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Nicaragua: Selected Issues and Statistical Appendix

Author(s):
International Monetary Fund
Published Date:
December 2002
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II. Tax Reform3

15. This chapter describes the main characteristics of Nicaragua’s tax system, identifying key weaknesses and their economic costs. In addition, it discusses the benefits of tax reform and describes the tax reform being implemented by the authorities.

A. Key Issues in Nicaragua’s Tax System

16. Tax revenues in Nicaragua have declined steadily in recent years. From a peak of 25.8 percent of GDP in 1998, tax revenues dropped to 21.5 percent of GDP in 2001. This deterioration reflects, to a large extent, the high vulnerability of Nicaragua’s tax system to changes in economic activity, especially to a slowdown in domestic demand. The sharp decline in economic growth from 7.4 percent in 1999 to 3.3 percent in 2001 strongly affected revenues from cyclically sensitive taxes such as petroleum products, general value added taxes (VAT) and import duties (Table 1).

Table 1.Nicaragua: Central Government revenue
Prel.Prel.
19981999200020011998199920002001
(in percent of GDP)(Share of tax revenue)
Tax revenue25.824.823.521.5100.0100.0100.0100.0
Direct taxes3.73.73.83.814.415.016.117.5
Taxes on net income and profits3.73.83.83.814.415.216.217.7
Taxes on property0.00.00.00.00.1−0.2−0.1−0.2
Taxes on goods and services17.117.516.515.066.270.769.969.8
General value added taxes9.310.09.59.036.240.440.441.9
On domestically produced goods and services4.34.54.64.416.518.219.320.7
On imported goods and services5.15.55.04.619.622.121.121.2
Excise and selective consumption taxes7.77.56.96.029.830.229.427.8
Petroleum products5.05.14.73.919.520.720.118.0
Beer and alcoholic beverages0.90.90.91.03.53.64.04.5
Tobacco0.70.40.20.32.81.50.91.4
Sodas0.40.40.40.31.61.61.71.4
Other0.60.70.60.62.32.82.52.8
Stamp taxes0.10.00.00.00.30.20.20.2
Taxes on international trade and transactions3.92.22.11.715.39.09.08.0
Import duties3.92.22.11.715.39.09.08.0
Export duties0.00.00.00.00.00.00.00.0
Earmarked revenue1.01.31.21.04.05.25.04.6
Sources: Central Bank of Nicaragua; and IMF staff estimates

17. The main weakness of Nicaragua’s tax system arises from its narrow tax base, which is excessively concentrated on a few taxes and a limited number of taxpayers.4Table 1 shows that over 60 percent of total tax revenue in 2001 was collected from VAT (42 percent) and excise taxes on petroleum products (18 percent), with the share of petroleum product taxes alone being greater than that of direct taxes. Given the large cyclical swings of petroleum product sales, the large dependence on petroleum taxation exacerbates the vulnerability of the system. In addition, more than half of VAT revenues is generated from imported products, further heightening exposure of the system to economic fluctuations. In addition to petroleum products, excise taxes on consumption are concentrated on a few products, mainly beer and alcoholic beverages, tobacco and sodas (together contributing some 5.5 percent of GDP, or one-fourth of tax revenues).

18. The concentration on few taxpayers arises from widespread exemptions, exonerations, preferential rates and special regimes. These special accommodations narrow the tax base, reduce transparency of the system, and make it difficult to administer. Table 25 illustrates the extensive sectoral exemptions in the Nicaragua’s tax system, including for tourism, agriculture, fishing, and other sectors. Sectors or activities that are exempt from all forms of taxation include, inter alia, universities and higher education institutes, firemen, churches and religious organizations, nonprofit organizations, and imports of medicines, paper, books, and equipment for the media. In the case of direct taxes, there are also several tax-exempted sources of income (Section 1.1 of the Appendix).

Table 2.Exoncrations and special Regimes
Import tariffsExcisesVATRevenue tax
Free zonesExemptExemptExemptExempt
TourismExemptExemptExemptExempt
Agricultural SectorExemptExemptExemptNot Exempt
FishingExemptExemptNot exemptNot exempt
Small handicraft industryExemptExemptExemptNot exempt
Exports under temporal admission lawExemptExemptNot exempt
Other exportsNot exemptNot exemptNot exempt
Investment in hospitalsExemptExemptExemptSome exemptions
Public transport (cooperatives)ExemptExemptExemptExempt
TradeNot exemptNot exemptNot exemptNot exempt
Industrial sectorSome exemptionsSome exemptionsSome exemptionsNot exempt
Source: Medal (2002).

19. The VAT is characterized by widespread exemptions, zero-rated products, and preferential rates (Section 4.1 of Appendix). Exemptions are granted to numerous goods and services; a zero-rate VAT regime applies to a long list of products and services, including 59 products included in a so-called “basic consumption basket”, as well as medicines, insecticides, fertilizers, energy, and some machinery and equipment. Zero-rate VAT is also applied to several economic activities beyond exports such as the media, free zones and tourism. Preferential VAT rates are granted to the cement and air travel sectors.

20. A number of economic sectors and activities are exempted from import tariffs, including by constitutional mandate (health; media and communication; education and political parties). Other exempt sectors include petroleum and energy; exports; firefighters; agricultural and transport cooperatives; the national army; the national police; the church and religious congregations; tourism activities; and hospital investments.

21. The revenue loss resulting from these features is substantial. For instance, a 2000 mission from the Fiscal Affairs Department estimated that the cost of exonerations on indirect taxation amounted to 54 percent of actual revenue, or about 10.5 percent of GDP.

B. Economic Costs

22. A key problem of Nicaragua’s tax system is its lack of neutrality. Because different economic sectors do not receive the same tax treatment, relative prices and intersectoral rates of return are affected and resource allocation is distorted. Tax policy rewards certain sectors, with no clear economic criteria, leading inter alia to unproductive rent seeking and corruption. Moreover, several studies of the Nicaraguan tax system6 have pointed to a significant anti-export bias because the tax incentives are predominantly oriented to the production of goods and services for the domestic market.

23. Tax exemptions also introduce different treatment by population group and economic sector, leading to an inequitable tax system. These distortions are illustrated by the fact that the contribution of some economic sectors to tax revenues are far different from their share in GDP (Table 3). For example, agriculture and mining contributed only 1.1 percent of total taxes in 2001, while its share of GDP was 33.7 percent; and the construction sector contributed 1.8 percent of taxes, well below its GDP share of 6.3 percent. In contrast, the manufacturing sector contributed 48.2 percent of taxes, while its share in GDP was 14.4 percent.

Table 3.Tax Burden by Economic Sector
Economic SectorTax BurdenGDP
Mill. of C$PercentMill. of C$Percent
Agricultural and Mining Sector551.111,44733.7
Manufacturing2,42448.24,89814.4
Electricity2765.53731.1
Construction891.82,1536.3
Trade and Transport1,18823.68,76925.8
Financial and Services99719.86,33718.7
Total5,028100.033,976100.0
Source: Inter-American Development Bank (2002).

C. Tax Reform

24. Improving efficiency of resource allocation and equity of the tax system in Nicaragua requires a significant widening of the tax base. To achieve this objective, FAD (2000) recommended the following core measures: (1) eliminating the zero-VAT rate except for exports; (2) reducing VAT exemptions and eliminating special regimes; (3) confining exonerations on imports tariffs to a few products; (4) including oil and its derivatives in the VAT base; (5) eliminating excise taxes on approximately 940 goods; and (6) changing the tax base for excise taxes on sodas and alcoholic beverages from ex-factory to retail prices. FAD stressed that tax policy should not be used as an instrument of income distribution and subsidization to particular economic sectors. Instead, a well-focused expenditure policy should be used for these purposes.

25. Against this background, the authorities in 2002 embarked on a comprehensive, two-stage tax reform. The first stage was approved by the National Assembly in August 2002, yielding about 2.1 percent of GDP on an annual basis. The following main measures were included: (1) reduction of revenue exemptions for a number of sectors and activities, such as the financial system, financial NGOs, interest on saving accounts of the corporate sector, lottery prizes; transactions of agricultural goods; (2) increased tax withholding for several activities (professional services; occasional gains; trade on goods and services; leasing; wood exploitation); (3) a new minimum tax payment for small traders; (4) a new presumptive tax for casinos and bingos; (5) an increase of the tax base for excise tax on sodas by changing the reference price from ex-factory to retail price; (6) reduced scope of accelerated depreciation; (7) gradual elimination preferential VAT rates for air tickets and cement; and (8) elimination of exonerations on imports of a large number of goods.

26. While these measures broadly followed FAD recommendations, the first stage of the reform fell short on the issue of zero-rate VAT. While the original plan was to reduce zero-rated products significantly, the government withdrew this proposal before discussion by the National Assembly. Subsequently, the National Assembly decided to increase the number of zero-rated VAT products included in the “basic consumption basket” (from 19 to 53). As a result, the approved package fell short of the original revenue target (3 percent of GDP), and an important part of the intended improvement in efficiency and transparency of the tax system was not achieved.

27. The second stage of the tax reform, to be implemented by mid-2003, is now expected to make up for the shortfall of the first stage. It is targeted to yield 1 percent of GDP on an annual basis and further improve efficiency, including by additional reduction of import tax exemptions and limiting the zero-rate VAT regime to only exports. To mitigate the social impact, the authorities are planning to use direct and well-targeted spending programs to help the most vulnerable groups of the population. The second round of the reform is also expected to include (i) a considerable reduction of the number of products subject to excises; (ii) an expansion of the income tax base; and (iii) inclusion of oil and its derivatives in the VAT base, compensated by a reduction in excise taxes.

References

    ArtanaDaniel,2001, La Politica Fiscal en Nicaragua. Trabajo preparado para IICA, September.

    International Monetary Fund, Fiscal Affairs Department, (FAD), 2000, FigliuoliLorenzo, ErikHaindl, OsvaldoSchenone.,Nicaragua: Tratamientos Especiales en la Tributacion al Consumo y a las Importaciones. March.

    Inter American Development Bank (IADB), 2002. Nicaragua: Desafios para la Modernizacion del Sistema Tributario, August.

    Medal, Jose Luis,2002, La Reforma Tributaria en Nicaragua. Trabajo preparado para discusion de la Secretaria Tecnica de la Presidencia (SETEC) y del Ministerio de Hacienda y Credito Publico (MHCP), July.

APPENDIX I: Nicaragua-Main Taxes
TaxTax BaseDeductions and ExemptionsRates
1. Income and profit tax [Impuesto a los ingresos y a las ganancias]
1.1 Income tax on corporations and enterprises (legal entities) [Impuesto sobre la renta a corporaciones o empresas (Personas Juridicas)]Current income:



Local sales or exports.



Service provision.



Leasing.



Non-exempt businesses.
Deductions:

1. Expenditure paid or incurred during the tax year in any taxable business or activity, such as wages or other compensation for personnel services actually provided, leasing, insurance premiums on present and future products and output, advertising and other payments or charges deemed necessary or essential to their production and to the existence or sustainability of any source of income generation;
30 Percent
Nonrecurrent income:



Transfers of personal and real property.



Prizes, raffles, etc.
2. Interest paid or incurred during the tax year on debts payable by the taxpayer, provided that these debt amounts have been invested or used in the production of taxable income. If taxpayers also receive tax-exempt interest, they may only deduct the interest paid in excess of the exempted amounts;
Transfers of shares.



Capital gains.
3. The cost of sales of the goods or merchandise produced or procured in any taxable business or activity;
Inheritances, bequests, and grants.



Special income:



Case of nonresidents or non-domiciled parties.
4. Outlays by the taxpayer to provide its employees with services free of charge for their cultural development and material well being, such as maintenance and repair of housing, health services, cultural promotion and other similar services;
Activities subject to presumptive income.5. The actual cost of the contributions paid or assumed by the taxpayer for premiums or payments to provide insurance coverage for its employees, up to the amount established by law and, failing that, up to 10 percent of their salaries or wages;
6. Amounts paid out by taxpayers to their employees as bonuses, gratuities, or profit sharing:
6.1 When said employees are members of civil or commercial companies, only those amounts paid as salaries and bonuses may be deducted;
6.2 When said employees are relatives of members of these companies or of the taxpayers or their spouses to the fourth degree of consanguinity or second degree of affinity, the salaries, bonuses, and profit sharing may be deducted in either case, provided that it is proven, to the satisfaction of the Directorate General of Taxes, that the work was necessary for the business to achieve its purpose and was actually performed, and provided that the salary, bonus and profit sharing, as applicable, is commensurate with the quality of the work performed and the size of the business, and comparable with the amounts paid by companies in the same line of business, region, and with the same volume of turnover that do not have such family connections;
7. Losses resulting from duly documented bad loans;
8. Losses resulting from the destruction, breakage, removal, or misappropriation of the elements invested in income generation, provided that they have no insurance or other indemnity coverage;
9. Amortization or depreciation amounts needed to renew or replace deferred assets and those subject to depreciation, such as organizational expenditure, improvements to leased property, buildings, machinery, equipment, and other movable property;
10. Up to 10 percent of annual taxable profits donated to the state or its institutions, municipalities, the Nicaraguan Red Cross, fire services, nonprofit charitable, social assistance, arts, science, education, and cultural, institutions; and
11. Taxes payable by taxpayers, which are not indicated in Art. 19 of the income tax law;
12. Coffee growers may deduct from their income tax 50 percent of their pollution-reducing equipment, and social infrastructure works in rural areas, and 20 percent of their investment in coffee crop renewal;
13. Tobacco and liquor companies may deduct as an expenditure from their taxable income up to 10 percent of their contribution to the Institute Against Drug Addiction and Alcoholism; and
14. Investment in research into environmental development and conservation, with prior certification from the Ministry of Environment and Natural Resources is fully deductible from the taxable income of persons or enterprises making such investments.
Exemptions:

1. Universities and technical higher education centers, pursuant to Article 125 of the Political Constitution of the Republic, as well as technical/vocational education centers. When these institutions engage in commercial, industrial, agricultural, agroindustrial, or service provision activities other than their intrinsic functions, the income from such activities shall not be exempt from this tax;
2. State corporations, autonomous entities, institutes, and other state agencies that operate without their own capital base;
3. Churches and religious denominations with recognized legal personality, regarding their income from activities and property used exclusively for worship;
4. Nonprofit civil associations, foundations, federations, and confederations, with recognized legal personality, and nonprofit charitable and social assistance institutions. When these agencies or institutions engage in commercial, industrial, agricultural, agroindustrial, or service provision activities, the income from such activities shall not be exempt from this tax. Similarly, all organizations listed or indicated in this subsection shall not be exempt from this tax if these legal entities engage in the provision of financial services of any kind, irrespective of whether they are subject to the supervision of the Superintendency of Banks and Other Financial Institutions. Should such organizations incur losses in the corresponding fiscal period, the provisions of Article 29 of the Income Tax Law (modalities for payments, refunds, and credits) shall apply.
5. Artistic, scientific, educational, and cultural institutions, labor unions, provided that they are not for profit. When these institutions or unions engage in commercial, industrial, agricultural, agroindustrial, or service provision activities other than their intrinsic functions or those envisaged in Art. 225 of the Labor Code in the case of unions, the income from such activities shall not be exempt from this tax. Similarly, income directly related to the core functions of the fire services and Nicaraguan Red Cross shall be exempt;
6. Legally established cooperatives. In the event that they distribute their surplus, the amounts distributed to members of or participants in the cooperative shall be considered part of the latter’s personal income and they shall be required to pay income tax as established in this law and its regulations;
7. Enterprises located in free zones are fully income tax exempt during the first 10 years and 60-percent exempt from year 11 onwards;
8. The tourism law envisages a reduction in income tax by type of investment (between 80 percent and 100 percent for 10 years for new hotels and for established hotels that increase their investment by 35 percent, and this is extended for an additional 10 years for new hotels if they subsequently increase investment by 35 percent); those investing in protected areas are allowed to deduct 100 percent of their investment from their income tax. Some investments in tourism services are given the same treatment as hotels (for example, golf courses);
9. Some investments in hospitals have the same arrangement as for hotels; and
10. River navigation firms are exempt from income tax for 10 years;
1.2 Personal income tax [Impuesto sobre la renta a personas naturales]Ordinary income:DeductionsSee Table No. 1
Salaries and other compensation.

Other ordinary income is described in point 1.1.
1. Wage earners - None.



2. Enterprises - The same as for the legally incorporated companies in point 1.1.
Extraordinary income:

Transfers of personal and real property.



Inheritances, bequests, gifts, and the other extraordinary income described in point 1.1.
Exemptions:

1. Diplomatic and consular representatives from foreign countries with respect to their official compensation, provided that there is reciprocity;
2. Representatives, officials, or employees of international institutions with respect to their official compensation, when such exemptions are included in the corresponding agreement or treaty;
3. Remuneration received by individuals residing abroad that occasionally provide technical services to the state or to official institutions, provided that such remuneration is paid by governments or foreign or international institutions; and
4. Retirement pensions are income tax-exempt.
2. Social security contributions [Contributions a la seguridad social]For employees:

The income base for calculating mandatory contributions by employees shall be the monthly salary or disability subsidy their earn. This base may be no less than the current legal minimum wage, except in the case of apprentices, farm workers, domestics, and others whose income is below that minimum wage. Members with two or more jobs shall make contributions to their retirement savings account on the basis of the sum of all wages earned. For INSS disability pensioners as a result of occupational hazard, the income base for the contribution shall be the pension.
See Table No. 2
For self-employed persons:

The income base used to calculate the contributions of self-employed persons shall be the monthly income they declare to the tax administration, which shall in no event be less than the current monthly legal minimum wage. Self-employed persons shall be responsible for full payment of the contributions referred to in Art. 17 of the Law on the Pension Savings System.
3. Property tax [Impuesto a la propiedad]
3.1 Municipal real property tax [Impuesto sobre Bienes Inmuebles IBI (Impuesto de carácter municipal)]The IBI is levied on real property located in the land district of each municipality in the Republic and its possessions at December 31 of each tax year.Exemptions:

Exempt from the payment of the IBI is the state and its institutions, autonomous entities, municipalities, diplomatic missions, headquarters of international organizations, churches, religious denominations, temples, and units used for religious purposes. Also exempt from the IBI, but with the obligation to file tax returns as a requirement for obtaining the respective credit against the tax on the personal property they posses exclusively in connection with their functions, are the following: municipal associations, agricultural and agroindustrial cooperatives for the first two years after they are legally established, indigenous communities, nonprofit charitable and social assistance institutions, retirees with respect to taxes on their residence (provided that the retiree or his/her spouse or companion in a stable union own or have the use of the property), universities and technical higher education centers, cultural, scientific, sporting, and artistic institutions, labor unions and associations, professional associations or guilds (not for profit), enterprises operating in industrial export processing zones, fire services, and persons whose houses have a value not exceeding the amount authorized by the Municipal Council, which may not be less than C$10,000.00 or more than C$40,000.00.
The IBI rate shall be 1 percent of the assessed value of the real property.
4. Tax on goods and services [Impuesto a los bienes y servicios]
4.1 Value added tax (VAT)[Impuesto al valor agregado (IGV)]Individuals, legal entities, and economic units engaged in the acts or activities indicated in this law shall be subject to the provisions established herein. These provisions cover the state, autonomous entities, institutes, and other state agencies, the municipalities, and autonomous regions of the Atlantic Coast.No tax shall be paid, therefore the rate shall be 0 percent, in the following cases:



1. Exports.



2. Transfers of inputs, raw materials, intermediate goods, and capital goods, to enterprises covered under free zone arrangements.
15 percent in general, except in the following cases:



1.0 percent on exports and basic goods.
In the case of transfers, the tax base shall be the agreed or billing price plus any additional amounts for other taxes, duties, interest, or any other concept.



In the absence of a price, the market value shall be used or, failing that, the appraised value. (In service provision, the tax base of the VAT shall be the value of the consideration plus any additional amounts for taxes, interest, or any other concept, excluding tips, where applicable. When the provision of a taxable service necessarily includes the sale of nontaxable goods, the tax shall be levied on the combined value of the service provided and the sale.)
3. Transfers and imports of rice; sugar; tortillas; eggs; milk; beans; chicken meat; ground coffee; edible oil; salt; fresh, refrigerated, or frozen meat; pork legs; fresh fish; full cream milk; local artisanal cheese; tomatoes; onions; cabbage; potatoes; ripe plantains; green plaintains; bread; coarse and fine roaster maize flour; washing soap; detergent; toothpaste; matches; brooms; toilet paper; toilet soap; sanitary napkins; house rents; local deodorant; toothbrushes; butane gas up to 25 pounds; urban public transportation; local men’s pants; local men’s shirts; local underpants; local socks; local men’s shoes; local women’s blouses; local women’s pants; local women’s dresses; local women’s panties; local women’s bras; local women’s shoes; local complete children’s outfits; local children’s underwear, socks, and shoes; with the exception of those produced under the free zone arrangement.2.10 percent on air transport abroad; 15 percent from 2003.



3.5 percent on imports of non-pulverized clinker and gray cement, 7 percent in 2003, 10 percent in 2004, 12 percent in 2005, and 15 percent in 2006.
Regarding the use or enjoyment of goods, the tax base for the VAT shall be the value of the consideration plus any additional amounts for other taxes, duties, expenditure on maintenance, construction, refunds, interest, or any other concept.3. Energy and electricity supply for home consumption if less than or equal to 300 Kw/hour monthly.

4. Supply of drinking water, not carbonated or enhanced, except ice. VAT shall not be included in the taxable value.
Regarding goods imports, the tax base of the VAT shall be the c.t.f. value plus any additional amounts for other taxes, be they tariffs, excises, or nontariff duties collected at the time of importation, and the other expenses reflected in the customs clearance binder or the corresponding customs form. The same base shall be used when the importer is exempt from tariffs not VAT. The value used for imports for own use or home consumption shall be established in accordance with the preceding paragraph plus the percentage for marketing, determined in accordance with the regulations or administrative provisions issued by the Ministry of Finance. The value used for the imports referred to in the second paragraph of Art. 19 of the VAT law shall be the transfer value of the goods.VAT shall not be levied on the following transfers:



1. Currency, lottery tickets, equity and other securities, except for certificates of deposit that include the possession of goods subject to VAT if transferred.



2. Crude or partially refined or constituted petroleum, as well as petroleum derivatives included in Annex III of Decree No. 25-94 of May 25, 1994, Establishment of Annex III of the excise for petroleum and its derivatives subject to that excise as a global or single tax [impuesto conglobado o único].



3. Live animals and fresh fish.



4. Fruit, legumes and vegetables.



5. Maize, sorghum, maize and wheat flour, and traditional sweet bread;



6. Imports or transfers of books, brochures, magazines, school and scientific materials, newspapers, and other periodical publications, as an express constitutional rule.



7. Imports or transfers of medicine, vaccines, and serum for human consumption, orthesis and prosthesis, as well as the inputs and raw materials needed to manufacture these products, as an express constitutional rule



8. Molasses and food for cattle, farm-yard fowl, and fish farming animals, irrespective of their presentation.



9. Transfers of veterinary products, vitamins, and pre- mixed vitamin compounds for veterinary use and plant health.



10. Transfers of insecticides, pesticides, fungicides, herbicides, defoliants, manure, fertilizers, seeds, and biotechnology products for agricultural or forestry use.



11. Transfers of medical, surgical, orthodontic, and diagnostic instruments and equipment for human medicine.
12. Transfers of goods produced by enterprises operating under the free port arrangement to persons entering or leaving the country.
13. Energy and electricity supply used for irrigation in agricultural activities.
14. Transfers of ownership of real property; and
15. Transfers executed at international or Central American fairs promoting the development of the agricultural sector.
The provision of services in general shall be subject to VAT at the corresponding rate, with the exception of:
1. Medical, hospital, and laboratory services related to human health;
2. Services of seed removal, pulp removal, drying, packaging, peeling, husking, bark removal, thrashing, cleaning, storage, and fumigation of agricultural products, as well as cleaning and preparation of shellfish and fish for export;
3. Insurance against agricultural risk and life or health insurance of any type;
4. Meets organized with amateur sportsmen and women;
5. Domestic air land, lake, and river transport;
6. Teaching services provided by educational units or organizations;
7. Financial services provided by:
7.1 Financial institutions, including insurance companies, civil or nonprofit associations and foundations, authorized by or subject to supervision by the Superintendency of Banks and Other Financial Institutions, including the notary’s services required to formalize contracts and financial income from interest on fixed- or variable-term deposits and from securities, except for insurance not covered by Art. 14(3) of the VAT law; and
7.2 Credit card companies and other auxiliary credit institutions, authorized by the Superintendency of Banks and Other Financial Institutions;
8. Construction contracts for low-cost housing of up to 60m2.
The use and enjoyment of goods in general shall be subject to VAT at the corresponding rate, with the exception of:
1. Leasing of property for residential purposes, unless the property is provided furnished;
2. Leasing of rooms or apartments for recreational purposes under a social services or leisure plan for workers; and
3. Leasing of land, machinery, or equipment for use in agriculture, forestry, or aquaculture.
The following imports are not subject to VAT:
1. Goods exempted under constitutional provisions;
2. Imports by the diplomatic and consular corps and international organizations duly accredited to the country, provided that there is reciprocity under international agreements;
3. Goods for which the importation process is not completed, which are temporarily imported, either as a result of the reimportation of goods temporarily exported or because the goods are in transit or subject to transshipment. If the temporarily imported goods are made available for use or enjoyment in the country, the provisions of Chapter IV of the VAT law shall apply, as appropriate;
4. The baggage and household effects referred to in customs legislation;
5. Goods not subject to this tax when transferred within the country, except for imports of used goods;
6. Imports financed directly with bilateral or multilateral external assistance, under current international agreements;
7. Grants in kind awarded under current bilateral or multilateral international agreements;
8. Grants for the branches of the Government of Nicaragua;
9. Imports sent to the Nicaraguan Red Cross and the fire services, for use exclusively in the performance of their intrinsic functions.
Excise tax [Impuesto Especifico al Consumo (IEC)]The value to which the corresponding rate or percentage shall apply shall be assessed as follows:



a) For transfers of locally-produced goods, the tax base shall be the ex factory or producer sales price, determined in accordance with the procedures established in the regulations to this law;
The following shall not be subject to the IEC:

1. Goods exempted under constitutional provisions;



2. Belongings of the diplomatic and consular corps and international agencies duly accredited to the country, provided that there is reciprocity under current international agreements;
The rates envisaged in Annex “A” of Law No. 257 on tax and commercial and amendments1 (See Annexes).
b) For merchandise imports, the tax base shall be the c.i.f. value, plus any additional amounts for other taxes and other expenses reflected in the import binder or in the customs entry form.



c) In the case of imports or transfers of alcoholic beverages, spirits, wines, rums, beer, cigarettes and cigars, liquor, brandy, carbonated beverages or carbonated water, juices and soft drinks or sodas, the following special provisions are established:



1. The tax shall be assessed on the retail price, determined in accordance with the procedures established in the regulations to this law.



2. Retail prices must be reported by manufacturers or importers to the Directorate General of Taxes (DGI) and published by manufacturers or importers nationally.



3. Manufacturers or importers shall be registered as the parties responsible to the DGI for collecting the IEC.



4. IEC advance payments on imports shall be deducted as a tax credit from the locally collected IEC.
3. Merchandise which, under current customs legislation, enters the country under customs arrangements for temporary imports and international transit;



4. The baggage and household effects referred to in customs legislation;



5. Merchandise financed directly with bilateral or multilateral external assistance, under current international agreements;



6. Grants in kind awarded under current bilateral or multilateral international agreements;



7. Grants allocated to the branches of the Government of Nicaragua;



8. Grants to the Nicaraguan Red Cross and the fire services, for use exclusively in the performance of their intrinsic functions.
The rates set out in Annex III of Decree No. 25-94 apply to oil and its derivatives.





Annex III of the IEC established for petroleum and its derivatives. The IEC collection system is applied as a global tax [impuesto conglobado] on the price. (See Annexes).
5. Taxes on external trade [Impuestos al comercio exterior]



5.1 Import tariffs [Derechos arancelarios de importacion (DAI)]






The DAI is levied on the c.i.f. value of merchandise originating outside the Central American area.
Exemptions:

The contracting states shall not grant duty free status or import tariff exemptions, except in the following cases:



1. For the household effects of persons domiciled in the country who were out of the country for the 24 month preceding their definitive return;



2. Merchandise covered by current regional and international agreements, or national laws with respect to any purposes or activities different from manufacturing industry, referred to in the Central American agreement on tax incentives and its protocols;



3. Merchandise imported for the development of cottage industry activities, small business, and export industry;



4. For eligible activities authorized by the Council;



5. For merchandise originating in the country and subject to reimportation without processing of any type within a period of three years.
Those envisaged in Annex “B” of Law No. 257 on tax and commercial justice (See Annexes), as well as the maximum rates established in the timetable for rollback of the DAI for signatory countries of the Central American Tariff and Customs System Agreement. (See Table No. 3)
6.2 Tax on goods and services originating in or shipped from Honduras and Colombia [impuesto a los bienes y serviciosde procedencia u origen Hondureno y Colombiand]This tax shall apply to all permanently imported goods and services shipped from or originating in Honduras or Colombia, including those listed in Annex “A” of the general treaty on Central American economic integration in force. [The tax shall also apply] in the case of imports or entry of goods originating or produced in those countries, independent of the country of consignment. In the case of the importation or entry of goods from Honduras or Colombia, the tax shall only apply to those goods originating or produced in or shipped from those countries. The tax shall apply to the combined amount of the c.i.f. value plus the import tariffs (DAI) and the temporary protection tariff (ATP) in force.Exemptions:

Exempt from this tax are those goods and services whose country or origin or consignment is one of the countries under reference, which:



1. Have issued proof of entry into a public or private bonded warehouse. Through in the report of merchandise received in-bond (IMRA), at a time prior to the enactment of the law;



2. Those goods exempted from the tax under the Political Constitution of the Republic.
35 percent

Prepared by Jorge Toro.

The Appendix presents a detailed description of the Nicaraguan tax system.

Based on Medal, 2002.

Laws No. 303 and No. 343, amending Law No. 257 on tax and commercial justice, changed the IEC rates and established rollback timetables for this lax (See Annexes 2 and 3).

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