The region, facing the European and American crisis – which is basically hitting the construction sector very hard – has become a very interesting investment area for this sector. In the case of Peru, the scope of construction in recent years has grown significantly, generating the attraction of various foreign companies, which have migrated to that country for the benefit of a solid economy, sustained growth and because in the construction sector there are very attractive tax treatments that we will detail.
In relation to the IR, the relevant issue related to the construction sector is that related to the recognition of income. It constitutes a basic rule, applicable to the generators of corporate income (of “third category”), to recognize the income generated in a commercial year according to the criterion or principle of “the accrued”. Thus, art. 57 of the LIR states that “Revenues will be allocated to the taxable year in accordance with the following rules: a) Revenues from the third category will be considered to be produced in the business year in which they accrue.”
Faced with the lack of definition of what is “accrued”, it is allowed to investigate the meaning in other rules. In that sense, the International Standard of Accounting – IAS 1 states that revenues, expenses and costs will be recognized as the right is earned or when they are incurred and not when they are collected or paid, shown in the accounting books and expressed in the financial statements in the which correspond In this sense, if a company acquired the right to income in an exercise, then in that year it will have generated the income, regardless of whether it received it or not.
However, in the case of construction companies or similar companies that execute work contracts, they may apply the general rule of imputation of income (through the “accrued” already outlined) or the special rule regulated by art. 63 of the LIR. So, we went on to detail the allocation criteria applicable to these contracts.
The methods of recognizing the income will be applied according to whether the work contracts are not greater than a recordable year or greater than a taxable year. In the first, if the construction or similar companies execute work contracts whose results correspond to a single taxable year, in order to recognize the income generated by said contracts, they must apply the accrual principle
In the second, if the results correspond to more than one taxable year, the income recognition methods indicated in art. 63. These correspond to the method of perceived, accrued and deferred income.
In the perceived method, to determine the gross annual income, the construction companies or similar will allocate to each taxable year the gross income that results from applying the percentage of gross profit calculated on the amounts collected for each work, during the financial year. For the total of the respective work. In this case, for the payments on account of the IR, the amounts collected in each month for progress of work are considered as “monthly net income”.
For the accrual method, each taxable year is assigned the gross income that is established by deducting the amount collected or receivable for the work executed in each work during the fiscal year, the costs corresponding to said works. Thus, the monthly net income is constituted by the sum of the amounts collected and receivable for the work executed in each work during said month.
The method of deferring income does not apply to companies whose execution of works will not be greater than three years. Thus, the IR will be applied to the tax utility determined in the commercial year in which the works are completed, with the income being deferred until that year.
Singularities of business income
In Peru, the definition of “works contracts” must be found in the Civil Code (articles 1771 to 1789), in a supplementary application authorized by Norma IX of the Tax Code, in the absence of an express definition in the law of the IR.
The “construction companies” must be defined through the ISIC 45. Thus, they are not construction companies, architecture and engineering, scaffolding rental without assembly and disassembly, decontamination of the soil, deepening of wells, etc.
In addition to the IR, there are two operations related to the construction sector that are taxed with an 18% VAT rate: a) Construction contracts and, b) The first sale of real estate executed by the constructor (not being taxed in this assumption the value of the land).
Attention with the methods
The construction companies are not obliged to apply the three methods described. If this is not done, the recognition of income is governed by the general rule of the “accrual principle”.
The adopted method will be applied uniformly to all works executed by the company and cannot be varied without the authorization of the Sunhat, which will determine from which year the change may be applied.
In all cases, companies must keep a special account for each work. These accounts must be differentiated in the management analytical accounts.
The methods will only apply to income from the execution of “works”. Therefore, with respect to companies that perform other types of activities, their income will be charged according to the accrual principle and the income from works will be added, as indicated by the method chosen.