February 17, 2015

CONSIDERATIONS ON THE TAX LAW ON FINANCIAL OPERATIONS

CONSIDERATIONS ON THE TAX LAW ON FINANCIAL OPERATIONS
 Published: 2014-09-12

Although it is true, according to publications made by the Public Administration, the Financial Operations Tax Law is not a tax removed from international tax practice, it is a type of tax adopted by countries in a crisis situation; that is, states that need to implement emerging taxes for their continuity. In that sense, its implementation will affect those who are forced to comply with it and the vision of El Salvador before potential foreign investors, who in the process of evaluating the destination of their investments, monitor the country that is already deteriorated by legal, social and insecurity. economical.
In less than fifteen days after the Law came into force, the Tax Administration has issued two complementary documents for its application: “Rules to Facilitate the Application of the Tax Law on Financial Operations” and “Guidance Guide”, which It denotes that the tax was approved in haste and lacked a scheduled implementation, with the sole desire to collect. 
The main problem with the rule is that although it meets the minimum requirements for the formation of a tax such as generating fact, rate and form of application, it is a casuistic tax, which requires a case-by-case analysis to know its applicability, exemptions and scopes.
The rule applies to two facts:
to)      Tax on checks and electronic transfers
b)      Withholding for liquidity control.
With respect to the Tax on checks and electronic transfers, the following generating facts are established:
to)      Payment of Goods and Services by check, debit card whose value per transaction or operation is greater than US$ 1,000.00.
b)      Payment through electronic transfers whose transaction or operation value is greater than US$ 1,000.00.
c)       Transfer in favor of third parties, under any modality or technological means, whose value is greater than US$ 1,000.00.  
d)      Disbursements of loans or financing of any nature.
and)      The operations carried out between the entities of the Financial System, based on any type of instruction from their clients or for their own interest.
On each generative event, an aliquot of 0.25% equivalent to US$ 2.50 per thousand will be charged in affected transactions (The Law does not establish an exempt basis), with the entities of the Financial System, entities that execute payment orders, being initially named as withholding agent. or transfers by any modality or technological means and to stock brokerage houses and Stock Exchange Posts, being therefore jointly responsible for the payment of the tax; The Tax Administration reserves the appointment of other withholding agents in the future.
In addition, 16 exemptions from application are established, which gives rise to the need and obligation of taxpayers to analyze and classify their operations, to understand whether or not they will be exempt from the tax.
This becomes a shared responsibility between the taxpayer and the withholding agent, which is why regulations and guides have recently been issued to help both with the interpretation and application of the tax, providing for topics such as the following:
to)      Creation of exempt accounts in entities of the financial system through which the taxpayer will declare under oath that the account will be used to carry out exempt transfers or operations regulated by law,
b)      Creation of legends to be noted on the back of checks to declare exempt operations.
c)       Return processes in case of improper or excess withholdings.
On creation of exempt accounts, They should be used only to manage all exempt operations such as social security and pension payments, compensation payments to workers, water and electricity services, among others.
The legends to be written on the back of checks for exempt operations, they will be the responsibility of the issuer of the check, and will serve to report and document exempt operations; thus creating a method of control of the taxpayer's responsibility, subject to the supervision of the Tax Administration, in case said legend is false.
In the guidance guide, it is established that since there is a improper or excessive withholding, the refund must be requested from the respective financial institution during the same month in which it originated and if appropriate, the amount improperly withheld will be returned, which will be subject to review by the Public Administration. Subsequently, requests for improper withholding must be made to the Tax Administration, where the process can take around 6 months.
The tax will have several negative impacts on the population, but we will refer to three specific ones:
to)                         Because it is a cascading tax that will be transferred throughout the production chain, it will have the effect of increasing prices and therefore creating inflation.
b)                        By affecting consumers in general, it will affect the economy, further delaying its growth.
c)                         Because it is a special tax, it is not creditable to any other tax and will be considered a non-deductible cost and expense. By express provision of the law, non-deductible expenses are considered income and as such pay income tax. In other words, we are facing a tax of collection, payment and direct impact, the real impact of which has not been duly disclosed by the Tax Administration.
At the same time, the Financial Operations Tax Law establishes a withholding tax for liquidity control, which will affect deposits, withdrawals and cash payments made by taxpayers. Although said withholding is developed in a single article, its intention is to make a withholding that directly affects the cash flow of a taxpayer, since it considers that if in a calendar month the accumulated sum of cash withdrawals, payments or deposits is greater to US$ 5000, an aliquot of 0.25% equivalent to US$ 2.50 per thousand will be retained as liquidity retention on transactions that exceed US$ 5,000.00 per month.
Since the law does not establish whether the application of said tax is on a national scale on all the taxpayer's accounts or on an individually considered account, the application rules and guidance guide supplemented by indicating that said withholding will be made by the institutions of the Financial System, accumulating the accounts that the taxpayer may have in each entity.
Unlike the check and transfer tax, said liquidity control withholding is creditable against any tax payable to the Tax Administration, as long as it is credited by electronic means and within a maximum period of two years. For these purposes, it is necessary to clarify that the payment on account is not a tax in itself but rather an advance, so it cannot be credited to said advance but can be credited to the annual income settlement.
As we have seen, both the check and transfer tax and the liquidity control retention are taxes still in development and the practice will present one or another problem in its implementation, so it is important to be clear in its form of application and its scope. as well as obtain advice from competent professionals in the matter, in order to avoid undue withholdings or wear and tear that affect your productive activity.

 By:  Lic. Francisco Martínez, Romero Pineda & Asociados

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