The Tax Concertation Law (“LCT”) of Nicaragua recognizes as capital gains and losses, variations in the value of the taxpayer’s patrimony, caused by the transfer of assets or assignment of rights. It includes those resulting from the transfer of ownership or possession of assets, generating a gain or loss subject to payment or not of the income tax for capital gains. In the case of goods subject to public registration, both for onerous and free transfers, there are special rules to determine the tax obligation. We have identified that in these transfers, it is common that the payment of income tax for capital gains and losses is higher than what would actually correspond. In this article, we will refer in particular to cases of undue payments that occur in the sale of real estate.
Tax trigger, value and taxable base
As recognized in article 75, numeral 2, the taxable event occurs when the transfer of real estate is made, which in a sale, happens at the time the contract is signed. For income tax purposes, all transactions are presumed made at their market value. The law foresees that in onerous disposals, for tax purposes, the value of the transfer will be the amount received by the seller provided it is not less than the market value, in which case the last one will prevail.
In accordance with articles 82 and 83 LCT, the tax base, in the case of onerous disposals, is determined by the difference between the transmission value and its acquisition cost. Deductions duly documented are allowed and the acquisition cost will be updated based on the official exchange rate of the Cordoba, the local currency, with respect to the United States of America dollar published by the Central Bank of Nicaragua (BCN). To this base should be applied the corresponding tax rate.
Tax rates and formal withholding obligations
In the case of real estate sales, in accordance with article 87 LCT, the applicable tax rates that will be applied as definite withholding range between 1% and 7% of the value of the good in dollars of the United States of America. The aforementioned article refers only to the tax rate to apply and should not be understood that the reference values indicated are the tax base regulated by articles 82 and 83 LCT.
For the fulfillment of the formal obligations to declare and pay the definitive withholdings, we note that there is a weakness between the application of the regulations and the administrative procedure to enforce compliance of the said obligation.
The tax falls on the taxpayer subject of the obligation, that is, the taxpayer who accrued or received the capital gain. On the other hand, the formal obligation falls on the Responsible Collector (taxpayer registered with the Tax Administration), who, under the law must declare and pay the corresponding tax before the Tax Administration, which is the buyer.
Origin of undue payments
The Responsible Collector is obliged to apply the definitive withholding at the time of making the payment, without previously having a calculation to determine the existence or not of a capital gain or loss, a situation that only the seller could know. On the other hand, neither the tax appraisal format used to settle this obligation at the time of payment of taxes on real estate transfers, nor the monthly declaration format pre-established in the Tax Information System administered by the Tax Administration for monthly withholdings, contemplates boxes to apply the deductions allowed for purposes of applying the withholding tax base that corresponds by law. The result is that a higher tax is paid than the one that would correspond.
Two examples allow illustrating this problem, assuming the tax authority does not adjust the agreed price and there are no other deductions than the acquisition cost:
Case 1: The seller had purchased the property for US $ 100,000.00 and sells it for US $ 120,000.00. The capital gain of US $ 20,000.00 would be subject to the 3% rate applicable for that price range, which corresponds to a tax of US $ 600.00. However, the authorities take the total value of the transaction, and in practice the withholding amounts to US $ 3,600.00, since the acquisition cost is not considered.
Case 2: The seller had acquired the property for US $ 100,000.00 but due to market conditions, he sold it to US $ 80,000.00, generating a loss. The loss of US $ 20,000.00 should not be subject to the payment of the a capital gains tax since there were no gains. However, the authorities take the total value of the transaction, applying the 2% rate for that price range, and in practice apply a US $ 1,600.00 withholding, even when there was a loss.
In both cases, the tax payment is greater than the corresponding tax. In view of the above, the taxpayer is subject to demonstrate later, through an administrative process, that the payment made for the operation did not correspond to the one that would have been made according to the applicable legal provisions.
In this situation, the seller may, through administrative procedure, request the refund of the undue payment of withholdings for capital gains and losses, through the return or refund action. The Tax Code establishes that undue payments of taxes, fines, late fees and penalties give right of the action of recovery through which can be used to claim the return of such payments. The action for recovery is open both for the taxpayer (seller) and those responsible for making the payment considered improper (buyer). Statute of limitations for the right of individuals to request refunds or credits for undue paid taxes will prescribe four years after the effective payment date.
With regards to the loss of capital, if any, compensation may be requested with capital gains of the following immediate fiscal period. This right prior authorization of the Tax Administration, may be deferred in the following three periods, under the conditions established in Article 86 LCT.