What is Income Tax and who must declare it?

Concepts on the Income Tax Law (LIR)

The Law on Income Tax, contained in Decree-Law No. 824, of 1974, is the regulatory body that establishes the different taxes on the income or profits of companies and natural persons in our country.

This Law is of great importance, due to its collective impact and the number of actors that participate in the process, either as taxpayers, as government entities, or as third parties.

So then, it is essential to know and understand the rights and obligations that emanate from it:

What are Taxes?

Although this is not a definition of the Income Tax Law, as citizens it is our duty to know the role they play in our society:

Taxes are the contributions in money that citizens are required by law to pay, so that the State has sufficient resources with which to finance the satisfaction of public needs.

Taxes are classified according to their type, into three large groups :

What is the Rent?

In the tax sense, income is all the income that constitutes profits or benefits that a thing or activity yields and all the benefits, profits, and increases in equity that are received or accrued, whatever their nature, origin, or denomination (Definition of article 2 ° N ° 1 of the Law on Income Tax ).

In other words, it is all the income earned in a business year. A business year is understood to be the 12-month period ending on December 31 or June 30 of each year.

What is Income Tax?

It is a tax that taxes the income obtained by natural persons, companies, and other entities. Although this tax is spoken of in the singular, the Income Tax Law establishes various taxes.

Among the most important, we can mention the following:

• Complementary Global Tax
• Single Second Category Tax
• Additional Tax
• First Category Tax

Income Classification in the Income Tax Law

The Income Tax Law, for the purposes of applying its provisions, classifies the income obtained by taxpayers into two groups or types of income, taking into account the predominant factor that causes the income to be obtained, namely:

1. The first category (of capital income)

   Capital income, in very simple words, is the benefits or gains that come from the assets that a person owns, therefore, in this category we find activities where the use of capital predominates over physical or intellectual effort.

   Examples: commercial, mining, and industrial activities.

   These incomes are taxed with the First Category Tax.

2. The second category (from work income)

   Work income is that obtained by natural persons, derived from activities where personal effort (whether physical or intellectual) predominates over the use of machinery, tools, equipment or other capital goods.

   In this category we find, among others, dependent workers and pensioners, for the income obtained by way of salaries, bonuses, salaries, bonuses, pensions, montepíos, etc.; and to independent workers, for income from the exercise of liberal professions or any other profession or lucrative occupation.

   These incomes are taxed with the Single Second Category Tax, the Complementary Global Tax or the Additional Tax, depending on the type of income and the domicile or residence of the person who obtains it.

Summary table of the Income Tax Law

Obligation to declare Annual Income Taxes

The Annual Income Tax Declaration is an annual obligation that must be fulfilled by companies and natural persons, in the month of April of each year, through Form No. 22 . In this Form, the income obtained in the previous business year is reported, and its term expires on April 30, with some exceptions, as occurs in the case of Termination of Business or Activities, since in this circumstance the corresponding taxes must be paid within the two months following the Term of Business.

Required to submit the Annual Income Tax Declaration

• As a general rule, all companies must submit Form No. 22, on Annual Income Tax Declaration, regardless of whether they have obtained income or losses during the year.
• Natural Persons who between January and December of the year 2020 have obtained income that exceeds the exempt limits established by the Law, that is, with income greater than $8,266,698 (value equivalent to 13.5 UTA, according to the value of this indicator at December 31, 2020).
• Dependent Workers and Pensioners who simultaneously receive income from more than one employer, authorized or payer, provided that this obligation results in a higher tax to be paid.

Not required to submit the Annual Income Tax Declaration

• Those who during the business year 2020 have obtained only income classified as “non-income” for tax purposes. In this situation, we find, among other income,: compensation for work accidents, eviction and for years of service (when the requirements established in the Law are met), family allowances, and acquisition of goods by inheritance or donation.
• Taxpayers with tax obligations fulfilled monthly. In this case are the Natural Persons who obtain salaries and pensions from a single employer, authorized or payer.
• Those who pay a Single First Category Tax as a substitute. Example: small artisanal miners, small merchants who carry out activities on the public highway, and supplements, to the extent that they only carry out said activities. This situation is due to the fact that the substitute tax is withheld by mineral buyers, in the case of small artisanal miners; It is collected by the corresponding Municipality, in the case of small merchants; and finally, it is retained by journalistic companies, publishers, distributors or importers, in the case of supplements.
• Natural Persons with income that does not exceed the exempt limits established by the Income Tax Law, that is, with an annual income equal to or less than $8,266,698 (value equivalent to 13.5 UTA, according to the value of this indicator on December 31). December 2020).
• Other taxpayers are released by the Income Tax Law.