On 17 August 2018, the Constituent National Assembly issued a Constituent Decree1 through which it established the "Temporary system for the advance payment of the value-added tax and income tax by Special Taxpayers" ("Decree").2 Under the Decree, special taxpayers engaged in economic activities other than exploitation of mines, hydrocarbons and related activities, and not beneficiaries of hydrocarbons and mining royalties, will be subject to a new system of advance payment of VAT and income tax. Special taxpayers are the big taxpayers subject to special payment calendars and other tax formal duties. The National Integrated Service of Customs and Tax Administration ("Revenue Service") designates special taxpayers based on their high level of income or the specific activities carried out.
The highlights of the Decree are:
Common rules provided in the Decree for VAT and income tax:
- The Decree defines as gross income the result of the "taxable sales" of goods, services, leases and any other regular or accidental income of the taxpayer.
- Individuals under labor relationships, qualified as special taxpayers, are exempt from the advance payment system.
- The tax advance payments will apply on the daily gross income.
- The Revenue Service must issue a general Administrative Order to regulate the filing and payment processes.
- The Revenue Service may group Special Taxpayers according to their economic activities, economic capacity or geographical location.
- Despite being called temporary, the regime remains indefinite until the Executive Branch repeals it.
- Failure to comply with the obligations established in the Decree will be sanctioned according to the Organic Tax Code.3
- The Revenue Service may liquidate the taxes on a presumptive basis.
New VAT advance regime:
- The tax period becomes weekly rather than monthly.4 Advance payments are determined based on the tax return filed in the previous week, divided by the business days of the current week. The rule is not clear but it seems that the intention is that at the end of each week the taxpayer must determine the VAT tax liability. Then the taxpayer must divide the tax among the business days of the following week and pay it daily.
- The tax that will serve a for the VAT advances will be determined based on the gross income of the previous tax period (in this case, previous week), multiplied by the set percentage. Advances will be deductible from the VAT return. Although the Decree is not clear enough, technically the tax advances are credited against the final tax and are not deducted as expenses.
- The weekly tax liability will be determined by the difference between output and input VAT.
- For the tax advances corresponding to the first week of September 2018 taxpayers must consider the VAT of the previous week, equivalent to the last week of August. The constitutionality of this rule is questionable as it violates the: (i) the principle of non-retroactivity, considering that it should apply to periods prior to the entry into force of the Decree; and (ii) the legality principle because it imposes the payment of tax advances with a regulatory instrument different of a Law.
New income tax advance payment regime
- The tax advances are determined on the gross income from sales of goods and services obtained in the "tax period of the previous month within the National territory" (i.e., on gross monthly and territorial sales). As a consequence, extraterritorial income will not be included in the basis for determining advances.
- The Executive Branch may set the rate between 0.5% and 2%. The Decree set a 2% rate for the banking, insurance and reinsurance sectors; and a 1% rate for the rest of the taxpayers.
- For financial institutions, banking, insurance and reinsurance sectors, the advance payment shall be calculated by multiplying the gross income earned on the immediately preceding day by the applicable rate. Income tax advances shall be deductible from the income tax return. As stated above, technically tax advances are credited against the final tax and are not deducted as expenses.
- The Decree suspended the advance payment rules of the Income Tax Law and its Regulations.