By Melchor Alcántara
The director of the National Directorate of Internal Taxes (DGII) announced this week the intention to tax with ITBIS the consumption made through virtual platforms such as Arbnb, Netflix, Amazon, among others.
In response to the public's legitimate complaints about the increase, the director of the DGII highlighted several points, namely:
- These taxes will fall on the virtual platforms and not on the users of these services.
- The procedure for applying ITBIS to digital services received in the Dominican Republic and provided by foreign suppliers stipulates that the ITBIS taxable base only includes the total amount of services received for services used and consumed in the country.
- That the taxable base will be its normal market value.
- Foreign suppliers will not be entitled to deductions from the gross tax established in article 346 of the tax code, unless they formalize a permanent digital establishment or a fixed place of business in the country.
- This will be applied to the total revenue obtained by the proportion that represents the number of times the advertising appears on devices located in the country with respect to the total number of times that advertising appears.
- It will be applied to the total revenue obtained from the proportion that the number of users located on Dominican soil represents, with respect to the total number of clients involved in that service.
It is worth noting that, from the moment the law prevents the digital provider from invoking Article 346 of the tax code, the service provider has no other fiscal option but to report the ITBIS (Value Added Tax) as a cost, thus having to transfer the tax to the user. This is further complicated by the fact that, since this tax appears in their financial statements as income, they could face double taxation (in the Dominican Republic and in their country of origin) if their legislation does not accept this tax as a cost.
This could result in the total cost passed on to service consumers amounting to 18% VAT plus the corresponding income tax, which in Anglo-Saxon countries ranges from 33% to 60%. In the latest analysis, this represents an increase for the consumer of between 24% and 30% on top of current rental prices.
The concept of taxing digital economic activities is not inherently aberrant. In the near future, all services will be digital. This step represents an unprecedented advance in tax legislation. However, I believe it should be implemented with modest rates until experience allows us to effectively calibrate the process so that rental costs through these platforms don't skyrocket and cause a stampede of potential clients who currently support a business model that drives a high percentage of real estate sales in the market.
Things get ambiguous from the start when it's established that the taxable base will be its normal market value. This suggests that the "normal" market value would be determined by the DGII (General Directorate of Internal Revenue) based on typically arbitrary parameters they've used for other taxed items, such as imported goods or resold vehicles. In this case, if you rent your property during the off-season at a very low price to cover basic maintenance costs, you could face a predetermined rate for your property that would allow the DGII to levy the ITBIS (Value Added Tax) on the rental based on a higher price, further increasing the already inflated cost the client will have to pay.
On this last point, I wonder what would happen if the platform in question refuses to pay the proposed taxes and decides to withdraw its service from the Dominican Republic. Would all investors in short-term rental properties be left stranded on an island without access to technology vital to the rental process, and would this consequently limit the real estate development experienced in recent years through the services provided by these platforms?
We must look at other countries' experiences on this issue. We have no room for error. The times ahead bring unpredictable challenges. With the current variables, the burden is already heavy. Industry associations must meet to review potential consequences and develop a consensus-based approach. That is the prudent course of action.
