Nicaragua | Areas of Improvement for Taxpayers Within the Tax Simplified Regime

Jeynner Gutiérrez, Associate expert in Fiscal Law from ARIAS Nicargua, shares this article on the Nicaraguan tax system and how it has different areas of improvement for a better management of the tax simplified regime.

The simplified regime is an alternative tax system that has been adopted by various Latin American legislations, each with different technicalities, but maintaining the nature of this regime, which is the integration of various taxes levied on an economic activity into a single tax.

This regime emerged in Latin America, initially in Brazil, to promote the development of small traders by reducing obligations and tax burdens, and to facilitate their integration into the 'formal' market. It also served as a mechanism for tax authorities to monitor traders who were not registered before any government authority. Over time, different Latin American legislations have been adjusting the specific features and parameters of the simplified regime, considering, as much as possible, the realities faced by each jurisdiction.

The simplified regime was originated in Nicaragua in 2003, through the enactment of the Fiscal Equity Law (‘Ley de Equidad Fiscal‘), a regime that was initially targeted at small taxpayers. The Fiscal Equity Law, currently superseded, only stipulated that the taxation under this regime would be determined through ministerial agreements, which raised concerns about a potential conflict with the principle of legal reservation in tax matters. It was not until 2013 that the regime was included within a law, specifically the Tax Concertation Law (‘Ley de Concertación Tributaria’). This law provides more detailed regulations applicable to the 'Simplified Fixed Quota Regime,' commonly known in Nicaragua as 'Fixed Quota'.

Briefly, the Fixed Quota in Nicaragua consolidates the Income Tax of economic activities ('IR') and the Value Added Tax ('VAT') into a single fixed monthly fee, which is determined based on an estimation of the taxpayer's monthly income. Furthermore, the Fixed Quota reduces the taxpayers' obligations before the tax administration, including, among others, maintaining formal accounting records, becoming withholding or collecting agents, and filing income declarations. Only individuals with monthly income below C$100,000.00 (approximately US$2,730) are eligible for the Fixed Quota, or those with stock of merchandise valued at no more than C$500,000.00 (approximately US$13,655). Additional restrictions exist for the eligibility of individuals into this regime. The following are among the most notable restrictions: (i) legal entities; (ii) importers or exporters; (iii) taxpayers located in shopping centers and malls. Based on the foregoing, it can be inferred that Nicaraguan legislation emulates certain characteristics of the simplified tax system found in other jurisdictions.

Although there are provisions in Nicaragua that govern the simplified regime, it is possible to identify different areas of improvement for better management of this tax that could benefit taxpayers. This time, it will be addressed only on the following aspects: (a) exclusion of legal entities and (b) fiscalization.

A. Exclusion of Legal Entities

As previously stated, the Fixed Quota in Nicaragua is limited to individuals, which means that legal entities, such as corporations, limited liability companies, and civil partnerships, are excluded from this tax regime.

The above mentioned implies that registration as a taxpayer under the simplified regime can only be conducted in the taxpayer’s individual capacity, preventing the taxpayer from associating with two or more individuals. Under this premise, the taxpayer is personally liable for obligations arising from their business, thus they are liable without limitations, and as such they are required to restitute any default with all their assets in the event of any action taken against them.

This poses a challenge for entrepreneurs and emerging businesses, as it forgoes the protection provided by the corporate veil and prevents the taxpayer from organizing with others to meet obligations arising from their businesses. These points are essential for the growth of a business with limited resources, besides of other eventualities or factors that may require the organization of two or more individuals to engage in an emerging economic activity. Such restriction could lead taxpayers to explore alternative or unconventional legal vehicles to associate with third parties, which may not provide legal security or may involve a more challenging registration process. This could discourage taxpayers’ registration before the tax administration.

The exclusion of legal entities in the Nicaraguan legal system differs from the applicability of taxpayers under the simplified regime in other Latin American legislations. Countries such as Ecuador and Panama allow taxpayers to be incorporated as legal entities to apply to the simplified regime, with eligibility based on different parameters, none of which are related to the type of organization.

It is possible to consider that the exclusion of legal entities from the simplified regime is an issue that can be overcome by establishing realistic criteria and ensuring an adequate fiscalization by the tax authority. For example, Latin American legislations allow the inclusion of legal entities in simplified regimes based on the following criteria:

• Establishing a threshold of the maximum taxpayer’s income;
• The partners, participants, or shareholders of the taxpayer (legal entity) must be individuals only, excluding from the regime legal entities incorporated by legal entities;
• Be eligible into the simplified regime only for a maturation period or for a specified term;
• Ensuring that the taxpayer has not previously registered or benefited from the simplified regime.

The Nicaraguan tax system could opt to include legal entities in the simplified regime, aligning with the conditions adopted by other countries and adapting them to the realities of the country. This would provide entrepreneurs and emerging businesses with greater legal security, resources, and options for conducting their projects, which, in turn, would encourage their integration into the formal market.

Furthermore, to achieve the effectiveness of the simplified regime, it is necessary for the tax administration to implement appropriate fiscalization mechanisms to reduce any potential abuse by taxpayers seeking to register under the simplified regime. This represents another area of opportunity in the Nicaraguan tax system, as described in more detail below.

B. Fiscalization

There are perspectives that suggest the simplified regime arises, among other reasons, to reduce the administrative burden and fiscalization by tax authorities through the reduction and simplification of the obligations for taxpayers adhering to this regime. The concept of fiscalization for simplified regimes is that it is not as aggressive or massive as it might be for taxpayers under the general regime. This has prompted various legislations to implement measures to facilitate supervision of taxpayers, in order to not undermine the nature of the regime.

Specifically for Nicaragua, the tax authority lacks effective mechanisms for supervising taxpayers under the simplified regime to ensure that they are not exceeding income thresholds. For the purpose of liquidating the Fixed Quota Tax, the taxpayer only generates a payment order through the Electronic Tax Portal (‘Ventanilla Electrónica Tributaria’). The tax authority does not require income declarations from taxpayers, nor are there any trends in auditing these taxpayers. Although the Tax Concertation Law establishes the obligation for taxpayers under the simplified regime to report to the tax authority once they receive an average monthly income exceeding C$100,000.00 over a six-month period in order to be transferred to the general regime, there is no active or at least immediate diligence on the end of the tax authority to ensure that taxpayers comply with this obligation.

The lack of fiscalization of taxpayers registered under the Fixed Quota regime could lead to the benefits of this regime being used as a mechanism for tax evasion, which could disadvantage other taxpayers, both in the simplified regime and the general regime, as well as the impact this may have on the fiscal system. On one hand, a taxpayer under the simplified regime may struggle to compete with another in the same regime who has greater resources and generates higher income (exceeding the permitted threshold). On the other hand, a taxpayer under the general regime may find it difficult to compete with another with the same resources and income but whose tax burden has been significantly reduced by being in the simplified regime.

Based on the above, it is imperative for the authorities to implement systems that mitigate these scenarios. The conditions established in section A. could be replicated in this context, as well as other conditions that could be explored by legislators to fit the context and resources of the tax authority. This would allow the tax authority to achieve greater visibility of taxpayers under this regime, without requiring a significant investment of resources, and ensure, as much as possible, that the simplified regime is being correctly implemented.

Indeed, the historical purpose of the simplified regime offers significant advantages to a tax system, both for the taxpayer and the tax authority. However, as evidenced in the case of Nicaragua, there are certain areas for improvement that can be enhanced through the adjustment of existing legislation and the implementation of best practices, to achieve better management of this regime and maximize its benefits and advantages.

The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.