SUPREME COURT OF JUSTICE ON "ADVANCE INCOME TAX DEPOSIT" ANTICIPO 1.5%

The judgment of May 21st, 2008, by the Supreme Court of Justice, Chamber of Lands, Labor Matters, Administrative Contentious, and Tax Contentious.----------------------- -------------

The Supreme Court of the Dominican Republic seems to have set a precedent regarding the tax that some companies pay, called “advance income tax deposit”, whose rate is 1.5% of gross income.

The decision was issued after a process between a private company and the Dirección General de Impuestos Internos (Directorate General of Internal Taxes). The company proposed a deduction of losses suffered in three tax years, arguing that the tax of 1.5% did not constitute a tax without an advance value to the Directorate General of Internal Taxes, and that the law amending the Tax Code did not change the compensation regime of tax losses. These laws, for the Dominican readers, are Law No. 147-00 and Law No. 12-01.

The Directorate General of Internal Taxes, for its part, argued that the cited laws, No. 147-00 and 12-01, indeed changed the tax system of paying as a minimum of the gross income of a special category of companies, and, hence, there is no need to compensate for losses suffered by businesses that pay the 1.5% tax.

The Supreme Court accepted the reasoning of the Directorate General of Internal Taxes under the argument that, when the cited laws (147-00 and 12-01) established a tax on gross income with a standard minimum, they were establishing a presumption of income, whose defining characteristics were that such payment was final and not refundable. This presumption of income, according to the Supreme Court (accepting the arguments of the Tribunal Contencioso Tributario -Tax Contentious Court-), is considered to be irrefutable or lawfully "jure et jure"; meaning that it does not admit any evidence against it. Accordingly, in assuming that, when a company pays its advance of 1.5% on gross income, it means that this payment is like a minimum income produced by the company and, hence, the same cannot be interpreted otherwise since it is a legal presumption, and the direct consequence is that the losses of the tax year cannot be compensated.

The Supreme Court of Justice also based its decision on the fact that the settlement of this type of tax has been expressly ruled out of the traditional system of income or income tax. It is understood that, by establishing a special regime different from the traditional system of calculating income tax of the companies, the benefits thereof have been excluded, among them the compensation for financial losses.

Our opinion about this decision is quite good. We understand that the reasoning by which it has been completed this inquiry of the cited laws above is quite coherent, and it is well suited to the legal logic. However, we are not specialists in this field, and the opinion of income tax specialists should be sought in order to compare their opinions with the criteria of the Supreme Court of Justice.

These criteria should be compared and argued about for the benefit of free enterprise and good conduct of business. We understand that it must be so because, although we repeat that this is not our area of expertise, the treatment seems unfair and discriminatory to companies that pay this tax, since the logic of free enterprise is the payment on their income, and any advance tax deposit -although it may be called minimum tax- is generated through the income of any enterprise, not necessarily out of its gross income. It is therefore an iniquity to prevent a company that, after determining that during its tax period there was no taxable income, that it has to pay a minimum tax because a law has established arbitrarily (under the best intentions and purposes; in particular, to eliminate evasion) that its tax year must produce a minimum income and, hence, the Supreme Ruler State is entitled to this portion.

We expect further decisions on this point, although we believe that the precedent will remain as a constant and -although we repeat that from the legal standpoint it seems logical-, there is a contrast with the known principles of the tax law.

Freddy Miranda
Translated by Orlando Alcántara