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Impact of exchange differences on the IRAE
In this report we will analyze the impact of exchange differences on the settlement of the IRAE. Bearing in mind that the dollar for the banknote as of December 31, 2019, the close of the fiscal year of most companies in Uruguay, was at $ 37,308 and at the date of this report is at $ 43,503, producing an increase of 17% , it is necessary to analyze its fiscal impact.
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In the first place, we clarify that the Administration expressed in several consultations its position that the exchange differences generated by assets are always considered income and those generated by liabilities, indirect financial expenses.
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Asset exchange difference
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In order to analyze the exchange differences originated by assets, the one generated by local assets must be separated from that generated by foreign assets.
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Local assets exchange difference
The asset exchange difference is part of the gross income of the IRAE, remember that the IRAE for simplifying purposes is calculated as follows:
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IRAE = 25% Net Tax Income
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Net Tax Income = Gross Income - Deductible Expenses
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Therefore, to the extent that the exchange difference is originated by local assets that generate taxed income, in the face of an increase in the exchange rate, gross income also increases and consequently the IRAE.
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Foreign assets exchange difference
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The income that is included in the IRAE is that of Uruguayan source, as defined by the regulations in Article 7 of Title 4, it is the income from activities carried out, assets located or rights used economically in Uruguay.
Consequently, the exchange difference generated by assets abroad is not included in the IRAE, therefore, the increase in the exchange rate, in principle, would not be affecting the tax.
On the other hand, the regulation establishes that the non-financial expenses partially affected to the obtaining of taxed income will be obtained by applying a technically acceptable coefficient, which arises from the actual operation of the company.
The criteria defined by the taxpayer may not be changed without prior authorization from the Administration.
Once the coefficient on indirect non-financial expenses has been applied, those that are associated with non-taxed income will be considered as non-deductible expenses in the liquidation of the IRAE.
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In the event that the coefficient chosen by the taxpayer arises from the relation of non-taxed income with respect to total tax income, the increase in the exchange rate increases the non-taxed income and consequently the IRAE.
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Liability exchange difference
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Differences generated by liabilities are considered as financial expenses, therefore an increase in the exchange rate increases financial expenses and consequently decreases the IRAE.
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In the event that the taxpayer obtains income taxed and not taxed by the IRAE, he must associate financial expenses based on a coefficient to determine the proportion of financial expenses associated with income not taxed and therefore not deductible.
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The regulations establish that the coefficient to be used is the one that arises from the ratio of the average of non-taxed income generating assets over the average of total tax assets.
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Consequently, although an increase in the exchange rate increases financial expenses in the event that the taxpayer obtains taxed and non-taxed income, it must determine how the exchange difference affects the expense association coefficient to determine the final impact on the IRAE.
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