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Dominican Republic: Transferrable tax credits, approaching action date for 31 March year-end taxpayers

Dominican Republic: Transferrable tax credits

Taxpayers with a fiscal year ending 31 March are reminded that they must acquire transferrable tax credits by 31 March 2020 in order to be able to apply and use the tax credits against their tax liabilities.

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Background

In order to make film production attractive in the Dominican Republic, Article 39 of Law 108-10 grants transferrable tax credits on 25% of the qualifying expenses incurred to produce a film in the Dominican Republic. These tax credits can be used against the film producer’s own income tax liability. Many film producers (especially foreign film producers), however, may not able to fully use these tax credits because their tax liability is not sufficient or is lower than the amount of tax credits granted. Thus, to provide an incentive for film producers, Article 39 of Law 108-10, par VI provides that these tax credits may be transferred—in whole or in part—by the film production company to one or more corporate and/or individual taxpayers. Typically, there is a discount that the transferor of such tax credits may be willing to accept.


Opportunity

For a potential “buyer” of the tax credits, it may not be intuitive that a taxpayer that has no connection or relationship the film industry can benefit from the transferrable tax credit regime.  Nevertheless acquiring the tax credits at a discount can allow the buyer of the credits to settle its Dominican income tax liability with less cash because the film tax credits are exchanged dollar-for-dollar to pay the income tax (with the price generally being lower for prior year credits). The buyer, thus, “earns” the difference between the face value and the amount of the tax credits negotiated for and acquired. 

The tax credit buyer’s income tax liability is not reduced, as the savings come from the discount negotiated from the film company as opposed to a reduction of the income tax expense.  However many companies are not aware that such mechanism exists or if they were aware felt it did not apply to them.  The transferability of these tax credits does not require any sort of partnership or a legal relationship between the film producer and the buyer of the tax credits.

Before the tax credits are granted by the Dominican tax authorities, the film producer will have gone through a rigorous validation process with the DGCINE, a CPA auditor, and the tax authorities.  Once the requirements have been validated, the tax authorities will issue the certificates to the film producer and it is these that can be transferred.  The tax credit regime only permits one transfer.   

Taxpayers with a 31 March fiscal year-end that are considering use of the tax credit rules to reduce their income tax (payable 31 July 2020) and thus to improve their cash position have until 31 March 2020 to purchase the tax credits.  Any amount of the tax credits that remain unapplied may be used against other tax liabilities including the asset tax liability and the income tax advance payments. Any remaining amount of the tax credits can be carried forward to the next three following tax years.


For more information, contact a KPMG tax professional in the Dominican Republic:

Marco Banuelos | +1 809 566 9161 | mbanuelos@kpmg.com

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