Transactions between a participant and a joint venture

Section 15.16 and 15.17 of Section 15 of IFRS for SMEs establishes that "when a participant contributes or sells assets to the joint venture, the recognition of any portion of the gain or loss from the transaction shall reflect the economic substance of the transaction. As long as the assets are held by the joint venture, and provided that the participant has transferred the significant risks and rewards of ownership, the participant shall recognize only the portion of the gain or loss that is attributable to the interests of the other participants".

To explain the above, it is necessary to consider the following example: Company "A" S.A.S. decides to form a consortium with company "B" S.A.S. to carry out the rendering of a service to a state entity. They decide to participate in the consortium in the following proportions; "A" with 60% and "B" with 40%.  The consortium decides to acquire, for a value of $1,000 (commercial value), the ownership of a backhoe loader owned by A, whose fiscal cost is $700. According to IFRS 11 and Section 15 of IFRS for SMEs, since A is part of the Consortium, the sale would be made with "the other parties of the joint operation", i.e., the sale would be made only with B and in the participation that B has in the operation.

This is because it would not be feasible -accounting-wise- to carry out a sale and purchase transaction where the buyer and the seller are the same person (A is the seller and A is the owner of 60% of the separate vehicle, without legal personality, who would act as buyer). Thus, A would only be able to recognize in income 40% of the profit corresponding to B's interest (300x 40%=120) and would have an unrealized gain for accounting purposes of $180.

Although the accounting treatment of the aforementioned transaction is clear, the tax treatment must now be reviewed, which implies a great interpretative challenge and the application of special rules over general rules. Depending on the analysis made, one or another rule will be applicable and the transaction may be taxed in different ways, as explained below.

Our tax system establishes certain general rules such as that the IFRS will be the basis for calculating the income tax, unless the tax regulations establish otherwise (Art. 21-1 of the Tax Statute -E.T.-) and that, except as established in special regulations, the expenses accrued for tax purposes will be those accrued for accounting purposes (Art. 28 of the E.T.). Likewise, our tax system establishes some special rules for certain specific cases, such as in the case of business collaboration contracts, where Article 18 of the Tax Statute establishes that "the commercial relations that the parties to the business collaboration contract have with the business collaboration contract that have a guaranteed return shall be treated, for all tax purposes, as relations between independent parties".

Thus, if it is interpreted that the sale between a consortium member and the consortium is an operation with guaranteed return (since it is not subject to an alea, but there is certainty of its profitability), the IFRS would not be applied as the tax basis of the operation (Art. 21-1 and 28 of the E.T.) but it would be considered -only for tax purposes- as a sale with a third party. On the contrary, if it is interpreted that the operations with guaranteed return are only those that grant a fixed monthly payment on the shared business (and not on other type of businesses, such as sales between participants and the joint operation), then IFRS would apply as tax basis and its tax treatment (in the absence of a special rule) would be the same as the accounting treatment. In such a case, the tax base on which tax would be levied would be the $120.