Managing Corporate Taxation in Latin American Countries - Dominican Republic

Author:Mr Norman De Castro,
Profession:Pellerano & Herrera
 
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Footnotes 1 Dividends and profits distributed by local branches are not subject to tax in Dominican Republic when branches have paid their corporate income tax on their Dominican Source income. 2 10% will apply when interests are paid to financial institutions. When interests are paid to non-financial institutions, the applicable withholding tax rate is of 25%. 3 In order to establish transfer pricing between related entities, the Dominican source income of branches or other forms of permanent establishments of foreign companies operating in the country will be determined based on actual results obtained from their operations in the Dominican Republic. 4 Goods subject to excise taxes are: leaded and unleaded fuel (16% ad-valorem tax); cigarettes (specific amounts of RD$29.59- RD$14.79 per cigarettes and a 20% ad-valorem tax), alcoholic beverages (specific amounts of RD$389.43- RD$317.59 per liter and a 7.5% ad-valorem), telecommunications (10%); insurances (16%) except if they fall under Law 187-01; electronic items (10-20%); among others 5 A tax of RD$1.50 per every thousand pesos (RD$1,000.00) is levied on the values of all checks or wire transfers. 6 This rate applies on the total value of the assets, including real estate properties as reflected in the tax payers' balance sheet, not adjusted by inflation and after applying the deduction for depreciation, amortization and reserves for non-collectable accounts. It will be excluded from the taxable base of this tax stock investments made in other companies, land located in rural areas, fixtures on agricultural exploitation and advance taxes. 7 Reference is made to the most usual rates, but other rates may be applicable. 1. Income Tax 1.1 General Aspects 1.1.1 Income Tax Rate. The general statutory corporate income tax rate for entities incorporated in the Dominican Republic, branches or permanent establishments of foreign companies is 25%. 1.1.2 Taxable Base. All Dominican source income is subject to income tax unless the result is the Gross Income from which all expenses incurred in obtaining taxable income are deducted. The after-deductions result is the Net Taxable Income. The Net Taxable Income is the tax base from which the 25% corporate tax rate is applied. The result of applying the 25% tax rate is the Resulting Income Tax from which applicable Tax Credits are subtracted to find the Income Tax Liability. [+] Sum of All Revenues [=] Gross Income [–] Deductible Expenses [–] Exempted Items of Income [=] Net Taxable Income (Minimum Presumptive Income Tax) [=] Taxable Base [*] 25% Corporate Tax Rate [=] Resulting Income Tax [–] Tax Credits [=] Income Tax Liability [=] Income Tax Charge Payable 1.1.3 Deductions. As a general rule all costs and expenses incurred in obtaining taxable income may be deducted, including interests, taxes (other than income tax, donation and inheritance tax, all taxes, rates or rights involved in the acquisition, maintenance and conserving capital goods, unless they have been allocated as part of the acquisition cost of such goods), insurance premiums, amongst others. The Dominican Tax Code establishes that deductions made by permanent establishments by payments of interests, royalties and technical assistance made to their foreign controlling entities will not be deductible if they have not paid the 25% withholding on the gross payment made. Expenses are generally allocated to the fiscal year in which they accrue. The Dominican Tax Code allows for the deduction of the following concepts: Interest on debts and expenses incurred through their constitution, renewal or cancellation, provided that they are directly related to the business and are involved in the acquisition, maintenance and/or operations of goods producing taxed income. Independently, interest on the financing of imports and loans obtained abroad shall be deductible only if the corresponding withholdings are effectively made and paid. Taxes and rates levied on goods that produce taxed income, except income tax and its surcharges, as well as the taxes, rates and rights incurred in acquiring, maintaining and conserving capital assets, such as the Tax on Inheritances and Donations, contributions to public works that benefit private property and other taxes levied on capital income, or any other, except when the same are calculated as part of the cost transferring the asset in question. Extraordinary damages suffered by goods that produce profits as a result of accidental causes, force majeure, or offenses by third parties shall be considered losses, but these must be reduced up to the amount of the value received by the taxpayer because of insurance or indemnification. If such value is superior to the amount of the suffered damages, the difference constitutes gross income subject to tax. Insurance premiums that cover risks on goods that produce profits. Depletion. In the case of the exploitation of a mineral deposit, including any gas or petroleum well, all the costs concerning exploration and development, as well as the interest attributable to it, must be added to the capital account. The amount deductible as depreciation for the fiscal year shall be determined through the application of the Unit of Production method to the capital account for the deposit. Amortization of Intangible Assets. The depletion of the monetary cost of each intangible asset, including patents, copyrights, drawings, models, contracts and franchises whose life has a defined limit, must reflect the life of said asset and the method of recovery in a straight line. Non-collectible Accounts. Losses arising from bad credit, in justifiable amounts, or in amounts separated to create a reserve fund for bad accounts. Donations to Public Institutions of Public Good. Investigation and Experimental Expenses. Losses. Contributions to Pension and Retirement Plans. Individual taxpayers, except those who are salaried, that carry out activities distinct from the business, have the right to deduct from the gross income of such activities the verified expenses necessary to obtain, maintain and conserve taxed income. 1.1.4 Depreciation. For the purposes of the DR Tax code, the concept of depreciable assets means the assets used in a business that loses value due to wear and tear, deterioration or disuse. The amount allowed in a fiscal year for deduction for depreciation of any category of assets shall be determined by applying to an asset account, at the close of the fiscal year, the percentage applicable to such category of assets. Depreciable assets must fall in one of the following categories: Category 1. Buildings and other structural components used to generate taxable income may be deducted at a 5% annual rate will be calculated by applying the depreciation coefficient to the depreciable base of each asset individually. Category 2. Automobiles and light trucks for common usage; office equipment and furniture; computers, information systems and data processing equipment may be deducted at a 25% annual rate over the acquisition or construction cost of such assets, minus the ITBIS that has been paid in the acquisition of a business. Category 3. Any other depreciable assets may be deducted at a 15% annual rate over the acquisition or construction cost of such assets, minus the ITBIS that has been paid in the acquisition of a business. Category 2 and Category 3 assets will be registered in a joint account and the depreciation will be calculated by multiplying the depreciation coefficient to the depreciable base of its joint account. The initial addition to an asset account for the acquisition of any asset shall be its cost plus insurance, freight and installation expenses. The initial addition to an asset account for an asset of one's own construction shall include all taxes, charges, including customs duties and interest attributable to such asset for periods prior to its placement into service. Amortization of intangible assets is permitted by the depletion of the monetary cost of each intangible asset, including patents, copyrights, drawings, models, contracts and franchises whose life has a defined limit, but it must reflect the life of said asset and the method of recovery in a straight line. At the taxpayer's option, organization costs may be deducted either in the year in which they are incurred or capitalized, or amortized over a period not exceeding five years. 1.1.5 Transfer Pricing. The Dominican Republic has transfer pricing rules applicable to transactions with related companies. The general principle is that when legal acts between a local enterprise of foreign capital and a natural person or legal entity domiciled abroad that directly or indirectly controls it shall be considered to be, in principle, made...

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