LAW N° 9635 STRENGTHENING OF PUBLIC FINANCE was published in the official journal La Gaceta, Extension 202 on 04 December, 2018, introducing significant reforms to the Income Tax Law, and creating the Value Added Tax.
Below is a summary of the main changes brought about by this law:
The Value Added Tax (VAT) is established, thereby repealing the Sales Tax in force since 1982. Final determination of the VAT at the end of the period represents the total tax debits (the VAT a taxpayer charges its customers) minus the total tax credits (the right to receive a refund for the VAT paid). When the tax credit is greater than the debit in a given tax period, the difference becomes a tax balance in favor of the taxpayer that may be offset.
The new VAT assesses a 13% tax on all products and services sold in the country. It also includes differentiated rates of 4% for private health care services and airline tickets, 2% for medication and personal insurance, and 1% for products in the basic food basket.
It is worth highlighting that the VAT is subject to full, partial or no credit of taxes paid, depending on the corresponding sale. Purchases of goods or services with 13% tax are subject to full credit. Purchases subject to a reduced rate are entitled to a partial credit. Purchases not subject to taxation are not entitled to a credit, with a few exceptions.
The VAT expands the tax base, i.e. more government income from a given economic activity, and greater control over service providers that had been exempt, such as private doctors, accountants, and lawyers.
Taxes must be settled no later than the fifteenth calendar day of each month, using an affidavit of the goods sold or the services rendered in the previous month. Such taxes are paid at the time of filing the affidavit. For the December statement, the taxpayer must calculate the definitive proportion of the fiscal credit based on the operations carried out in the corresponding calendar year.
Tax on profits undergoes certain changes, including the creation of dual rent on income tax, which means taxing any rent resulting from lucrative activities at a tiered rate, and capital gains at a uniform rate.
The law also restructured the financial year, now running from January through December. Taxpayers whose new period does not yet match must file a second statement for the unpaid portion of 2019, which runs from the first day after ending the previous period until 31 December that year.
Profits and losses from foreign currency exchange rates are subject to profit taxes on an accrual basis. Concerning interest deductibility, the Tax Administration requires evidence of the use given to the loans for which interest deduction is claimed, since they must be used to generate taxable income. Additionally, non-bank interest is subject to a maximum deduction of 20% of earnings before interest, taxes, depreciation and amortization per tax period. The new Law also includes changes to tax rates for staff (salary) and legal entities.
Taxes now apply to income and capital gains. The applicable taxable income rate in this case is 15%. For equity income, only 15% of the gross income is deductible, while the remaining 85% is taxable. Returns on savings held in credit and savings cooperatives and solidarity associations will have an annual exemption of up to 50% of a base salary; an 8% will be withheld and applied to any surplus. Any surplus or earnings paid by solidarity associations, cooperatives and similar entities to their members are subject to a 10% rate. For the first year of this Law, the rate will be 7%, and will increase one percent per year until reaching 10%.
The Anti-Avoidance General Norm (Norma General Antielusión) aims to avoid tax maneuvers void of economic rationale, in search of a lower contribution. In other words, stratagems must have a valid economic reason other than reducing tax payments, and must be documented and demonstrated to the Tax Administration in the event of an audit.
Additional Tiers and Rates for Payroll Taxes
Employee salaries are subject to gradual tax rates of 0%, 10% and 15%. The Law provides for two more tiers, at 20% and 25%.
Salaries ranging between approximately US $3,655 and approximately US$7,315 are subject to 20% tax, while 25% applies to salaries higher than US$ 7,315.
Foreign Remittance Taxes
The Law increases foreign remittance withholding taxes to 25%, applicable to professional fees, commissions, per diems and other independent personal services.