Tax Update- Important changes you should be aware of as we start 2016.
A new law (Law No 891) came into force starting December 18th, 2014 with amendments, additions and repeals for Law No 822, Tax Concertation Law. We will describe the most important changes in each section below:
1.1. General Aspects
Law No. 822 is in force since January 1, 2013 and establishes new conceptualization of income tax which includes:
1. Labor income / Personal Taxes;
2. Income from economic activities, and;
3. Capital income, capital gains and capital losses.
The Law considers the Capital Income/rent any income perceived originating from the exploitation of assets that belong to the company.
There are two kind of capital income considered by the Law:
(i) the immovable capital income/rent (renta de capital inmobiliario) and
(ii) the movable capital income/rent (renta de capital mobiliario).
Now Law 891 establishes that all income perceived by the tax payer that cannot be classified or justified as income, or extraordinary gains, capital contributions, loans etc.., without documentation to prove the origin of that money it will be considered income subject to taxation.
1.1.1. Income Tax Rate.
The general statutory corporate income tax rate is a flat rate of 30% on net income. This is equally applicable to local branches of foreign corporations. Payment of Income Tax (Span- ish acronym IR) is subject to an “Anticipated Payment of Income Tax” (Spanish acronym PMD). The rate of the Income Tax Definitive Minimum Payment (Pago Mínimo Definitivo del Impuesto sobre la Renta), is 1% calculated on the gross income. Such payment takes place through in-advance monthly payments of 1% of the gross income of the company. In the case of taxable income based on commissions, such percentage is calculated on the sales commission or commercialization margin as long as the provider complies with the corresponding prior in-advance monthly payment. Annual income tax will be determined at the higher of the net taxable income (i.e. after deduction of expenses) or 1% of gross income.
Tax Concertation Law, Law No. 822 (Ley de Concertación Tributaria) established that the tax rate would decrease yearly by 1% starting on 2016 until it reached a flat 25% tax rate in year 2020, for the statutory corporate Income Tax (Spanish acronym IR), however, with Law No. 891, this benefit was repealed and there is no longer a yearly decreasing of the tax rate, so it will be indefinitely fixed at 30%.
Although the income tax in Nicaragua will remain on a territorial basis of taxation (with some elements of global taxation), the new income tax law includes regulations related with per- manent establishment, transfer price rules or even a concept of resident for taxable purpos- es.
As a general rule, all costs and expenses related and necessary to the income producing activity, are considered deductible expense but the lack of appropriate legal support on the expenses could lead to a proportional rejection on overall deductible costs and expenses.
There are four necessary conditions for the expenses to be deductible which are:
A) The spending must be caused or paid.
B) The spending should be caused in the fiscal year
C) Must be properly supported
D) Must be used to generate income.
Tangible and intangible fixed assets’ depreciation is deductible. Depreciation term varies depending on the nature of the assets.
Law No. 891 removed the benefit to depreciate the reevaluations of assets. 1.2. Transfer Pricing
Considering the legislative model recommended by the OECD, nowadays, with the entry into force of Law No. 822 “Ley de Concertación Tributaria”, Nicaragua has a regulatory framework in the field of transfer pricing in effect starting 2016. Different methods to apply the arm ́s length principle, as well as definitions of related parties are contemplated by the Law. Our legislation is based in the established or suggested principles by the OCDE, in which we will enhance 3 elements.• Improvements in the supplying systems and mechanisms and information exchange.• Creation of the Specialized Unit of Transfer Pricing.• Principles and methods of calculation.
1.3. Inflation Adjustment
Nicaragua has an annual inflation adjustment, which consists in determining the monetary gain or loss, derived from the effect of the inflation on debts and credits acquired in a foreign currency. For such purposes, taxpayers shall compare the average balance of their debts acquired in a foreign monetary with that of their credits acquired in a foreign currency; in case the balance of the debts is higher, an inflationary gain originated by the exchange differential which shall be considered as a taxable income; otherwise, an inflationary loss will be obtained, which may be considered as a deductible item for income tax purposes. The referred inflationary gain or loss is determined by applying the na¬tional exchange rate established by the Central between Cordobas (National currency) and US Dollar.
1.4. Net Operating Tax Losses (NO L’s) Carry-Forward
NOL’s can be carried forward for a maximum term of 3 fiscal years. There is no carry-back possibility contemplated by law.
The transfer of assets originate by a reorganization of corporations, mergers and Spinoffs could be subject to tax in Nicaragua as a capital gain.
1.6. Payment and Filing of Income Tax
Ordinary tax year covers the period from January 1st. to December 31. The annual income tax return must be filed and payed within the three months following the end of the corresponding fiscal year. Monthly income tax payments must be filed during the fiscal year. Withholding at Source Monthly Tax Returns will be effected in the corresponding forms and other means, in the form and conditions established by the Tax Concertation Law. Even in the case when a withholding agent does not perform withholdings at source during one or more monthly periods, he shall be however obliged to file the tax returns corresponding to those months.
1.7. Interest and Penalties on Unpaid Tax or Tax Paid Belatedly
Unpaid taxes are subject to lateness interest that should be assessed at the official rate fixed by the Tax Administration, and penalties vary according to infraction are established by our Tax Code Law No. 562. It is important to notice, that Nicaraguan legislation establishes that if a contributor omits to file the Declaration Formulary and does not pay the correspond- ing income tax, such contributor can be responsible under the crime of forgery in civil and criminal matter.
Dividends to be paid to companies’ shareholders are considered to be Capital Income and are subject to a withholding tax of 10% if the shareholder is a resident, and 15% if the share- holder is a nonresident; however, the Tax Concertation Law establishes that the movable capital income si subject to a single deduction of the 50% on the raw income paid.
According to the Nicaraguan Securities Law, stock Certificates are considered to be movable objects because of the value they represent, that being said, Dividends, as movable capital income could be subject to the above mentioned deduction, making the effective withholding tax to a 5% when paid to residents, and 7.5% when paid to nonresidents.
1.9. Cross-Border Payments 1.9.1. Tax Withholding
Non-resident individuals or entities receiving Nicaraguan sourced income are subject to income tax withholding in Nicaragua. This is a final tax applicable to foreign residents. In some cases deductions may apply.
All payments (for services or other economic activities) made to nonresident legal entities are subject to a 15% withholding tax
Movable capital income/rent is considered as the income derived by a resident or non-resident from the lease, sublease, alienation, use, assign of rights, License of any immovable or intangible properties or assets related to Intellectual Property.
The withholding tax rates applicable to capital income for resident or non-resident used to be 10% over the total income, however, after the amendments in Law 891 came into force, the tax rate for nonresidents increased to 15%.
1.9.3. Interest payments.
Interest payments are subject to a 10% withholding tax rate if paid to residents, and 15% if paid to nonresidents.
1.9.4. Equity Reimbursements
Although tax liabilities may arise within this context, they would not be subject to withholding obligations, under the logic that reimbursements are not payments per se.
1.9.5. Tax Havens
Operations with companies incorporated/established in a country consider as a “Tax Heaven”, are subject to a withholding tax of 17%.
The governments is supposed to publish an official list of countries considered as tax havens but it has not done it until this date.
VALUE ADDED TAX (VAT)
2.1. General Aspects
VAT ́s general rate is 15%. There are also some VAT exemptions for specific entities. 2.2. Taxable Transactions
The Nicaraguan Value Added Tax (IVA) of 15% applies to all imports and sales of goods and rendering of services and importations as well as leases, with significant exceptions, mostly for basic goods and services.
2.3. Taxable Base
As a general rule, the taxable base is the price or value of the consideration paid for the goods or services.
2.4. Creditable VAT
As a general rule the VAT taxpayer has the right to credit all VAT charged to clients (VAT Debit) against payable VAT (VAT Credit) and VAT paid on imports. . The credit is a personal right and it is not transferrable.
2.5. Payment and Filing
VAT returns must be filed under a monthly basis on the next 15 days of the following month
3.1. Property Taxes
Please see Municipal taxes.
3.2. Stamp Tax
This is a documentary tax applicable to some documents. The Stamp Tax has fixed rates for some specific documents and agreements.
3.3. Excise Taxes
In Nicaragua, there are three excise taxes:
1. The Selective Consumption Tax (Spanish acronym ISC) apply to the consumption of national or imported goods such as cigarettes, alcoholic beverages and soft drinks.
2. Excise Tax on Fuel (Spanish acronym IECC), apply on the sale or importation of oil/petroleum goods.
3. Special Tax to Finance the Road Maintenance Fund (Spanish acronym IEFOMAV) which apply to the sale, import of oil/petroleum goods.
3.4. Custom Duties
In addition to import VAT (15%), Nicaragua imposes ad valorem import duties (DAI) on a good’s c.i.f. (cost, insurance and freight) value. The range is between 0% and 15%. Also, some goods are levied with the Selective Consumption Tax depending on which good.
PAYROLL TAXES /WELFARE CONTRIBUTIONS
4.1. Social Security System
According to Nicaraguan social security legislation employer must submit their employees to the social security system. The social security comprises two special schemes: compulsory and optional. The first establishes the requirement of membership to any person who is under a labor relationship. The second, or optional scheme, it is a voluntary recruitment of independent professionals. This scheme is completely optional and there is no legal basis to oblige any service provider to this scheme. Up until December 31st 2013 the top monthly salary or wage subject to contribution was C$ 37,518.00 córdobas however on December 20th 2013 there was an amendment to the regulations of the Social Security Law which states that starting January 1st 2014 the top monthly salary or wage subject to contribution will be C$ 54,964.00 up until December 31st 2014, and starting January 1st 2015 the top salary subject to contribution will be C$ 72,410.00.
The employer must pay 17% (it was 16 until December 31st 2013) of total payroll, the employee contributes 6.25% of their salary as part of the quote, and the State accounts for 0.25%. The billing is made by applying the percentage established over the monthly remuneration of the insured person. The thirteenth month is free of social security deductions or withhold. In the thirteenth month pay¬ment the employer does not contributes with 17% of gross pay.
4.2. Labor Risks Insurance
This mandatory insurance is covered under the Nicaraguan Social Security Institute, and covers all the labor force
4.3. Other Tax/obligation
Also, all the employers are required to pay a monthly contribution of 2% for the National Technological Institute (INATEC) on the gross amount of the payroll. The collection of this contribution must be done through the infrastructure of social insurance fund. Since the 2% is payable on the gross amount of the monthly payroll, in the month that an employer pay vacations the payroll increase as well the 2%. The thirteenth month is free of INATEC contri- butions. In the thirteenth month payment the employer does not contributes with 2% of gross payroll. INATEC offers training in various disciplines at low prices. By law, the percentage of salary is withheld and given to INATEC to be applied to the cost of courses offered or to be used in training seminars or courses offered by the institute
5.1. Property Taxes
The Real State Tax (Impuestos de Bienes Inmuebles) is paid to the local municipality. The amount is 1% of the assessed value given to the property by the Cadastral Office. (The taxable base is 80% of the assessed value) The assessed value of the property is set each year and will be amended following any improvements made. Taxes are paid in arrears each year by March 31. If paid before March 31 certain discounts may apply.
All contributors have to:
a. Register and obtain a Municipal Registration in the place where the services was ren- dered and if the company or person has a physical establishment in that place. All natural or legal persons who carried out, industrial, commercial and services activities, must regis- ter annually from December 1st to January 31st. The fee registration is established accor¬ding to its constitution capital. After the first year to revenue the register the tax rates apply is 2% on the average gross income ob¬tained in the last three months of the previous year. In the case of opening a new business, as tuition will be paid 1% of indi- vidual social capital. The Municipal Registration must be paid on each and every munici- pality where the taxpayer has business establishments.
b. Pay a Municipal Tax over the gross sale (1%) for all industrial commercial and ser- vices activi-ties carried out in the territory of each municipality. The Mayor can appoint a contributor as a municipal tax withholder. The tax rate is paid on a monthly basis
c. Trash Recollection Tax, over sales.