In accordance with Law No. 822 “Ley de Concertación Tributaria de la República de Nicaragua” (LCT), all taxpayers, whether natural or juridical persons, who accrue income from economic activities, will be subject to the tax on income from economic activities (Annual IR). In this sense, Nicaraguan legislation defines income from economic activities as “income accrued or received in cash or in kind by a taxpayer who supplies goods and services (…)”.
According to the provisions of Article 35 of the LCT, the taxable base of the annual income tax on economic activities is the net income, i.e., the result of deducting from the gross taxable income the amount of the deductions authorized by law. In other words, the taxable base of the tax will be the result of the non-exempt income or taxable income minus the deductible costs and expenses established by law that comply with all the tax requirements for their deductibility.
In this sense, it is important for taxpayers to know that deductible costs and expenses must comply with a series of legal requirements for their deductibility, since it is not enough to incur and record such expense to deduct it from the taxable income in order to reduce the income tax payable, since the taxpayer is exposed to tax adjustments that will be subject to fines and penalties calculated on the tax not collected by the Tax Administration. Therefore, taxpayers must make sure that their costs and expenses are duly recorded, documented and comply with all the requirements for purposes of calculating the Annual Income Tax base.
In general terms, articles 39 and 43 of the LCT detail, by means of a list, all those costs and expenses that will be considered deductible and non-deductible, respectively, for purposes of calculating the taxable base (net income) of the tax on income from economic activities. However, it is important to highlight that, it is not enough that the cost or expense incurred by the taxpayer is contemplated in the list of article 39 of the law, since, it must comply in its entirety with a series of tax requirements established by law, such as:
- The cost and/or expenses must be caused, general, necessary and normal to produce the taxable income and to preserve its existence and maintenance.
- They must be duly recorded and supported by their corresponding receipts.
- The taxpayer must have the supporting vouchers and sufficient support of the costs and expenses.
- If withholding has been made and payment has not been made to the Tax Administration, the expense will be deductible in the fiscal period in which the payment of the withholdings or contributions is made.
- The receipts and supports of the expense must also comply with the tax requirements established in the current legislation, as is the case of invoices and other related tax receipts, which have a series of requirements that if not complied with would not be considered valid by the Tax Administration.
The aforementioned are requirements that the taxpayer must fully comply with in each of the deductible costs and expenses. Likewise, we reiterate that taxpayers may not deduct those costs and expenses contemplated in article 43, since the law expressly states that they must be considered non-deductible for purposes of calculating the annual income tax base.
In summary, it is of great relevance that taxpayers make sure to comply with all the tax requirements established by law, since, otherwise, they would be losing the right to deduct such costs and expenses from the gross taxable income, which may affect the profitability of the business and cause a higher tax to be paid due to an incorrect tax planning.
Likewise, we recommend that you have tax and accounting advice to identify that the costs and expenses to be deducted effectively have all the relevant supports. This is important because the Tax Authority has a period of 4 years to audit the due compliance of the tax obligations and from its review may determine adjustments when considering that the costs and expenses are unduly supported or do not comply with all the tax requirements, therefore, the taxpayer is exposed to an adjustment for the omitted tax – according to the amount of the unduly deducted costs and expenses – in addition to a fine for tax contravention (25% of the omitted tax), late payment surcharges (up to 50% of the omitted tax) and value maintenance.