EL SALVADOR: The Tax Law on Financial Transactions and reforms to the Tax Code and the Law on Income Tax made in 2014 are declared unconstitutional

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The Constitutional Chamber of the Supreme Court of Justice, through sentence 96-2014 dated May 28th, 2018, declared unconstitutional the Legislative Decrees numbers 762, 763 and 764 approved in the Plenary Session of the Legislative Assembly on July 30th of 2014, which ended on July 31st, 2014.

In Legislative Decree 764, the Law on Tax on Financial Operations was approved.

In Legislative Decree 763 the Tax Code was reformed to enable the application of the guidelines of the Organization for Economic Cooperation and Development (OECD) in the determination of price transfer, to regulate the suspension of the statute of limitations for payment, the interruption of the expiration period of the power of control from the notification of the appointment of the auditor up to 3 years, incorporates rule on electronic equipment for payment control, modifies formalities in the notification of tax assessments and fines and in the hearing procedure and opening to evidence, as well as in the case of notaries, the regulated on the solvency of internal taxes is extended to the customs tax obligations, attributes to the General Directorate of Internal Taxes the competence to disclose list of debtors and regulates the publicity of resolutions of tax assessments and fines.

In Legislative Decree 762, the Income Tax Law was reformed to incorporate, on the one hand, a chapter on the minimum payment of 1% on net assets that was declared unconstitutional by judgment 98-2014 dated April 17th, 2015 and moreover, Art. 132-B that repeals the exemptions in relation to the Income Tax contained in Art. 8 of the Printing Law, which does not extend to the exemptions established in the book.

The fundamental reason for this declaration of unconstitutionality is that there were no real possibility of deliberation and parliamentary discussion, which contravenes Article 135, first paragraph of the Constitution.

The effects of the unconstitutionality are deferred until December 31st, 2018, so that the decrees will continue to apply until that date, leaving the Legislative Assembly safe from the possibilities of overcoming this formal deficiency until that date arrives and only if it exceeds, these decrees will no longer apply as of January 1st, 2019.