The Current Tax System Applied in Bolivia

InterAm Database

National Law Center for Inter-American Free Trade

Valdés, Rodriguez, Miranda, Gutierrez & Guevara

SERVICIOS LEGALES S. C.

Calle Socabaya No. 240 Edificio "Handal"

Piso 11, Oficina 1103

La Paz - Bolivia

ABOGADOS

Susana Valdés Andreatta

Eduardo Rodriguez Veltzé

Carlos Antonio Miranda G.

Primitivo Gutiérrez Sánchez

Ramiro Guevara Rodríguez

ASOCIADOS DE

Maciel, Norman y Asociados

(Argentina y Uruguay)

CURRENT TAX SYSTEM APPLIED IN BOLIVIA

Prepared by: Dra. Susana Valdés A., Senior Partner

Gil B. Rosenthal, Associate

Introduction

Starting in 1985 the Government of Bolivia has undertaken a major initiative to progress toward a free market system. The market reforms of 1985 have been institutionalized and advanced and other initiatives have been implemented to encourage foreign investment. In addition to extensive tax reform, the Government has reformed the financial sector, simplified procedures for exports, adopted an anti-dumping law, restructured the customs administration and adopted new foreign investment and capitalization (privatization) laws. These laws combined to provide a coherent legal framework to encourage foreign investment.

Main Tax Laws (Nos. 843 & 1606)

Until May 1985 there existed in Bolivia a confusing tax system with around 400 taxes. Ignorance of the tax system by the taxpayers and deficient supervision made the statistics on evasion in Bolivia one of the highest in South America.

In order to correct this situation, in May 1985 the Tax Reform Law No. 843 was passed, which, as its name indicates, completely reformed the prior Tax System, repealing all the previous taxes and replacing them with seven new taxes that are the following:

1. Value Added Tax (Impuesto al Valor Agregado)

2. Complimentary Regime to the VAT (Régimen Complimentario al Impuesto al Valor Agregado)

3. Transaction Tax (Impuesto a las Transacciones)

4. Tax on the Presumed Profits of Companies (Impuesto a la Renta Presunta de Empresas) which has been replaced by the Tax on Company Profits (Impuesto sobre las Utilidades de las Empresas)

5. Property Tax (Impuesto a la Renta Presunta de Propietarios de Bienes)

6. Excise Tax (Impuesto a los Consumos Específicos)

7. Inheritance Tax (Impuesto a las Sucesiones)

8. Tax on Foreign Travel (Impuesto sobre Viajes Aéroes al Exterior)

Under the 1985 Tax Reform Law petroleum exploration and exploitation companies and companies in the mining and electricity sectors had special tax regimes.

Until January of this year, the above taxes had not been substantially modified, except for some increases in their rates. This has provided a stable tax regime for the country. In December 1994 Law No. 1606 was promulgated, which modified Law No. 843. The most important change in the Tax System is the substitution for the Tax on the Presumed Profits of Companies with the Tax on Company Profits.

Following is a brief description of the taxes in force and a description of the modifications made by Law No. 1606.

1. Value Added Tax (VAT).

The VAT is levied at a rate of 13% on all normal economic activities such as the sale of personal assets within Bolivian territory, the leasing (rent) of personal assets and real estate, the rendering of services in the country and the permanent import of goods. VAT payments are normally made monthly by the business or individuals subject to the VAT, before the fifteenth of the following month. The taxable base for the VAT is the net price indicated in the invoice issued or for the importation of goods the customs CIF value.

As in all other VAT systems, this system is based on fiscal credit and debit. A fiscal credit is realized from all goods purchased for the company, goods imported by the company for its own use, and for rents paid for personal assets or real estate, as long as these are verified by official receipts issued in Bolivia.

A fiscal debit is the amount realized from the application of the above rate on the sale of taxable items described above. Therefore the amount payable is derived by subtracting the fiscal credit from the fiscal debit.

The main change introduced by Law 1606 in the VAT is the incorporation of provisions for the taxation of leasing.

2. Complementary VAT

The Complementary VAT is the personal income tax, which has a flat rate of 13% and is paid monthly. All Bolivian source income, in monies or in kind, for rents, interests, dividends, bonuses and any other type of distributions (except in shares), wages, salaries, fees, compensation payments and royalties, are deemed to be income and therefore subject to this tax. Employers are required to make a monthly withholding of the tax on wages and salaries paid to their employees which is then reimbursed upon presentation of receipts issued according to Bolivian regulations.

The following are not regarded as taxable income: Indemnity payments paid in accordance with the law for termination of employment; parental, matrimonial, birth, postnatal and family subsidies; pension rights as defined by law, distribution of dividends paid in shares and per diem up to the amount documented by official invoices.

Shareholders which are not employees must file a tax declaration every three months showing their dividend income. Dividends may be paid in cash or in shares. If they are paid in shares, they are not taxed, since they are not considered a distribution but a reinvestment of distributable profits. If paid in cash, they are subject to this tax.

Law No. 1606 has partially modified this tax stating that except for employees wages and salaries when income mentioned in paragraph one of this section is subject to the Tax on Company Profit, it shall not be subject to this tax.

3. Transaction Tax

The Transaction Tax is applied to all normal economic activity, and on the transfer of goods or rights. It is levied at a rate of 3% of the gross value of a transaction. Exempt from this tax are employee income; exports; services rendered by the state, departments or municipalities; interest on savings accounts, current accounts and fixed term deposits; private education incorporated in official education plans; diplomatic representative services and imports of books, magazines and newspapers.

The most important change introduced by Law 1606 to this tax is that the amount paid under the Tax on Company Profits may now be considered as payment of the Transaction Tax and that the Transaction Tax may be deducted monthly until the amount paid under the Tax on Companies' Profits is exhausted. From that moment forward the company must pay the Transaction Tax without any deduction.

4. Tax on the Presumed Profits of Companies replaced by the Tax on Company Profits.

The Tax on Company Profits was introduced in Law No. 1606 and replaces the Tax on the Presumed Profits of Companies. The Tax on the Presumed Profits of Companies was calculated on the national income of the company calculated on its net worth at the rate of 3% and was paid once a year.

The Tax on Company Profits introduced by Law 1606 has a rate of 25% levied on net earnings as determined by the company's financial statements. The net taxable profit is the gross profit (income minus gross sales) minus the expenses necessary for the business.

The law does not determine which taxes will be deductible from the gross profits in order to arrive at the net taxable profit and defers this aspect to the regulations.

The remittance of profits as well as any other revenues of Bolivian source remitted abroad are subject to a tax of 12.5% of the amount remitted. Therefore, when the company remits profits abroad it pays a total of 34.37% because of the Tax on Company Profits and the Tax on Remittances of Profits.

5. Property Tax

The Property Tax is levied on the value attributable to real estate, vehicles, boats and airplanes. Taxes are calculated from formulae based on the characteristics of the assets. Rural smallholders are exempt from the Property Tax.

6. Excise Taxes

There are excise taxes applied to the production, sale or importation of specific goods. These goods are usually considered "luxury items" such as alcoholic beverages, soft drinks, vehicles, tobacco, perfume, jewelry and electronics. Goods for export are exempt.

Law 1606 expanded the categories included in the excise tax and levied this tax at different rates depending on the item.

7. Gift and Inheritance Tax

The tax is levied on the hereditary succession or gratuitous transfers of fixed assets, stocks and other capitals rights and motor vehicles. A 1% rate is charged to parents, children, descendants and spouses, 20% to all others.

8. Foreign Travel Tax

A tax is levied on all Bolivians and foreign residents traveling abroad. The tax is currently Bs. 100 for travel to neighboring countries and Bs. 150 for other countries. Non-resident aliens and small children are exempt from this tax.

The 1985 Tax Reform created one of the simplest Tax Systems in South America by eliminating the multifarious taxes in the pre-1985 System. This System has functioned effectively since then with very few changes. Law No. 1606 merely refined the existing system to enable it to operate more efficiently. It also replaced the Tax on the Presumed Profits of Companies, which, although easy to administer, was a disincentive for individual investment. The Tax on Company Profits may be credited against the income tax in the United States and other countries. Regulations to 1606 will be issued during the first quarter of 1995.