Dominican Republic: Transferrable tax credits; possible opportunity for cash maximization
Dominican Republic: Transferrable tax credits
Taxpayers encountering economic challenges resulting from the coronavirus (COVID-19) pandemic may be seeking opportunities to improve their cash flow. One such opportunity could involve the acquisition of transferrable tax credits.
Taxpayers with a calendar year-end have until 31 December 2020 to enter into an agreement to purchase these tax credits if the intent is to use them on their 2020 tax returns (due 29 April 2021).
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, these tax credits are transferred at a discount.
Before the tax credits are granted by the Dominican tax authorities, the film producer will have gone through a rigorous validation process with the Dominican cinema authority (Dirección General de Cine—DGCINE), by a CPA auditor, and then by the tax authorities. Once the tax credit requirements are satisfied, the tax authorities will issue the tax certificates to the film producer and it is these that can then be transferred. The tax credit regime only permits one transfer.
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.
To clarify, the income tax liability of the buyer of the tax credit is not reduced, given that the savings come from the discount negotiated from the film company (as opposed to a reduction of the income tax expense). Companies may not be aware that this mechanism exists or, if they were aware, believed that the tax credit regime would not apply to their situations.
Moreover, 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.
The use of this tax credit transfers system can improve a taxpayer’s cash position. The amount of any of unused tax credits can be applied against other tax liabilities including the asset tax liability and the income tax advance payments, and any remaining amounts can be carried forward to the next three tax years.
For more information, contact a KPMG tax professional in the Dominican Republic:
Marco Banuelos | +1 809 566 9161 | firstname.lastname@example.org
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