TREATMENT OF UNCOLLECTIBLE DEBTS AND VAT IN EDUCATIONAL SERVICES SUPPORTED BY PROMISSORY NOTES
San Jose, February 9, 2023
Subject: Attention to a consultation protected under article 119 of the CNPT
The inquiries submitted for consideration to the General Taxation Directorate are as follows:
- a) Do the amounts recovered from accounts receivable at the administrative or judicial level through promissory notes have to pay VAT?
- b) Can my client deduct as deductible expenses the manifestly uncollectible debts from 2017 to 2020 that were part of its regular business operations, for the profit determination period of 2022?
Directorate’s Criteria (Responses):
Accounts receivable at the administrative or judicial level, where payment was secured with a promissory note, must include VAT in those collection efforts. This is because your client was required to issue an invoice or electronic receipt at the time-of-service provision, regardless of whether the student attended or not. As for the matter of profits, your client can deduct as deductible expenses the manifestly uncollectible debts from 2017 to 2020, provided it complies with the aforementioned requirements regarding the declaration of uncollectibility and the statute of limitations.
Please note that the VAT Law indicates when the taxable event occurs for the provision of services:
“Article 3 – Occurrence of the taxable event. The taxable event for the tax occurs: (…)
In the provision of services, at the time of invoicing or service provision, whichever occurs first. However, in the case of service provisions that generate advance payments before or during the service, the tax shall accrue at the time of payment of the price for the amounts effectively received. (…)”
Furthermore, according to Article 17, Section g) of the Income Tax Regulation (RLISR), once the taxpayer has deducted uncollectible accounts, the Tax Administration could reject the expense upon prior justification. In this case, the taxpayer can still attempt to deduct the expense in the following fiscal period, provided they demonstrate that they have pursued legal collection actions before the courts and that more than 24 months have elapsed since the due date of the debts without any payment being made by the debtor. The relevant part of the norm states:
“Article 17 – Deductible Costs and Expenses. Companies and individuals engaged in lucrative activities mentioned in Article 2 of the Law have the right to deduct from their gross income the necessary costs and expenses provided for in Article 8 of the Law, as long as they are necessary to generate current or potential income subject to the income tax. // In accordance with the above, the following shall be deductible from gross income: (…)
g) Debts in favor of the taxpayer that are manifestly uncollectible, provided they arise from operations within the regular course of business and the reasons justifying such classification are indicated. In the event that the Tax Administration does not accept the deduction of an uncollectible debt, the taxpayer may deduct it in the following fiscal year, if they demonstrate that the appropriate legal actions were taken before the ordinary courts for collection and as long as a period of more than 24 months has elapsed after the due date without any payment being made by the debtor. However, the Tax Administration shall have broad discretion, in highly qualified cases, to reject or accept the expense. If an uncollectible account that has been deducted from gross income is recovered in whole or in part, its amount must be included as taxable income in the fiscal period in which the recovery occurs.”
From the reading of the regulations, it is clear that neither the Law nor the Regulation establish a specific period to classify an uncollectible debt as a deductible expense, as long as the established requirements are met, and the statute of limitations has not expired. Furthermore, in the case of recovering such amounts, they must be declared as taxable income in the ISU (Income Tax) return for the fiscal period in which the recovery occurs.