Global Tax Alert. Honduras adopts tax reform. Fines, surcharges and interest. Alternate minimum income tax 1

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1 28 January 2014 Global Tax Alert News from Americas Tax Center EY Americas Tax Center The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: Services/Tax/Americas-Tax- Center---borderless-clientservice Honduras adopts tax reform Honduras s Decree No , published in the Official Gazette on 30 December 2013, adopted tax reform, referenced as the Law on public finances, the control of tax exemptions and anti-evasion measures (the Reform). The Reform is effective 1 January Fines, surcharges and interest The Reform repeals a statute enacted in 2002 that made it possible in practice for taxpayers or withholding agents to avoid paying fines, surcharges and interest charged by the tax authorities in their tax audits. This is a major change that removes the incentive taxpayers had to postpone paying their taxes due until ordered to do so in the context of a tax audit. Alternate minimum income tax 1 The Reform creates an alternate minimum income tax with the inclusion of new Article 22-A to the Income Tax Law. Under Article 22-A, individuals or corporations domiciled in Honduras with gross income for a given tax period equal to or greater than L. 10 million (approx. US$481,761) must pay an income tax computed by applying a rate of 1.5% to gross income. For legal entities (i.e., legal persons, business entities companies), the income tax must be computed by applying the ordinary rate of 25% to net income and by applying the alternate minimum tax rate to gross income. The income tax payable is the higher amount resulting from the calculations. This minimum income tax rate will be reduced to 0.75% for individuals or legal entities producing or selling the following products or services: cement production and distribution, public utility services provided by state-owned companies, products and medicines for human use (at importation and production levels), oil and derivatives, bakery-related products. Re-establishment of the temporary Social Contribution Tax The Reform reinstates the temporary Social Contribution Tax, in place since 2003 and scheduled to cease applying as of tax year Corporations, with the exception of those included in the Special Import and Tourism Regimes, will have to pay the temporary Social Contribution Tax at a rate of 5% (rate would have been

2 4% in 2014 without the reform) applied to the excess of the net taxable income above L. 1 million (approx. US$ 48,192) starting in the 2014 tax year and thereafter. Dividends tax Dividend payments made to Honduran entities are now subject to the 10% dividend tax. They were previously not subject to withholding taxes. Special contributions for the strengthening of social inclusion The Reform establishes a tax on the increase in value of real property or capital gains derived therefrom. The rate is 10% and applies on each registration made at the Property Registry in respect of real estate property subject to this tax. The Secretary of Finance will issue regulations on this tax and will determine the form of payment for this tax. Withholding tax on capital gains The Reform subjects transfers of real property or rights and securities carried out by nonresidents to an increased 4% (previously 2%) withholding tax over the transfer value to be withheld by the acquiring party. Special cases of withholding taxes when the payor is the Honduran State A withholding tax of 10% applies to capital gains arising from the sale of goods, indemnifications received, sales of rights / titles (e.g., real estate 2 ) when the buyer or payor, as the case may be, is the Honduran State. A withholding tax of 12.5% is imposed on payments made by the Honduran State for easements, rights of way and similar type of payments made to individuals or legal entities. Elimination of exemptions The Reform eliminates all customs exemptions on the import of goods. Tax exemptions that applied to certain local sales are also eliminated. All exemptions granted to nonprofit organizations of public interest are also eliminated, regardless of the activities performed by such organizations. Limited exceptions 3 to the above are set out in the Decree. Limitations to exemptions for call centers and outsourcing of business services Tax exemptions available for call centers and the outsourcing of business services have been limited in scope. The Reform narrows the exemption available under the Law to Promote Call Centers and the Outsourcing of Business Services for customs duties, charges, surcharges, consular fees, domestic taxes on consumption and other taxes on the import of equipment, tools, spare parts, accessories, office furniture and equipment, and other assets that have a direct nexus with the operation and implementation of the incentivized activity. Prior to the Reform, the exemption also applied in the case of an indirect nexus. Elimination of income tax exemptions All income tax exemptions established through decrees and special laws are eliminated with limited exceptions set out in the Decree. The most relevant exemptions that remain are those granted by the Honduran Constitution, International Conventions or Treaties, Free Trade Zone Law, Industrial Processing Zones, Law for the promotion of the electric power generation with renewable resources and its reforms, among others. Before the Reform s enactment, some tax exemptions were available to businesses of the fast food and beverages sector under a special law promoting tourism. The Reform eliminates these exemptions, but as of the end of the ongoing exemption period, which is specific to each taxpayer. In other words, the beneficiaries will continue enjoying the exemptions until the end of the exemption period applicable to them. Sales tax The ordinary sales tax rate of 12% has been increased to 15%. The sales tax rate applicable to alcoholic beverages and cigarettes has been increased from 15% to 18%. The list of tax-exempt goods from the basic food basket is modified, as well as tax-exempt services. 2 Global Tax Alert Americas Tax Center

3 Control over exemptions and anti-evasion measures A term of up to 12 years is established when the law granting tax exemptions or benefits does not provide a term. Persons or legal entities that have enjoyed tax exemptions or benefits granted through decrees or special laws may not apply for another special taxation regime at the end of the term for which the state granted those exemptions or benefits. The Secretary of Finance and the tax authorities will establish regulations under the Reform within 30 calendar days of the Decree s effective date. Air and maritime transport companies Air and maritime transport companies incorporated abroad with operations in Honduras shall now be subject to income tax as follows: their net taxable income shall amount to 10% of their total annual Honduran-source gross income, which is subject to a 25% income tax rate. Tax on the import of petroleum and derivatives The Reform increases the tax on the import of petroleum and derivatives. Endnotes 1. This tax was enacted in 2010, but was declared unconstitutional in 2011 by the Supreme Court of Justice for being retroactive and confiscatory. 2. Note that the Property Registry (i.e., in Spanish Instituto de la Propiedad) will not register a real property transfer until the payment of any capital gains tax due on the sales of the underlying property to the Honduran State. 3. E.g., tax-exemptions under the following laws remain available: Temporary Import Regimes, Law Incentivizing Tourism (as amended), Law Creating Free Zones under Decree No. 35 (as amended), Law Promoting the Generation of Electric Power and Renewable Resources contained in Decree (as amended). Global Tax Alert Americas Tax Center 3

4 For additional information with respect to this Alert, please contact the following: Ernst & Young S.A. de CV, San Pedro Sula Karem Marquez Ernst & Young, S.A., San José, Costa Rica Alexandre Barbellion Rafael Sayagues Co-Directors of EY Americas Tax Center Global Tax, Eric Solomon, Washington, DC Global Tax, Michael Mundaca, Washington, DC EY Americas Tax Center America s Tax Center Chief Operating Officer Declan Gavin, Washington, DC ATC - Customs William Methenitis, Dallas ATC - Global Compliance and Reporting (GCR) Ken Brown, Dallas ATC - Global Tax Desk Network Gerrit Groen, New York ATC - Tax Controversy Rob Hanson (interim), Washington, DC ATC - Operating Model Effectiveness (OME) Lisa Lim, New York ATC - Tax Performance Advisory (TPA) Gary Paice, Chicago ATC - Tax Policy Michael Mundaca (interim), Washington, DC ATC - Value Added Tax (VAT) Jean-Hugues Chabot, Montreal, Canada ATC - Insurance Terry Jacobs, Washington, DC 4 Global Tax Alert Americas Tax Center

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Americas Tax Center 2014 EYGM Limited. All Rights Reserved. EYG No. CM4132 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com