Understanding Income Tax: A Comprehensive Summary

Posted on Dec 3, 2024 in Economy

Income Tax

What is Income Tax?

Income tax is a tax imposed on the income of individuals, corporations, and other legal entities. It is typically calculated as a percentage of the revenue of the person or entity subject to the tax.

Types of Taxes

There are three main types of income tax:

  • Progressive Tax: The tax rate increases as income increases.
  • Flat Tax: The tax rate remains constant regardless of income.
  • Regressive Tax: The tax rate decreases as income increases.

Purpose and Application

The primary purpose of income tax is to generate revenue for public spending. This revenue funds essential government services and programs.

Tax Payment Requirements

Income tax involves the following requirements:

  1. Monthly Interim Payments: These payments are due each month, no later than the 17th of the following month (e.g., January’s payment is due in February).
  2. Payments to States: Intermediate regime taxpayers must make payments to the federal entity where their income originates. These payments are calculated at a rate of 5% of the tax base. Certain previous payments from the same year may be deducted.
  3. Annual Statement: This statement calculates the total income tax and deductions for the year and is due in April of the following year.

Classification of Taxpayers

Individuals

Individuals are classified into different tax regimes based on their activity:

  • Salary: Individuals employed and receiving wages. Their tax is typically withheld by their employer.
  • Small Contributors: Individuals engaged in commerce with annual sales or income up to $1,750,000.00.
  • Intermediate: Individuals engaged in trade or industry with annual sales or income up to $4,000,000.00.
  • Business Activities: Individuals engaged in trade or industry with no income limit.
  • Professional Activities: Self-employed professionals, such as lawyers, doctors, and accountants, who receive fees for their services.
  • Lease of Property: Individuals receiving income from renting or leasing real estate.

Corporations (Legal Entities)

Corporations are also classified into different tax regimes:

  • Non-Profit Legal Entities: Organizations not seeking financial gain, such as charities and welfare institutions.
  • Simplified Procedure Legal Entities: Entities exclusively engaged in land freight trucking, passenger transport, agriculture, livestock, forestry, fishing, and business integration.
  • Regime Legal Entities: Commercial companies, professional civil associations, production cooperatives, credit institutions, and decentralized marketing entities.

Corporate Income Tax

Legal persons are considered to be commercial companies, decentralized business activity entities, credit institutions, societies, and associations.

Corporations are subject to a 35% income tax rate (Art. 10 ISR).

Obligations of Legal Persons

  • Maintain accounting records.
  • Issue receipts for all transactions.
Subject of Legal Entities’ ISR

According to the Income Tax Act, legal persons are considered to be commercial companies, decentralized business activity entities, credit institutions, societies, and associations.

  • Article 10: Legal persons must calculate income tax at a rate of 30% of the tax result.
  • Article 11: Legal persons distributing dividends or profits must calculate and withhold the appropriate tax according to Article 10.

Legal persons engaged exclusively in agriculture, livestock, fisheries, or forestry may apply the provisions in the penultimate paragraph of Article 81 of this Law.

Income tax deductions can only be made against the corporation’s income for the year in which the tax was paid.