When thinking about investing in the region, companies should not only take into consideration the tax systems of each country, but also the auditing power of the Tax Administrations to ensure tax compliance. In this sense, the purpose of this article is to give an overview of the assessment processes in the different countries of the region and general recommendations on how to deal with a possible tax audit.
In Guatemala, the Superintendence of Tax Administration (hereinafter SAT), an autonomous and independent entity of any power of the State, is the one who, as the active subject of taxes, has the legal power to verify the due compliance with the tax laws and, consequently, to audit the due and correct determination of the taxes it administers.
As a general rule, SAT has a statute of limitations period of 4 years to carry out any verification, audit, determination and formulation of adjustment in the event of any difference with what has been determined (declared) by the taxpayer. This period is extended to 8 years in case no returns have been filed or if it is presumed that a tax offense has been committed (tax fraud).
Each year SAT issues a plan establishing the sectors and industries that could be subject to verification and inspection. As a result of the foregoing, it is advisable that, in any case, taxpayers pay their taxes in the manner and within the terms established by law, keep their accounting in a legal, up to date and orderly manner, having all the corresponding supporting documents, making sure that all reported transactions are in fact material, i.e. true, real and verifiable, in order to avoid adjustments or complaints for irregularities in the operation.
On this last point, although the commercial law in Guatemala requires to keep the documentation of the companies for 5 years, it is recommended to keep the documentation that is related to other fiscal periods but that has direct incidence in future not prescribed or future, in order to have the documentary support in its opportunity, for example, the invoices for the purchase of goods subject to depreciation greater than five years.
In Guatemala taxes may be assessed by the taxpayer, by SAT or jointly. SAT can only make the determination ex officio when the taxpayer has omitted to do so.
In its case, SAT may verify compliance with the tax laws ex officio or by complaint. In any case, the Tax Administration must inform the taxpayer of the alleged inconsistencies found with respect to the determination made, on which the corresponding administrative procedure must be followed, within the framework of the tax law.
In its case, the SAT may carry out the verification of compliance with the tax laws ex officio or by complaint. In any case, the Tax Administration must inform the taxpayer of the alleged inconsistencies found with respect to the determination made, on which the corresponding administrative procedure must be followed, within which the taxpayer has the opportunity to present arguments against the alleged findings, present his evidence in defense, as well as appeal those resolutions in which, either the legal procedure or fundamental rights of the taxpayer are violated or, as to the substance, are contrary to the taxpayer’s interests. This type of process can last from 2 to 3 years.
During the examination of taxpayers, the Tax Administration has the legal power to request all documentation related to the payment of taxes, whether of the taxpayer or of a third party, as well as to request accounting and legal books, auxiliary books, reconciliations and integrations, supporting documentation, as well as any information that may be relevant to verify the correct determination of the tax obligations in relation to a particular tax period. In this case, the failure to deliver the information, even partially, may be sanctioned as resistance to the audit action and, in case of persisting in such resistance, the taxpayer may even be criminally sanctioned.
Once notified of the initiation of an audit procedure through the corresponding information request, it is recommended to review the tax on which the information is requested, the tax period on which it is requested and the content of each request, in order to verify whether all the required information is available and the feasibility of submitting it within the period granted for delivery (in Guatemala it is only 3 days), without the taxpayer being able to request extensions. This is due to the fact that SAT, being a public entity, is only empowered to do what the law allows it to do, and it is not legally empowered to grant extensions.
During the audit, the official appointed by SAT to carry out the audit is legally empowered to visit the taxpayer’s facilities as he deems necessary, in order to review the information and supporting documentation he deems necessary. At the end of the visit, he/she will prepare a report on what has been reviewed and verified. It is advisable to verify in detail the content of the record and in case its content has inaccuracies, the taxpayer has the right to incorporate the clarifications considered necessary.
In case the required documentation is not submitted within the three-day term established by law, and as a consequence of the partial documentation the corresponding verification cannot be carried out, the taxpayer may incur in the infraction known as resistance to the audit action, which provides for a fine of 1% of the gross income of the audited period.
During the auditing process, the tax return under review may not be rectified from the moment the taxpayer is notified of the hearing by means of which adjustments are made, therefore, if the taxpayer is required to submit information, he may rectify his return until before the notification of the adjustments.
In Guatemala, the taxpayer has access at all times to the administrative file of the audit carried out, with the exception of certain information or actions that SAT considers to be reserved.
Finally, it is worth mentioning that the amounts adjusted by the tax administration, fines and compensatory interest, may not be collected by SAT until they are final and all the corresponding administrative and judicial appeals to challenge them have been exhausted, which includes the contentious-administrative judicial process and the extraordinary appeal for cassation before the Supreme Court of Justice, The taxpayer may, in any case, pay “under protest” in order to avoid that the interests continue to run during the time that may delay the processing of the procedure and corresponding judicial processes, and in case the taxpayer wins the dispute, SAT is obliged to return the amount paid.
The Salvadoran Tax System establishes as a general rule the collection of taxes, by means of tax returns (self-assessments), so that in a first moment, it corresponds to the taxpayers to liquidate the tax and make the payment of the same. When this does not occur or a lower amount is paid, the Tax Administration may exercise the power of ex officio assessment of taxes (taxes, rates and special contributions).
The power of inspection and informal assessment of taxes expires in three years, counted from the date on which the deadline for filing the tax return ends, when the tax return has been filed; otherwise, the expiration period is five years. However, such expiration does not operate with respect to withholding and collection agents, who have not reported to the Tax Administration the taxes withheld and collected.
In addition, it should be clarified that the Unofficial Determination of Taxes is composed of two phases: a tax audit phase; and another contradictory phase, in which taxpayers are given the opportunity to exercise their right to be heard and to provide evidence, in order to be able to disprove the tax non-compliance attributed to them.
The audit phase begins with the notification of the Auditor’s Appointment Order and ends with the issuance of the Audit Report. At this stage, the appointed Tax Auditor requires the audited taxpayer to exhibit the relevant tax documentation, such as accounting records, VAT Books, Inventory Control Record and tax documents (Tax Credit Voucher, Invoices, among others).
The auditing power is not exercised in a discretionary manner; it must be subject to the framework of legality. For example, the Audit Appointment Order must establish who is the taxpayer under investigation; the fiscal year or periods under investigation and the tax to be audited. Therefore, the possible tax non-compliance should not go beyond the limits established in the Appointment.
Notwithstanding the foregoing, the Tax Authority has broad powers to request information from taxpayers, even with respect to other taxes, fiscal years or periods different from those audited, due to the possible relationship that these may have with the investigation, so that the limits of the Designation Order should not be interpreted as an excuse for not providing information, as this could result in the imposition of highly onerous administrative fines.
In order to exercise an adequate defense at this stage, all information that allows establishing the adequate compliance with tax obligations must be identified and provided. For example, in an Income Tax (ISR) audit, it must be demonstrated that the income was duly declared; and that the expense is duly documented and accounted for; that it relates to real operations; and that it is necessary for the generation of the income or the preservation of its source.
Ideally, the taxpayer should be accompanied by an expert in the matter, which will allow him to strengthen the tax defense, since in many occasions, the tax findings can be vanished from the audit, if the applicable tax criterion is known, and the appropriate evidence is provided in a timely manner.
If the findings are not disproved in the audit, the contradictory phase of the informal assessment procedure begins, in which the taxpayer is given the opportunity to be heard and to provide evidence, so that the taxpayer may disprove the alleged tax non-compliance. This is an eminently tax litigation phase, which is why the assistance of an attorney specialized in the matter is essential.
Although the tax defense through an attorney is not mandatory in the informal assessment procedure, it is undeniable that the accompaniment of a legal professional will allow the taxpayer to invoke a legal defense that protects the taxpayer’s rights. If the lawyer is also a specialist in tax matters, it is very likely that a more favorable result will be obtained. For example, the provision of suitable evidence in a timely manner; the correction of non-compliances to access mitigating factors in the event of a possible tax fine; and the invocation of favorable tax criteria, requires a considerable degree of specialization, which other legal professionals do not have.
Finally, if the tax non-compliance has not been disproved before the Tax Administration, the latter will issue the administrative resolution that informally determines original or complementary installments of unpaid taxes, and the imposition of the consequent tax fines. Here again, it is recommended to seek professional advice to guarantee the adequate use of the administrative and judicial means of appeal.
The Revenue Administration Service (SAR), is the Tax Authority in Honduras, and has the attribution and obligation to verify, check and/or audit the data and facts consigned by the taxpayers in the declarations and statements presented before said institution, following the procedures established in the Tax Code.
The Tax Code establishes rights and obligations for taxpayers during a verification and/or audit. Among the most relevant rights are the right to be informed at the beginning of the verification or audit of the nature and scope of the same, as well as of their rights and obligations during the course of such actions and that they are carried out within the legal time limits. The personnel who will carry out the auditing tasks are identified, as well as the confidential nature of the data, reports and tax and customs records, as well as the information contained in the returns, reports and studies of the taxpayers submitted to the Tax Administration. Likewise, the guarantee of not providing the documents already submitted or in the possession of the Tax Administration and to challenge the resolutions within the terms established by law is also recognized.
Among the obligations of taxpayers are to facilitate the review, verification, control, audit, investigation, determination and collection tasks performed by the Tax Administration. To keep and support the operations through the issuance of tax receipts. Keep accounting books, keep them for 5 years, in accordance with IFRS and keep them at its tax domicile, without prejudice of having contracted accounting services within the country.
Likewise, the Tax Code establishes that the Tax Administration has the authority to verify, verify or inspect the data and facts included in the returns and statements, to make notifications, to enable hours and non-working days, to impose penalties and to resolve the procedures. The Tax Administration also has the power to inspect compliance with tax obligations and to request information and documentation.
The obligations of the Tax Administration include notifying the beginning of the auditing work, documenting in minutes all the actions carried out in the course of the auditing procedure, issuing the regularization and liquidation proposal within the term established in the Law and admitting the taxpayer’s challenges.
Regarding the deadlines for the Verification and Auditing processes, the following must be taken into account:
The statute of limitations period, for obligations relating to taxpayers registered in the National Tax Registry (RTN), through which in turn the rights and actions of the Tax Administration are extinguished, is five (5) years. However, the Code also establishes exceptional cases by means of which the statute of limitations may be interrupted; reasons that may be attributable to the tax administration or the taxpayer.
It is important to mention that the taxpayer, in accordance with the provisions of the tax code, cannot be obliged to submit to the personnel performing the aforementioned processes, information or documents that do not correspond to the periods or taxes established in the notification; however, in practice, sometimes this type of situation occurs, so it is at the discretion of the taxpayer whether or not he/she wishes to provide the information.
Given the different legislation in force in each of the countries of the region, it is undoubtedly advisable to contact a trusted tax advisor who can guide the company in the best possible way through the process before the Tax Administration and assert its rights as a taxpayer.
Nicaraguan tax legislation regulates different types of taxes, such as national, municipal, customs and special social security contributions; each of these are subject to regulation and supervised by a tax authority. In this sense, we differentiate between customs taxes, which are supervised by the General Directorate of Customs Services (DGA); municipal taxes, under supervision by each of the Municipal Mayors’ Offices – each municipality has administrative autonomy over its territory -; special social security contributions by the National Institute of Social Security (INSS); and national taxes, which are supervised by the General Directorate of Revenues (DGI). We will focus on the latter in this section.
In this particular, we note that in Law No. 562 “Tax Code of the Republic of Nicaragua” and its reforms, which regulate the legal relations derived from national taxes, which includes the procedure for auditing, administrative process, prescription periods of tax obligations, as well as the rights and obligations of taxpayers.
As a general rule, we observe that the statute of limitations period for tax obligations and rights derived from National Taxes (Income Tax, Value Added Tax, etc.) will be 4 years from the date on which their compliance becomes enforceable. Except in cases of inaccurate declaration or concealment of income on the part of the taxpayer, this term may be extended up to 6 years.
By virtue of the foregoing, the auditing activity exercised by the General Revenue Directorate (DGI) is limited to national taxes included within fiscal periods not prescribed. It should be noted that the law prohibits the auditing of taxes within prescribed tax periods.
The auditing activity allows the General Revenue Directorate to review taxes not prescribed and in those cases where the Tax Administration determines that there are omitted taxes, to make objections and notify them to the taxpayer by means of an Administrative Resolution issued by the competent authority. Below, we will detail the different main phases that make up the administrative audit procedure:
All audits begin with the notification to the taxpayer of the credential to audit, through which the taxpayer is informed that an audit process will be initiated and the taxes and periods that will be subject to review are indicated.
During the course of this procedure, the General Revenue Directorate may request tax documents from the taxpayer (tax returns, financial statements, tax supports, contracts and any other document and information necessary to determine the tax obligation). The Tax Administration may even carry out cross-checks of information with other authorities and request information from Foreign Tax Administrations through international agreements.
Taxpayers will be obliged to comply with such Tax Information Requests within 10 business days after notification. For evidentiary purposes, it is advisable to submit a letter of referral detailing the information and documentation shared with the Tax Administration.
Once the authority has completed the analysis of the documentation provided and made all the pertinent requirements, it will proceed to issue a record of the documents provided and not provided by the taxpayer during the audit procedure.
Finally, the taxpayer is notified of the completion of the audit and an administrative resolution called “Acta de Cargos” is issued, through which the findings, motivations and adjustments made on the audited taxes are reported.
The taxpayer has the right to oppose these findings and present the means of proof and legal arguments to have them dismissed by filing a written statement of defense against the administrative act issued; the procedure culminates with the formalization of the findings through a Determination Resolution, which declares the existence of the tax obligation and accessory obligations (late payment surcharges, fines, etc.).
Subsequently, the taxpayer may file the appeals established by law (reinstatement, review and appeal) to challenge such act, and may even resort to judicial proceedings before the Supreme Court of Justice of the Republic of Nicaragua.
The General Directorate of Revenues (DGI) has its own calendar of audits, therefore, internally it has a plan that determines which taxpayers will be subject to audits. Due to the above, it is advisable that all taxpayers observe the due compliance of their tax obligations, have the fiscal supports of each of their transactions, transfer pricing studies and in particular have their accounting books updated; in order to avoid adjustments in the taxes that were declared, which would also be subject to late payment surcharges of up to 50% of the omitted tax, fines for tax contravention of 25% of the omitted tax and maintenance of value. It should be noted that in the case of customs and municipal taxes, the administrative fines correspond to 100% of the omitted tax.
Any entity that is considered a Tax Administration in its condition of active subject of a tax, has the possibility of auditing the taxes it administers. As a general rule, the General Directorate of Taxation has a prescription period of 4 years to determine any difference with the self-declared by the taxpayer. This period is extended to 10 years in case no returns have been filed or these are declared as fraudulent.
In Costa Rica, in general, there are two types of assessment processes. Preliminary liquidations are abbreviated procedures carried out based on information held by the Tax Administration, such as cross-checking of information and arithmetic verification. This type of process can last from 2 to 3 months.
On the other hand, in the case of definitive liquidations, the Tax Administration is empowered to request accounting and legal books, auxiliary books, tax reconciliation, accounting entries, supporting documentation, as well as any information that may be relevant to verify the correct determination of tax obligations in relation to a particular tax period. This type of audit processes are more extensive since they may last from the communication of the initiation of the tax audit to the tax authorities.
Each year the General Directorate of Taxation issues a plan in which it determines the sectors and industries that could be subject to review. Based on the above, in anticipation of an audit process, it is prudent to keep the accounting up to date and orderly, considering the auxiliary expenses according to their nature, to keep and reference the tax reconciliation with the accounting accounts involved in the tax determination, as well as to make sure to file and keep the supporting documentation of the transactions verified during the tax period.
On this last point, although Costa Rican law requires keeping the documentation for 5 years, it is advisable to reguasdar that documentation that affects other tax periods, such as those relating to loans or investments.
Once notified of the initiation of an audit procedure, it is recommended to review the content of each requirement in order to verify if all the required information is available within the period granted, which should not be less than 10 working days. The taxpayer will have the right to request extensions of at least 5 additional days.
It is prudent to reconcile the details, auxiliary and information provided with the information reported in the corresponding tax return and to ensure that the proper documentary support is available.
The required information must be submitted in the format specified by the auditor. It is not recommended to submit original documents, and it is prudent to provide copies and have them checked against the original or copies certified by a notary public.
It is important to be aware that the Costa Rican Tax Law provides for fines of up to 2% of gross income in case the required information is not submitted on time or incompletely.
The official in charge of the audit is authorized to visit the company’s facilities in order to review information and supporting documentation. At the end of the visit, a record will be drawn up of what has been reviewed and verified. It is advisable to verify in detail the content of the report and in case of inaccuracies in its content, the auditors have the right to incorporate the clarifications deemed necessary.
During the auditing process, the tax return under review may not be rectified except with the prior authorization of the official in charge of the audit. Likewise, there will be no access to the administrative file of the audit until it is concluded, so it is advisable to have backup of everything that has been contributed to the process.
Any difference resulting from the study carried out may not be collected by the Treasury until the taxpayer has exhausted all administrative remedies to contest it.