Investment through Tax Incentives
By TBY | Dominican Republic | Aug 31, 2014
Tax Incentives have been one of the most utilized instruments of public policy makers when looking to jumpstart a specific economic sector by stimulating job creation, attracting capital investment, and procuring technology transfer. While their effectiveness has always been questioned, developing and industrialized countries nonetheless make use of them as they act as a generator of a better business climate (OECD, 2008).
In a more competitive world, where free trade agreements (FTAs) and geographic economic alliances are the norm, the Dominican Republic by offering this preferential treatment is aligning itself to compete for mobile capital, without directly affecting the rest of the tax system, because tax incentives policies are given to a specific industry or sector based on qualification criteria, thus providing a level playing field for competitors.
The Dominican Republic exhibits one of the highest growth rates in the region, both in per capita and overall terms, and has experienced less volatility than other countries in Latin America over the past 20 years according to OECD data for 2013. Tax ‘ncentives have played an important part in achieving consistently rising FDI figures.
The Dominican Republic corporate income tax regime is based on the Territoriality Principle, therefore only Dominican Republic source income is generally subject to tax. Dominican Republic source income is generated from services provided, assets located, and capital used within the Dominican Republic, besides income from supplying technical assistance services, whether from outside or inside the country.
Based on the territoriality principle and specific provisions established in the Dominican Constitution, any tax incentives or exemptions must be specifically established by a law, stating the specific objective goals for the industry or economic sector, the admission criteria, the administrative body, specific exemptions and their term.
Foreign Investment Law 16-95 sets the principle of equal treatment of national and foreign investments, securing them the same legal protection, without any discrimination. This principle is first expressed in the elimination, for the purposes of the law, of all prohibitions and restrictions established before on foreign investment in many economic sectors, such as public service enterprises, mining, banking, insurance, and transport, among others.
Under Law No. 16-95, the foreign investor has the right to remit abroad in freely convertible currency, and without the previous need for central bank authorization, the following: total amount of capital invested, including the capital gains realized and reflected in the books of the undertaking according to generally accepted accountancy principles; total amount of the dividends declared during each fiscal year, up to the net profits realized during such period, upon the liquidation of income tax.
It is necessary to point out that the approval of the Monetary and Financial Law No. 183-02, (Article 24) established the principle of free convertibility of the national currency. This principle affirms that the exchange rate and currency obligations under Dominican legislation can be freely and voluntarily established by respective parties. This basically means that the central bank cannot impose any restrictions on international currency exchange operations, or set any exchange rates or price determinations.
TOURISM LAW 158 AND ITS AMENDMENTS
Today, tourism is, along with free zone exports, the main generator of foreign exchange and an important national employer. The most important item of legislation in the tourism sector is Law 158-01, on the promotion of tourist development for new or low development locations in provinces and districts of marked tourist potential, and for the creation of the tourist promotion official fund.
Since its approval in 2001, the law only focuses on tourism geographical areas (poles) with the potential to be exploited, and specifically stated these in the Law. However, the recent approval of the modification of Law 195-13, eliminated these tourism poles and indicated that the exemptions could be applicable to all projects in the Dominican territory that meet the criteria for tourism development, and presented incentives to remodel or expand inner city hotels.
CONFOTUR is the governing body with the authority to grant all, or part of the benefits and incentives described in the law, integrated by a mix of representatives of the public and private sectors. Projects must meet strict criteria and submit before the CONFOTUR Council documents such as stated business plan, marketing study and strategy, detailed architectural drawings, and construction blueprints.
It has been our experience that CONFOTUR usually grants all incentives available in law; however, we cannot discard those cases in which it has been selective of which incentives and benefits it approves for other tourist projects. In order to clearly describe the incentives and benefits, we have divided them into two categories: the first are the taxes, charges and fees exempted by law, and the second category describes the amortization of the invested amount. Then there are tax, charges, and fee exemptions, 100% exemption from the payment of income tax, incorporation tax, tax due to capital increase, property transfer tax — (only to first buyers of the project) and tax applicable to luxury real estate. There is also 100% exemption from any other taxes, charges, or fees that may apply when importing machines, equipment, materials and personal property for use in construction, or that may be classified as the initial equipment to be used to commence the operations of the tourist facility.
Once a project is approved by CONFOTUR and granted the above-described benefits, investors are able to deduct their investments from their net taxable income. In this respect, the law specifies that the investors will be entitled to apply for a yearly amortization of up to 20% of their net taxable income. Nevertheless, this amortization benefit will only be permitted for a period of no greater than five years.
Pro-industry Law 392-07 was aimed at improving the legal and institutional framework for fostering the competitiveness of the industrial sector in the country. Specifically, it centered on promoting diversification of the productive system, production linkages through industrial parks, and deeper linkages with international markets. (OECD 2014).
Intervention under this scheme is more targeted in nature, aimed mainly at improving logistics and competitiveness, and fostering innovation. A special feature is the creation of a special customs regime applicable to classified firms’ import and export procedures. The incentives include: VAT exemptions of imports and on local acquisitions between companies that are classified in Proindustria; exemptions of selective taxes on baking transactions, oils/gas derivatives and telecommunications; 50% exemption from custom duties for inputs imported through special zones and exported to the Dominican customs territory, for partial processing and subsequent re-entry to the special zone.
The border provinces with Haiti have historically had the lowest growth rate in relation with other provinces of the Dominican Republic. That is why Law 28-01 created a Special Border Development Zone that provides for all enterprises installed within any of the provinces listed in the law, (Pedernales, Independencia, Elias Piña, Dajabón, Montecristi, and Santiago Rodriguez an Bahoruco) will benefit from the following facilities and exemptions: Exclusion of 100% of the net income tax- Exemption of 100% of tax on the transfer of Industrialized Goods and Services (ITBIS), Exemption of import duties and taxes and other related charges, including tariffs, on materials for internal consumption and manufacturing process, all for a maximum of 20 years, for companies engaged in the industrial, agriculture, metallurgical or energy sectors.
For the Renewable Energy Incentives Law 57-07, renewable energy is defined as that where the primary source of the electricity generated is solar, wind, biomass, biogas, municipal waste or organic, waves, tides, currents, water, geothermal and/or any other renewable source unused in significant proportions. Also included in this definition are small (micro and mini) hydropower operating currents and/or hydraulic jumps and unconventional energy sources that are renewable equivalent in terms of the environment and saving on imported fuels.
Upon compliance with certain regulatory procedures specific to each project, the National Commission of Energy (CNE) will recommend the exemption of all kinds of import taxes on equipment, machinery and accessories imported by companies or individual persons, necessary for the production of energy from renewable sources. Concessions and incentives granted to operations that produce or use clean technology are the following: exemption from income tax for up to 10 years until the year 2020. Income must be derived from sources dedicated to generating or selling renewable energy, or selling or installing renewable energy equipment, parts or systems thereof specified under the law. Such equipment, parts, and systems must be produced locally with a minimum aggregate value of 35%; there is exemption from ITBIS for certain equipment expressly listed in the law; there is exemption from import duties on equipment necessary to produce energy from renewable sources.
FILM ACTIVITIES LAW 108-10
The incentives enacted by Law 108-10 were directed toward entities that advance the creation, production, distribution, exhibition and film and audiovisual training and related technical industries in the Dominican Republic. The beneficiaries of the incentives under Law 108-10 must have previously been enrolled in the Information System and Dominican Film Registry, controlled by the Dominican Republic’s Film Commission (DGCINE).
Persons or entities investing in companies whose sole purpose is the production of works of Dominican cinematographic films previously approved by DGCINE are entitled to deduct 100% of the actual amount invested from the income tax charge, for the taxable period of the investment. This amount should not exceed 25% of the total tax payable income tax for the same fiscal year of the investment.
Capitalized or reserved income used in the development of new productions, or else new investments in the Dominican feature film industry, whether at home or abroad, will be exempt for up to 100% of the income tax value. This incentive will apply to all persons who are producers, distributors and exhibitors of said feature films for a period of 10 years up until 2020. Also, producers may receive a tax credit equivalent of 25% of all expenditure incurred on Dominican territory for the production of short, medium, and feature length films, documentaries, and series, among other cinematographic products.
We must disclose that several tax incentives have been given to specific corporations through the government concessions system, especially in the mining and power generation sector, contracts that were duly sanctioned by the Dominican Congress, but not by a specific law.
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