Dominican Republic

Dominican Republic – Thinking Beyond Borders...

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Nowadays, the way people and organizations work is constantly changing. These changes have opened up new doors to global opportunities for lots of multinational companies, which has required the mobilization of a very important asset, the companies’ human resources, as an effort to ensure the best quality in the manner that these companies manage their businesses.

Extended business travelers are employees that continually travel internationally on a temporary basis, in order to perform any kind of task or business on behalf of their employer companies. Most of the time, these employees travel to different countries during a calendar year, which makes it very important to keep track of the workdays they spend in every location, as well other factors that may lead to other significant issues. Consequently, it has become truly essential that such companies are aware of the tax and legal liabilities and risks that these factors may bring for their employees and for the companies themselves

Key message

An extended business traveler’s liability for Dominican Republic Tax is generally determined by the Territoriality Principle. Therefore, they are likely to be taxed on employment income relating to their Dominican workdays.

Income tax

Liability for income tax

The Dominican Tax System is based on the Territoriality Principle, whereby all income derived within Dominican territory is subject to income tax. Accordingly, if an individual is working in Dominican territory, it doesn’t matter if his salary is paid from abroad or locally; in both cases it is considered as Dominican source income and is thus deemed taxable.

An individual’s liability for Dominican tax is determined by its residence status. In accordance to the Dominican legislation, an individual is considered a fiscal resident when remaining in the country for more than 182 days during a fiscal year whether (continuously or not).

A Dominican fiscal resident is taxed on his Dominican source income, as well as on his income deriving from investments and financial profits from sources outside the Dominican Republic.

On the other hand, a non-resident is taxed only on his Dominican source income. However, if a foreigner becomes a Dominican resident, its income from investments and financial profits from sources outside the Dominican Republic will become subject to the Dominican income tax, as of the third taxable year in which he/she is considered to be a fiscal resident.

Tax trigger points

In summary, if an individual has been physically present in Dominican territory for more than 182 days during a fiscal year, continuously or not, it is understood that such individual has met the substantial presence requirement to be deemed as fiscal resident for Dominican income tax purposes.

Types of taxable income

For extended business travelers, the types of income that are generally subject to the Dominican income tax are monetary compensation for employment or self-employment, and Dominican sourced income, pursuant to Section 272 of the Dominican Tax Code.

Further to Section 318 of the Dominican Tax Code (DTC), fringe benefits are any sort of benefits provided by a local company to a specific group of employees. Hence, employers are obliged to monthly report a 27%, via the IR-17 Form, for the retribution given to employees at the moment of giving the free shares, corresponding this to complementary retribution tax.

Fringe benefits, if paid in cash to the employee, as per the case of the cash bonus, these shall be fiscally treated as part of the employee's salary. Considered this as an extraordinary salary.

The most common fringe benefits provided in the Dominican Republic are: housing, vehicles, education for employee’s children, etc; all of which, shall be subject to the fringe benefit tax. The payment of the fringe benefit tax, allows the employer to include such expenses in its annual Corporate Income Tax (CIT) return as tax deductible expenses. However, please note that only the expense incurred shall be deductible, thus the tax paid in connection with these benefits is not deductible for CIT purposes.

Tax rates

As of fiscal year 2017, taxable income for individuals is taxed at progressive rates ranging from 0 percent to 25 percent. The maximum marginal rate is reached when the yearly income amounts to RD$ 867,123.01 (Dominican Pesos) or more.

In light of the above, the taxable income for individuals shall be determined by the application of the following scale:

Annual Scale Tax Rate
From
RD$416,220.00 and below
Exempt.
From
RD$416,220.01 to RD$624,329.00
15%
of the surplus of RD$416,220.01
From
RD$624,329.01 to RD$867,123.00
RD$
31,216.00 plus the 20% of the surplus of RD$624,329.01
Income
from RD$867,123.01 onwards
RD$79,776
plus the 25% of the surplus of RD$867,123.01

Social security

Liabilities in matters of social security

Foreigners who work for Dominican employers are subject to Dominican Social Security contributions when an employment relationship is deemed to exist in Dominican Republic, and such employees are enrolled in a local payroll. In accordance to Law 87-01, concerning the Social Security System, employees in the Dominican Republic are to the provided with a Health Insurance, Old age and Disability and Survival Insurance, and Occupational Hazard Subsidy.

However, Law 87-01 also establishes that an expatriate does not need to enroll in the Dominican Social Security System if he or she is protected by their own social security regimes. Nevertheless, the individual shall have an international health insurance or a local health insurance; and has to be registered with the labor ministry. In addition, it is required that the individual requests a coverage certificate from the Social Security Authorities of its home country.

The Dominican Social Security contributions are capped at a maximum rate of 20 times the Dominican minimum wage (The minimum wage is DOP 9,855.00 per month). Under this scheme, both employees and employers contribute to the Social Security System.

As per the aforementioned, contributions are calculated based on the following percentages:

Type of Insurance              Paid By Total percentage
Employee % Employer %
Old age, disability, and survival insurance 2.87% 7.10% 9.97%
Family health insurance 3.04% 7.09% 10.13%

The contributions to the labor risks insurance shall be fully covered by employers, and will depend on the category of the risk. Accordingly, the categories are as follows:

Category Percentage of the contributable salary
I 0.10%
II 0.15%
III 0.20%
IV 0.30%

In addition to the abovementioned contributions, employers are also subject to a 1% payroll contribution for INFOTEP (National Professional Technical Institute), which is applicable to the total amount of the income obtained through the fixed salaries of the employees.

Compliance obligations

Employee compliance obligations

Employees who are enrolled in the local payroll and have a sole source of income derived from employment, are not required to complete an Individual Income Tax Return (IR-1). However, if the Company decides to pay its employees through a foreign payroll, the individual is required to file an Individual Income Tax Return (IR-1), the deadline of which is March 31st following the tax year-end, which is December 31st.

Employer reporting and withholding requirements

Employees are subject to monthly income tax withholdings on wages paid by their employers for any work/services performed.

According to this, the Dominican Tax Code establishes that employers shall act as withholding agents and collect and/or pay the referred tax under their sole responsibility, as there are considered as jointly responsible parties for tax compliance in connection with their employees.

Other issues

Work permit/ visa requirements

Over the past years in the Dominican Republic, major changes have taken place with regards to immigration legislation as a result of international recommendations related to Human rights as well as Labor and Security rights. This process culminated with the entry in force in 2011, of a new Immigration Law and its corresponding Rule
.
According to the referred law, new procedures and immigration documents are now required by the General Agency for Immigration (DGM).

Hence, if a Dominican entity is hiring foreign personnel, it shall be duly registered as an employer before the Dominican Ministry of Labor. Without this pre-requisite, the company will not be able to officially offer an employment to any foreign individual.

In accordance with the new criteria settled by the General Agency for Immigration, it is demanded to any foreign individual caught to enter to the Dominican Republic, requesting a business visa with the Dominican Consulate from his country of origin or country of residence.

The foreign individual will have to pay the rights for the issuance of the business visa before the Dominican Consulate of his/her country.
In addition, once this type of visa is authorized, the foreigner has a period of 30 days to enter to the Dominican Republic and request a Residence Permit at the DGM.

Double Taxation Treaties

Currently, the Dominican Republic has entered into Double Taxation Treaties with only two countries: Canada and Spain. These treaties seek out to prevent double taxation and allow cooperation between the parties involved in order to enforce their respective tax laws. It is important to point out that the individual shall provide a Tax Residency Certificate in order to apply for any benefits granted by these double taxation treaties.

Permanent establishment implications

A permanent establishment may be triggered as a result of extended business travel, but this would depend on a number of factors including the type of services performed, the level of authority of the employee while carrying out business in the Dominican Republic on behalf of the Company, the length of its presence in the country, among other factors.

Indirect taxes

Value added tax

The standard rate of VAT (Impuesto sobre Transferencias de Bienes Industrializados y Servicios; ITBIS) is of 18%. Notwithstanding, exports of goods are subject to a 0% VAT; while exported services, whereas such services comply with certain conditions, are VAT exempt. There are certain goods that enjoy a reduced VAT rate of 16%, due to their high consumption, including certain dairy products, coffee, shortenings and oils, sugars, and chocolates. 

Exempt goods include basic consumption items, educational materials, medicines, health services, financial services, utilities, nonconventional or renewable energy equipment and supply, and inland transportation services of individuals and cargo, amongst others. 

Nevertheless, as of January 1st, 2017, importers of raw materials, industrial machinery and capital goods which are considered exempt by law, shall advance a 50% of the VAT that would apply under the ordinary regime when clearing customs. Such measure substantially modified the previous scenario, in which VAT was levied with the first transfer of finalized products within the local market, and not through the production process. This change is significant as it partially eliminated the tax deferment that producers and manufacturers used to benefit from.

Transfer pricing

The enactment of Law No.253-13, which established the Fiscal Reform Law, introduced significant changes regarding the valuation of intercompany transactions. In accordance with the referred law, all entities operating in the Dominican Republic shall be subject to the dispositions of Section 281 of the Dominican Tax Code (DTC) when carrying out commercial and financial transactions with:

• A related party domiciled in the Dominican territory;
• Individuals, companies or societies domiciled in low tax jurisdictions or tax havens; and,
• Related parties benefiting from the Free Trade Zone Regime.

Consequently, commercial and financial transactions performed with the previously mentioned entities shall comply with the transfer pricing regulations.

Additionally, the Dominican Tax Law may consider the existence of Related parties when:

• One of the parties is in a top management position in both entities with significant decision making power;
• The majority of the members of the Administrative Body controlled entity are the same members of the controlling entity; and,
• The Partnership condition is transferred to the spouse, or kinship on collateral affinity.

Local data privacy requirements

On December 13th, 2013, the Dominican government published Law 172-13, on Data Privacy Protection. Such law institutes the legal framework applicable to the comprehensive protection of personal data based on archives, public records, data banks and/or any other technical means of data processing for reporting, whether public or private. In view of that, the purpose of this law is to ensure the privacy and rights of the owners, while promoting the truthfulness, accuracy, effective updating, confidentiality and appropriate use of such information.

Law 172-13 has a nature “of public order” and its application shall be governed throughout all the national territory.

Exchange control

The Dominican Republic does not restrict the flow of Dominican or foreign currency into or out of the country.

Nondeductible costs for assignees

Nondeductible costs for assignees include contributions by an employer to non-Dominican pension funds.

Thinking Beyond Borders: Management of Extended Business Travelers

As businesses become global, few organizations seem to understand the risks that business travel may bring.

 
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