Maximizing Tax Deductions and Properly Supporting DGI Declarations – Nicaragua

No one wants to pay more tax than they need to. Therefore, it is important to comply dutifully with the requirements outlined by the Ley de Concertacion Tributaria and its bylaw, so as to be able to deduct all expenses and costs that are available to taxpayers.

This article will discuss the importance of deducting legally all expenses and costs related to the generation of taxable income and the requirements that supporting documents need to have so as to be deductible.

What are the requirements for deductible expenses in Nicaragua for taxes?

Business income tax is calculated taking into consideration two main factors, which are the tax basis and the tax rate that is applicable for each case.

Tax liability = tax basis x tax rate (%)

Tax basis for all effects, as stated by article 35 of the Ley de Concertacion Tributaria, refers to simply the net income or bottom line of the business.

What is net income?

Well net income is the subtraction of all deductible costs and expenses from gross taxable income. This is fairly simple and straightforward, nonetheless, the process involved in adequately supporting costs and expenses implies implementing important protocols both internally for those in charge of purchasing and externally in relation to the providers and suppliers of your business.

What do I mean by this? I mean that it is important that the individuals within your business be aware of the requirements that the Ley de Concertacion Tributaria stipulates as to what qualifies as a deductible expense and that they assure that all documents related to purchases to be included and deducted from taxable income be not only complete, but also safely filed in case of future audits by the national or municipal tax authorities. Also, in regards to your providers it is important that they are aware that as a business you require that they provide, not only the products and services that you are buying, but also the proper legal documents that will be the ultimate support of any transactions that may arise from the business relationship.

Now, in the case of tax rates, these unfortunately cannot be changed and it is imperative that the correct rate be used in accordance to each taxpayer. Although, the tax basis is different. It is different in the aspect that depending on how well your documents are supported and whether or not a expense is deductible, your tax liability will either increase or decrease. So the lower your tax basis when multiplied by the tax rate the lower you tax liability will be.

Therefore, what are the requirements as per the Ley de Concertacion Tributaria in relation to deductible costs and expenses?

Costs and expenses that are deductible need to be general, necessary and normal to produce the taxable income and to maintain its existence and or maintenance, rule of thumb.

Also, said costs and expenses have to be recorded in the accounting of the business and supported by their corresponding invoices and receipts.

What is a properly supported expense?

A properly supported expense is on that complies with the following criteria:

Having reported and made the withholding the payment to the Tax Administration;

Invoices and receipts include the name of the taxpayer and his RUC or Cedula number.

In the case of purchases of VAT-exempt products made in the informal market (individuals that are registered taxpayers) or to taxpayers of the simplified regimes, the deduction will be accepted if the requirements set out above are met, the supplier is identified (full name and Cedula number) and the receipt of the acquired good or of the service received, where appropriate, is demonstrated.

If the aforementioned criteria isn’t met, then not only will any deductible expenses be reversed in an audit by the tax authorities, but your tax base for that year will be readjusted, you will pay additional tax and be subject to various penalties by the administration.

I strongly recommend taking care in properly supporting all purchases, if not not only will the law be infringed, but there will be no basis for appeal.

At SAENICSA | Accounting & Tax Services we have provided accounting, tax and payroll services since 1995. If you have any questions regarding taxes or accounting, feel free to contact us HERE for a initial consultation.