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Dominican Republic: Opportunities for tax credits to reduce tax liability

Dominican Republic: Opportunities for tax credits

Taxpayers with a fiscal year ending 31 March are reminded that they must acquire transferrable tax credits by 1 April (given that 31 March 2019 is a Sunday) in order to be able to use the credits to reduce the tax liability reported on their 2018 tax returns.

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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 maybe transferred—in whole or in part—by the film production company to one or more corporate and/or individual taxpayers.  

Opportunity to use tax credits

The transfer of these tax credits is generally accomplished via an outright sale at a discount. For a potential buyer, it is not intuitive that a taxpayer with no nexus to the film industry can benefit from these tax credits.  However acquiring the tax credits allows the buyer the ability to settle its Dominican income tax liability at a discount because the film tax credits are exchanged dollar-for-dollar to settle income tax—with the price generally being lower for prior year credits. The buyer will “earn” or realize the difference between the face value of the credits and the amount negotiated for and paid for the credits. Still, the buyer’s income tax liability is not reduced; rather, the savings comes from the discount negotiated from the film production company (as opposed as a reduction of the income tax expense).  

Many taxpayers are not aware of the availability of the tax credit mechanism or, if they are aware of the program, they may not be aware that they may be eligible for its benefits.  Transferability of these tax credits does not require any sort of partnership or a legal relationship between the film producer and the buyer. 

It is also important to note that before these tax credits are granted, the film producer must complete a rigorous validation process involving the Dominican film agency (DGCINE), a CPA auditor, and the tax authorities. 

Once the tax credit requirements have been satisfied, the tax authorities will issue the certificates to the film producer and it is these certificates that can be transferred to the buyer of the tax credits.  The law only permits one transfer.    

KPMG observation

Taxpayers with a 31 March fiscal year-end seeking to use this tax credit mechanism to legally reduce the amount of their income tax that is due and payable by 31 July 2019 have until 1 April 2019 (given that 31 March 2019 is a Sunday) to purchase the tax credits from eligible film producers and to comply with other requirements for the 2018 tax year. Unapplied tax credits may be used against the Dominican asset tax liability and against the Dominican income tax advance payments. The remaining tax credits may be carried forward for three 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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