Income tax systems with pass-through entities transfer a firm's incomes tothe shareholders, which are taxed individually. In 2014, a Chilean tax reformintroduced this type of entity and changed to an accrual basis that distributesincomes (but not losses) to shareholders. A crucial step for the Chileantaxation authority is to compute the final income of each individual, given thecomplex network of corporations and companies, usually including cycles betweenthem. In this paper, we show the mathematical conceptualization and thesolution to the problem, proving that there is only one way to distributeincomes to taxpayers. Using the theory of absorbing Markov chains, we define amathematical model for computing the taxable incomes of each taxpayer, and wepropose a decomposition algorithm for this problem. This allows us to computethe solution accurately and with the efficient use of computational resources.Finally, we present some characteristics of the Chilean taxpayers' network andcomputational results of the algorithm using this network.
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