As an analogy with human life, the start-up stage in companies could be defined as the phase since its birth up to the moment when an individual is able to walk by himself. In companies, the start-up stage ends when the company begins to have recurrently income, meaning that it starts to operate and obtain resources in conformity with the principal activity; therefore according on the type of industry or activity, the start-up stage could terminate immediately after the constitution date or could take several years for its completion.
Even when the end of the start-up stage is variable and depends on the draft of industry or activity and the evolution and development of said company, there is a set of regulations and rules in common which the companies in this stage should follow, rules that we are going to talk about to expose a general landscape of the main observations.
The financial reporting standards (NIF’s, for its initials in Spanish) establish the following guidelines:
The disbursements that are included in the start-up stage, are the ones made by the following companies before they start their commercial activities:
- New created companies, in the beginning stage.
- Operating societies, when they adopt a new draft or substantially expand their capacity.
The term in commercial form, is defined by the NIF’s as the moment when the product is sold and offered in a consistent basis, with an acceptable quality to the client and without experimental ends.
Likewise, in order for the above mentioned start-up disbursements to be recognized as assets, it is required to have the determination that in the future they will provide an economic benefit and it can be reliably quantified.
Regarding its recognition in results, the NIF’s gives two options: i) if it’s possible to determinate the useful life of the disbursements on start-up stage these must be amortized by the above mentioned period; ii) If it is not possible to identify the useful life, it will remain as an indefinite asset subject to rules of recognition of deterioration.
As for fiscal dispositions we must comment that, regarding the Income Tax Law, the maximum percentage of annual deduction is 10% starting on the date in which the goods are used or since the year next to the start of their use, this last option is left to the taxpayer’s choice.
As for the Law of the Value-added tax, the recent regulations restrict the possibility to obtain the return or compensation of balances in favor for payments of disbursements made in start-up stages, burdened by this tax, since there has to be an estimate of the incomes that will be burdened by this tax and the percent which they represent of the total incomes, in order that the same percentage is used to determinate the IVA paid to suppliers, that will be able to credit and obtain in return and/or compensation, likewise it will have the obligation of presenting the information and documentation that endorse the property, activity, and other information. Otherwise, it will be possible to fulfill this credit up to the moment the aggrieved activities of this tax begin, it is to say that income should be obtained by goods or services burdened by IVA.
Along with what was mentioned before, a transcendental point that will have to be checked is the type of expenditures, since not all will have to be considered to be an asset or deductible under the treatment of the start-up stage.
As it was observed, there are significant differences in the treatment of this expenditures that might represent major tributary and administrative burdens if the correct controls for their identification, recording and control are not implemented, which is why we consider as convenient to first review if the company is within the startup-stage and the amount of the expenditures made under this concept, in order to determine the correct treatment of said expenses.
In case you consider it as convenient, our group of advisors can help you with the identification, quantification and the establishment of adequate accounting policies and fiscal treatment in a timely manner to confirm the correct presentation of the financial information and therefore avoid an excessive tax burden.
If you have any questions or comments, please do not hesitate to contact us.
C.P.C. | L.D. Gabriela Alicia Rojas Jiménez
Terán Rojas & Associates.
This article was written by Gabriela Rojas. You can find more articles and seminars in www.teranrojas.com.This article is owned by TR & Associates and its reproduction requires the written consent of Mrs. Rojas, who have the rights of this work. Copyright 2018. This article is a general explanation of tax issues valid at the time of publication. “That article may be contrary to the interpretation of the tax authorities”.For each particular case we recommend obtaining written information from the applicable fiscal responsibilities of your case.