Salvadoran tax legislation establishes, in Article 1 of the Law on Tax on the Transfer of Movable Property and the Provision of Services (LIVA), that VAT is applied to the consumption of movable property from realizable assets, understood as those intended to be sold or converted into cash within the normal cycle of operations; Consequently, Article 11 of the LIVA considers the withdrawal of tangible goods from realizable assets (inventories) to be a taxable event when these goods are intended for:
- The taxpayer’s own use or consumption, including withdrawals made by partners, managers, or company personnel.
- Commercial purposes, such as raffles, sweepstakes, or free gifts for advertising purposes. In this case, the goods may or may not be related to the business.
- Inventory shortages, for which the law applies a presumption of self-consumption, unless the taxpayer can prove unforeseeable circumstances, force majeure, or causes inherent to the business.
It is important to clarify that not all inventory withdrawals are subject to VAT, as the regulations exclude the following from taxation:
- Transfers to fixed assets, provided that they are goods necessary for the business.
- Donations made to entities classified as public utilities, in accordance with Article 6(c) of the Income Tax Law.
On the other hand, with regard to the provision of services, Article 16 of the LIVA establishes as a taxable event the use of services produced by the taxpayer himself when they are intended for the use or consumption of partners, managers, agents, company personnel, their family groups, or third parties related to any of them.
Applicable tax base
According to Article 48(c) of the VAT Law, for withdrawals of goods or inventory disposals subject to tax, the tax base must be determined in accordance with:
- The retail price assigned by the taxpayer as recorded in their documentation or accounting records.
- In the absence of records, the current market price.
A common mistake is to document these withdrawals at acquisition cost or, in the case of promotional products, to assign them a value lower than the sale price, a practice that can lead to contingencies in the event of an audit, such as adjustments for internal sales or the determination of additional tax liabilities.
Correct documentation of withdrawals
According to Article 58 of the LIVA, withdrawals of goods and self-consumption do not generate tax credits and must be documented only by means of an invoice or equivalent document authorized by the Tax Administration; in this regard, the law emphasizes that tax credit receipts or credit notes should not be used for these transactions.