Fiscal impact of the frozen exchange rate of the cordoba against the US dollar

The Central Bank of Nicaragua (BCN) is the entity responsible for determining and executing monetary and exchange rate policy in coordination with the government’s economic policy, under Law No. 732 “Organic Law of the Central Bank of Nicaragua.” In this sense, the BCN sets the annual exchange rate policy and determines the official exchange rate of the cordoba against the United States dollar (USD).

Considering the above, on December 28, 2023, the Central Bank of Nicaragua published the notice “Official Exchange Rate of the Year 2024” in line with the exchange rate policy adopted by the government of Nicaragua and applicable for the entire fiscal period of 2024.

Through the notice, it was communicated that the official exchange rate of the cordoba with respect to the United States dollar for the period from January 1 to December 31, 2024, will be C$36.6243. In other words, the adopted exchange rate policy has consisted of reducing the slippage of the cordoba against the US dollar to 0%.

This has economic, legal, and fiscal effects, such as effects on tax obligations, remittances, salaries, pensions, and clauses for maintaining value in obligations contracted through private and/or public contracts, among others. In this case, we will focus on the main effects from a fiscal perspective, in which this exchange rate policy directly impacts compliance with tax obligations.

Below, we outline the direct effects of the reduction in the slippage of the cordoba against the dollar. Here, it can be identified, on the one hand, the reduction in income from exchange rate differentials, and on the other hand, the decrease in deductible costs and expenses due to exchange rate differentials, the above according to arts. 36 and 39 of Law No. 822 “Tax Concertation Law” and its amendments establish:

  • Art. 36: Gross Income:
    Gross income shall constitute: (…) 2. The net positive result of exchange rate differences arising from assets and liabilities in foreign currency, regardless of whether they are realized or not at the end of the fiscal period (…)
  • Art. 39: Deductible Costs and Expenses:
    Costs and expenses incurred, general, necessary, and normal to produce taxable income and to preserve its existence and maintenance, provided that such costs and expenses are recorded and supported by their corresponding vouchers. Among others, the following are deductible from gross income: (…) 11. The net negative result of exchange rate differences arising from assets and liabilities in foreign currency, regardless of whether they are realized or not at the end of the fiscal period, as the case may be (…).

On the other hand, for the case of trade in goods and services locally, the Law for the Protection of the Rights of Consumer and User Persons (Law 842 published in La Gaceta No. 129 of July 11, 2013) also applies. This law establishes that the price of a good or service must be expressed in the national currency and includes the corresponding taxes where applicable. Art. 10 of said Law prohibits suppliers from charging or invoicing prices or fees in metals, currencies, or foreign currencies or any monetary unit or means of payment other than the cordoba, under art. 36 of Law No. 732, “Organic Law of the Central Bank of Nicaragua” (published in La Gaceta, Official Gazette No. 148 of August 6, 2010). Exceptions to this provision are companies operating under the regime of export industrial free zones, warehouses for depositing goods to order, and other exceptions established in art. 37 of the same Law.

Law 842 recognizes the possibility for the consumer to pay in foreign currency in those cases where the consumer or user persons agree with suppliers to pay for the good or service in this currency voluntarily. For these cases, what is established in art. 10, numeral 6, must be complied with, which prohibits the supplier from applying an exchange rate lower than the official one of the days (published by the Central Bank of Nicaragua).

In tax regulations, there is no prohibition for taxpayers to issue invoices with prices established in dollars. However, companies that habitually invoice in this currency are obliged to use the official exchange rate of the cordoba concerning the United States dollar (USD), which will be C$36.6243. At the same time, they are obliged to use this same exchange rate to comply with the rest of the formal tax obligations, such as accounting records that are in cordobas and their tax declarations that will be liquidated in cordobas, obligating, at the same time, that when issuing invoices in dollars or cordobas, their equivalence in cordobas be expressed within them, both the subtotal, the VAT, and the total.

As observed, this monetary and exchange rate measure has legal and economic effects in different sectors, requiring knowledge of its operation and its repercussions in transactions where foreign currencies (US dollar) are used, and for the calculation of the maintenance of private obligations before private individuals and public obligations before tax authorities or other state entities.