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The Legislative Assembly approved, with 57 votes, a new authentic interpretation of article 28 of the Ley de Impuesto sobre la Renta (ISR), which establishes that the deductible “necessary costs and expenses” must be directly linked to the economic activity of the taxpayer and be real, reasonable, measurable and inherent al business. These may include losses, losses and expenses generated in industrial, commercial and service activities, such as the sale of perished products, textiles, electrical energy and hydrocarbons, among other sectors.
With this provision, representatives seek to delimit in a clearer way what expenses can be deducted from the ISR payment, thus strengthening legal security and providing greater certainty both to taxpayers and to tax administration.
The initiative, presented by representatives of Nuevas Ideas, also included the derogation of Legislative Decree 345, approved on may 29, 2019, due to which, as explained in the plenary session, this interpretation had generated gaps and different application criteria since its entry into force.
The legislators indicated that the reform would allow consolidating a more efficient, coherent and objective tax system, avoiding ambiguous interpretations when determining which expenses are deductible for fiscal purposes.
The new interpretation establishes that, to be recognized as deductible, costs and expenses must be properly documented and registered in formal accounting or in special taxpayer records, as appropriate. This includes invoices, vouchers and other accounting support that allows you to demonstrate that expenses are directly related to the economic activity being developed.
Furthermore, it is clarified that these costs and expenses can be recognized as deductible when there is no tax to pay in the corresponding tax exercise. As approved, this will allow companies and taxpayers to adequately reflect on the real operating expenses of their economic activities.
Within the sectors contemplated in the authentic interpretation, commercial and industrial activities are highlighted that record losses or natural losses derived from their daily operation. For example, perished products that suffer deterioration, losses in textile inventories, expenses associated with the supply of electrical energy or processes linked to hydrocarbons.
Parliamentarians assured that this more precise definition will allow us to standardize criteria in tax inspection processes and avoid discrepancies between taxpayers and tax authorities regarding which expenses can be validly deducted.
Another of the points included in the reform is the faculty granted to the Dirección General de Impuestos Internos (DGII), of the Ministry of Hacienda, to issue instructions, circulars, resolutions and technical guides that facilitate the correct application of authentic interpretation.
Therefore, it is intended that both companies and natural people have clearer guidelines on the tax management of their costs and expenses, reducing uncertainties and strengthening fiscal compliance within the salvadoran tax system.
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