World growth is slowing sharply, due to high inflation, rising interest rates, reduced investment and disruptions caused by Russia’s invasion of Ukraine, according to the latest edition of the “Outlook Outlook” report. World Economics” from the World Bank.
As a consequence of the fragile economic situation, any new adverse event could push the world economy into recession. The global economy is projected to grow by 1.7% in 2023.
The tax factor plays a fundamental role in this regard. In the Dominican Republic, the 2023 General State Budget contemplates an increase in tax pressure, whose Explanatory Report and Budgetary Policy, published by the General Directorate of Budgets, describes a set of actions and regulations that, although some originated in 2022, They will have their tax effects from the year 2023.
According to said report, the main objective to introduce changes in the Dominican tax system is to achieve the sustainability of fiscal accounts, including the reduction or consolidation of public debt. In addition to the need to increase collection levels, in order to comply with the commitments to invest in infrastructure works; food safety; health, education, social security, and other basic services demanded by society.
This means that both large and small taxpayers are aware of and prepared for the readjustments that will take place at the tax level during the course of this year. According to the consultants Ludovino Colón, Felipe Vargas, René González, Claudia Ramírez and César Peñafrom the firm EY in the Dominican Republic, the tax panorama comes with news regarding transfer prices, inspections, corporate reorganizations, electronic invoicing and the possible entry into force of General Regulation 11-2022 of the General Directorate of Internal Taxes ( DGII), on the application of benefits of agreements to avoid double taxation that the Dominican Republic has signed.
Transfer prices. After the inclusion of the Dominican Republic in the inclusive framework of BEPS (for its acronym in English according to its acronym “Base Erosion and Profit Shifting”), important changes have been made in the transfer pricing documentation. Said changes correspond to the presentation of the notification of Country by Country Report, Master Report and Local Report.
With these changes, the DGII has at its disposal information to carry out more precise questions and more effective audits. For this reason, it is recommended that taxpayers take into account the information that is being provided to DGII and seek advice. Likewise, the taxpayer is recommended to carry out an internal analysis of their operations with related parties to ensure that they are agreeing at market value to avoid questions from the DGII.
Audits. Some trends of the DGII in inspections include undeclared dividends (for accounts receivable with shareholders/parent company/related companies and repurchase of shares/shares in treasury), request for justification of minor expenses, advances of Tax on the Transfer of Industrialized Goods and Services (ITBIS) not deductible by application of proportionality of the tax, expenses not deductible in Income Tax by application of proportionality (exempt income versus income taxed with the tax) and expenses without reliable receipts not admitted (including expenses without tax receipts).
Reorganizations of companies. Regarding corporate reorganizations, due to recent regulatory changes on the matter by the DGII, it would be recommended that taxpayers consult the DGII in order to determine if the principle of neutrality f would apply to a reorganization transaction. , in order to prevent that Authority from later understanding that it does not comply with the legal requirements and to claim the taxes applicable to it.
Some of the regulatory novelties include that the value of the equity transfer in a reorganization must be the book value of the absorbed, split-off or assigning company, or failing that, the Adjusted Fiscal Cost (CFA) of the assets involved. In addition, companies that lose their legal status as a result of the reorganization may be subject to an inspection process over the years that the DGII deems necessary.
How beneficial are the agreements to avoid double taxation (CDIs)? Another tax aspect that is being explored is the potential limitations to the benefits contained in the CDIs. The General Standard 11-2022 of the DGII establishes the new guidelines for the application of benefits of international agreements to avoid double taxation and prevent tax evasion that the Dominican Republic has signed (with Spain and Canada). Its entry into force has been postponed several times, however, it is expected to begin in October.
Its entry into force would have a significant impact on some taxpayers, since it entails points to consider such as: non-automatic application of the benefits of the agreements, absence of an extension to send documents to the DGII, greater difficulty in applying benefits for non-residents, prepayment of tax, among other indications.
Electronic billing. Electronic invoicing is almost a reality in the country. With the potential approval of a bill that is currently undergoing in the National Congress, its use is made mandatory for all taxpayers. It is important that taxpayers take the necessary measures to adapt to this modality hand in hand with their service providers. software and tax advisors. For these purposes, the electronic invoicing bill includes tax incentives for taxpayers who adhere to the implementation schedule.
“Taxpayers must be prepared for the adjustments that will be introduced in the tax laws and regulations during the course of the year. It is important to outline an action plan to join these innovations and be able to comply with the requirements of the General Directorate of Internal Taxes on the scheduled dates”, concluded Ludovino Colón, Tax partner of the Firm EY in the Dominican Republic.
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EY is a global firm of 300,000 professionals, a leader in consulting, audit, tax, strategy and transactions, and legal services. In Central America, Panama and the Dominican Republic, it operates as a single integrated organization, with a multi-disciplinary and multi-cultural team, made up of more than 1,700 collaborators and 50 Partners, committed to building a better business world for its people, its customers and their communities. EY assists its clients in the expansion, reorganization, improvement and management processes of their businesses.
