn must meet specific requirements.[6] Currently, foreign statements are not considered as tax receipts in Mexico. In this sense, taxpayers who intend to deduct or credit tax vouchers issued by residents abroad without a permanent establishment in Mexico, may use them provided they contain the following requirements:

  • name, denomination or business name;

  • the address and, if applicable, tax identification number, or its equivalent, of whom it is issued;

  • place and date of issuance;

  • key in the Tax Federal Registry[7]of the person to whom it is issued or, in his default, name, name or social reason of such person;

  • the quantity, unit of measure and class of the goods or merchandise or description of the service or the use or benefit covered;

  • unit value reflected in number and total amount entered in number or letter.

Irrespective of the requirements established by domestic law for an outlay to be considered deductible, it must be strictly indispensable for the purposes of the taxpayer’s business and such provision should consider in its determination the prices and amounts of consideration that independent parties would have used in comparable transactions, in the case of transactions between related parties.

The Costa Rican law[8] establishes a 15% rate on remittances abroad to all individuals or legal entities domiciled in the national territory when they pay, credit or transfer, or make available any income of Costa Rican source to a person not domiciled in the country.

The Information Statement D152 ”annual tax withholding declaration” of Costa Rica, consists of a summary of all monthly payments made by the taxpayer on all remittances abroad for the concepts of interest, commissions, dividends, remittances abroad, Development Bank withholdings, among others. All these withholdings are applicable to all financial institutions located in “first-tier banks” and “second-tier banks”; where the former refer to banks engaged in financial intermediation, such as collecting and placing money; and the latter do not deal directly with users of credit, but make the placement of credit through other financial institutions, such as second-floor banks or co-responsible banks.

The Costa Rican government pays close attention to SWIFT transactions, especially the banking and tax authorities, as they are potential money laundering means. Hence the importance of proper formal and material verification by the Tax Administration when validating the banking transaction as payment of the financial service.

In view of the above, Costa Rica has set up another set of legal bodies[9] to deal with the control and monitoring of this type of activity.

From the above, it can be deduced that in order to support such transactions, for tax purposes, the countries analyzed do not use a specific document (e.g. invoice), but a document without a name, whose content must comply with the rules, which in most cases is supplemented by other documents that could prove their veracity. This leaves in the hands of the Tax Administration a greater workload when deploying its controls and the need to better understand the customs and practices of the banking sector at the international level, to understand how they operate and document their transactions. In practice, it will be the Tax Administration who perceives compliance risks, that will have to prove the existence of any irregularities. Thus, requiring a greater effort put into control -more complex or expensive procedures- than would be applied to other transactions that can be supported by documents that are fiscally approved. In all countries, the general normative for the deduction of eligible expenses and costs for legal entities apply. However, differences arise from the information provided by the four countries analyzed, some of which are more rigorous than others in terms of the characteristics of the documents supporting the expenses in question.  Costa Rica provided further details on the control procedures in place that are carried out by competent state institutions for controlling compliance with tax and financial rules. An interesting approach, since the financial sector control tools associated with taxation -many of which are available in several countries- can make it possible to optimize the control of transactions between local banks and correspondent banks, for example to verify the origin of deductions for payments abroad.  The above leads us to think about the best documentation and control regimes, using current technology and good practices. Can the use of electronic tax documents whose veracity is verifiable on the internet be part of the solution? I am sure that cooperation between tax and financial authorities to promote the interrelationship of tax rules and financial sector regulations would make it possible to improve controls. For example, the topic put on the table by the Global Forum on Transparency and Exchange of Information for Tax Purposes of the OECD and G20, relating to Financial Action Task Force (FATF) rules regarding the ultimate beneficial owner. Is it necessary to have specific documentation obligations in addition to the existing ones (general standards and transfer pricing documentation regimes) to support international financial transactions (e.g. foreign correspondent banks and local banks) for transactions between related parties? Finally, and among other topics to be analyzed, what current technologies would be useful to implement systematic controls? I invite you to reflect on this issue, which, in my opinion, requires optimization in many countries in order to be able to apply less expensive and more systematized procedures on transactions with foreign subjects and specifically with banks.

[1] Art. 23 of the Código Imposto o Rendimiento das Pessoas Coletivas (IRC).
[2] According to the TCAS judgment issued in case No. 03669/09 of 2 February 2009.
[3] Article 21 of the tax code.
[4] Article 35 of the tax code.
[5] Article 27 section III of the Income Tax Act.
[6] Articles 29 and 29-A of the Federal Tax Code and rule of the current miscellaneous tax resolution
[7] Federal taxpayer registry.
[8] Income Tax Act, Title IV “tax on remittances abroad”, articles 52 to 60. Regulation, Chapter VIII “special regimes”, Article 22.
[9] Law 8204 “law on Narcotic Drugs, Psychotropic Substances, drugs of unauthorized use, related activities, legitimization of capital and financing of terrorism” Law 9416 “law to improve the fight against tax fraud” Registry of Transparency and Final Beneficiaries.



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Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

1 comment

  1. clic aqui Reply

    Se considera a un banco virtual como un banco sin oficina y normalmente se asocia el concepto banca virtual al de banca electrónica. En términos generales, este mercado no debería denominarse virtual, siendo más adecuada la denominación de banca electrónica o por Internet, puesto que las organizaciones participantes en el intercambio existen físicamente.

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