The Concept of “Accrued” in Corporate Income Tax

The controversy arose from the challenging by the Tax Authority of the deduction of certain expenses incurred by a taxpayer as a result of exclusivity agreements signed with its customers.

The Income Tax Law states the accrual criterion for the allocation of third-class income (business income). The argument was based on how this standard should be applied in that particular case.

The taxpayer had deducted the amounts paid as compensation to customers for the exclusivity granted during the execution of the agreements. The Tax Authority claimed that this allocation should be made in proportion to the service actually provided in each fiscal period, which was appealed by the taxpayer.

The Federal Tax Court adhered to the Tax Authority’s position and considered that the concept of the term “accrued” implies that the income and expenditures must be allocated in the Income Tax when the operation from which they result is completed. Hence the expenditures should have been allocated in proportion to the fiscal periods corresponding to the provision of the services.

The Court of Appeals confirmed this decision and the Federal Supreme Court of Justice, endorsing the conclusions of the Attorney General, annulled the adjustment performed by the Tax Authority.

The Supreme Court clarified that “accruing” is a general legal concept which refers to the origin of an economic right. Accordingly, deductions should have been made in the fiscal period corresponding to the execution of the agreements by which the company agreed to fulfill its payments.