REQUIREMENTS FOR THE DEDUCTIBILITY OF COSTS AND EXPENSES

Experience tells us that when the Tax Administration audits the Income Tax of companies, the most common adjustment that is usually made is adjustments to EXPENDITURE, which consequently increases the taxpayer's taxable income and translates into the payment of higher taxes to those declared and paid.

In Nicaragua the IR of Economic Activities is 30% of the NET Income, which is determined by the following formula:

NET INCOME = GROSS INCOME (TAXABLE INCOME) – DEDUCTIBLE COSTS AND EXPENSES

IR = 30% OF NET INCOME

It is essential then, in order to determine the Net Income and the tax to be paid, in accordance with the previous formula, what is a DEDUCTIBLE EXPENSE.

In general, the general, necessary and normal costs and expenses to produce the taxable income and to maintain its existence and maintenance are deductible.

The Tax Concertation Law clearly indicates in its article 39, a list of which are the expenses that are considered DEDUCTIBLE, which in general are all those expenses paid and caused during the taxable year en cualquier negocio o actividad afecta al impuesto, generales, necessary and normal to produce taxable income of the company and to preserve its maintenance and existence.

Específicamente, el artículo 39 establece:

"Art. 39 Deductible costs and expenses. Costs and expenses caused, general, necessary and normal to produce the taxable income and to preserve its existence and maintenance are deductible, provided that said costs and expenses are recorded and supported by their corresponding receipts. Among others, the following costs and expenses are deductible from gross income:

1. The expenses paid and those caused during the taxable year in any business or activity affects the tax;

2. The cost of sales of goods and the cost of rendering services; …”

However, it is not enough that the expenditure made by the company is necessary to produce taxable income or that said expense is within the list that the article itself provides, but that it must also meet other requirements. SINE QUA NON (without which no/essential), which determine that the expense can be deducted, in order to reduce net income.

Article 42 of the Tax Coordination Law and in accordance with the article 31 of the Regulation of the same law, expressly establishes the requirements that must be met for the deduction of costs and expenses to be accepted as deductible for Income Tax purposes as follows:

1. That the due withholding of the income tax be made at the source for the expense caused and that this withholding be reported to the General Directorate of Revenue.
2. That it has the supporting documents or supports that must include the name of the taxpayer, RUC, identity card, if applicable. These vouchers can be invoices authorized by the DGI, Public Deeds, Private Contracts and duly authorized machine tapes.

"Art. 42 Deduction requirements. The deduction of the costs and expenses mentioned in article 39 of this Law will be accepted provided that, as a whole, the following requirements are met:

1. That having made the withholding, the payment has been made to the Tax Administration, the expense will be deductible in the fiscal period in which the payment of the withholdings or contributions is fulfilled; Y

2. That they have the supporting documents or supports…”

So, after having analyzed the above, we can conclude that there are 4 major requirements that costs and expenses must meet, in order for them to be considered DEDUCTIBLE for IR purposes.

THE 4 REQUIREMENTS

1. That the expense is from the fiscal period in which it is intended to be deducted.
2. That the due Withholding at Source has been made and the same has been reported to the Tax Administration, otherwise, the expense will be deductible in the period in which said withholding is reported.
3. That it is duly registered in the accounting and supported by documentation.
4. That contributes to the generation of taxable income of the company.