- February 2, 2019
- Posted by: saenicsa
- Category: Economics, Tax
Since the 25th of January 2019 a proposed reform to current the current tax law has been on the dock of the National Assembly, the legislative body of the Nicaraguan government.
Given the current economic and social circumstances the proposed reforms have raised many questions as to the viability of implementing these changes.
Putting aside projected macroeconomic repercussions, this article will discuss the effects that the reforms will have solely from a fiscal standpoint and the obligations that both the tax administration and the taxpayer will assume, pending final approval.
Changes in Income from Business Activity
One of the changes that will affect many taxpayers is with regards to article 13 of law 822 Tax Concertation Law. Up to now, this article defined income from business activity as being “accrued or earned income in cash or in kind by a taxpayer providing goods and services, including capital income and capital gains and losses, provided that they are incorporated or integrated as income from economic activities”.
If the reforms are approved, capital income and capital gains and losses will no longer be considered and taxed as business income, for non-financial institutions.
How does this affect businesses? Well from now on a business can’t deduct, or apply any credits that they have to reduce either taxable base or any tax due.
Doing business with non-residents will become more difficult. In the reform that is currently being considered, article 53 proposes an increase from 15% to 25% on the withholding tax for such payments.
Capital Income & Capital Gains
Continuing the topic of capital income and capital gains, let’s first define these two concepts. The first concept is related to the generation of income by an asset over time, such as what happens when renting real estate or a mobile asset – a vehicle – for example. The other concept can be defined as the profit from the sale or transmission of an asset, either a fixed asset such as real estate or mobile.
Since the definition of income from business activity has changed in the proposed reforms, businesses that are outside of the financial sector will no longer be able to declare capital income and capital gains and losses as part of their income from business activity.
Now when a capital income or capital gain is to be paid, businesses will have to calculate the withholding amount using the following calculation:
- Capital income: the effective tax rate is now 8%, previously it was 7%; and
- Capital gains: the effective tax rate is now 7%, before it was 5%.
What does this mean? This means that if you’re a construction business, but for whatever reason decided to sell a cement mixer for US$ 10,000, for this transaction a US$ 700 tax will be withheld from payment, instead of only US$ 500, and there is no manner to recover this tax on your year-end tax declaration.
What about assets that are sold and have to be registered before a public office, such as what occurs when purchasing a motor vehicle or property?
In this circumstance, the tax rate will vary depending on the tax base which in this case is the sales amount, such as follows:
|Sales Value in US Dollars
Before the proposal of the reforms the tax rate started at 1% and the maximum was 4%.
Definitive Minimum Income Tax Payment (Pago Minimo Definitivo, or PMD for its acronym in Spanish)
The Definitive Minimum Income Tax payment is a payment that taxpayers each month are required to calculate, declare and pay to the tax authority, as per article 58 of the law 822 Tax Concertation Law.
With the reforms that have been presented an important change in the tax rate of this tax will be put into effect.
The reforms propose a 3 tiered system in which, based on your annual gross income the respective tax rate will be anywhere from 1% to 3%.
It is important to note that this monthly payment is calculated on gross income, without any deductions whatsoever other than the application of income tax withholdings your clients may have made at the source. The payments you make as a taxpayer throughout the year are summed and then accredited to annual year end income tax obligations.
The system and tax rates are broken down as follows:
- High Grossing Contributors are taxpayers that gross C$160 million annually, their rate is 3%;
- Medium Grossing Contributors are taxpayers that gross between C$ 60 to C$160 million annually, their rate is 2%; and
- Low Grossing Contributors have annual sales below C$ 60 million, their rate is 1%.
Before the proposed changes, the rate was 1% for everyone, without consideration of annual income. This change will mainly affect taxpayers that have high volume sales resulting in loss of cashflow, especially considering that the profit margin in this sector is minimal, in most cases.
Also, businesses that export, and are not in the Free Trade Zone regime, previously benefitted by receiving a 1.5% tax credit that was a deduction reducing monthly definitive minimum. If the reforms are approved, this credit will still exist, but will only be applied for the purposes of the year-end tax declaration.
Time-frames for Tax Declarations
Another important change that will take affect is that taxpayers will have considerably less time for the declaration of taxes.
Currently, each month taxes are declared and paid to the Dirección General de Ingresos (DGI) within the first 5 business days and for the Definitive Minimum Income Tax Payment and Impuesto al Valor Agregado (IVA) payment within the first 15 calendar days. While for the annual year-end income tax declaration which is the most important and extensive declaration that has to be filed and declared, the deadline was the first 3 calendar months of each year, in other words from January 1st to March 31st.
With the reforms, these time frames will be changed considerably. Effectively, what used to take 2 weeks to prepare file and declare with IVA taxes and Definitive Minimum Income Tax Payment will now have to be done within the first 5 business days of every month. Regarding the year-end tax declaration this too has changed, because instead of a 3 month period, now by the last day of February of every calendar year this tax must be filed, declared and paid, to avoid fines.
These changes in timeframe for tax declarations are a significant change that will mean taxpayers will have to be much more diligent in preparing documents, declarations and paying their taxes.
Impuesto al Valor Agregado (IVA)
The Impuesto al Valor Agregado (IVA) is a consumption tax that increases the cost of goods and services to the final consumer. Fortunately, the tax rate, currently 15%, will remain the same. Unfortunately, various products, that previously were exonerated, will now be taxed upon approval of the reforms.
For the purposes of this article we will not go through all of the items, but we do recommend that if you are a commercial business of any kind, please review whether the changes will affect any of the items you sell.
Service based businesses do not have to worry about the changes in exonerated items, for the most part. Although, words of caution, it will be important to consider any tax implications when realizing irregular transactions. For example, as per the reforms the sale of used items will be taxable, so if you are a services based business, but for whatever reason decide to get rid of some office equipment and sell it, if approved be sure to add 15% Impuesto al Valor Agregado (IVA) to the final price. If not, then be weary of an audit, because then not only will you have to pay the IVA you didn’t charge, but you’ll also pay considerable fines.
Changes to the Tax Code
Along with the reforms to Law 822 Tax Concertation Law, there are also reforms that have affected the Tax Code. This is important considering that the Tax Code contains the obligations and rights of both taxpayer and the tax authority.
Even though in practice the Dirección General de Ingresos (DGI) has implemented either electronic communication, through email or other means, the Tax Code until now had not specifically mentioned such means as a means of communication with the tax authority. With the proposed reforms this changes, since article 152 mentions that the tax authority will be able to use such electronic means as a authorized channel of communication with taxpayers. This will even apply to the exercising of taxpayer rights and due process when requesting a review and appeal of resolutions emitted by the tax authority.
Unfortunately, when required to present documents to the tax authorities, the maximum amount of time has been reduced to 10 business days, previously an extension of up to the same amount of time was possible, not anymore.
Additionally, previously any administrative bulletins that the Dirección General de Ingresos (DGI) would emit used to have to be printed and circulated, now the reforms state that the uploading of said bulletins to the Dirección General de Ingresos (DGI) website is sufficient.
The reforms also mention that the tax authority will have the right to corroborate information and share information with other government institutions, including the municipalities.
A Few Final Points…
The final implications of the reforms remain to be seen. In the meantime, all that can be done is diligent preparation for possible changes. As an accounting, tax and payroll firm, we remind business owners to be aware that the Dirección General de Ingresos (DGI) and other government tax authorities are taking various steps as a whole to improve taxation. The best way to be prepared for an audit or review by the tax authority is by maintaining your accounting up to date. Also, it is important to declare every month, even though the activity of your business has reduced or may be even zero, to simply ignore the requirement to declare can result in an audit or at the very least a visit by the Dirección General de Ingresos (DGI).
Regarding business operations and general economic considerations, it is important that businesses take the time to also review and go over their financial statements, especially the balance sheet. A review of the income statement through various periods is also advisable to better comphend sales vs. expense trends to then project possible scnearios for the current year based on circumstances. Finally, if anything, we recommend that a budget as detailed as possible be prepared – if you don’t watch your spending then no amount of revenue will be able to keep your business from bankruptcy.
SAENICSA | Accounting & Tax Services is a certified public accounting firm located in Managua that has provided accounting, tax and payroll services to businesses since 1995. If you have liked this article, we encourage you to share it and if you have any questions feel free to contact us, HERE.