What are the new rules for calculating income tax for natural persons

The tax reform proposal or Law for Economic Development and Fiscal Sustainability three the COVID-19 pandemic that reached the Assembly last Thursday, with an urgent economic nature, and that seeks to collect in its entirety about $ 1.8 billion in two years, brings a new way of calculating income tax for natural persons.

Many workers and citizens in general had already become accustomed to making the payment with the previous game rules, which included the deduction of personal expenses (housing, food, clothing, health, education). But now, if the law is approved, it will be necessary to adopt a new calculation methodology that includes personal expenses, but to a lesser extent.

Is that article 40 of the Law explains how the calculation should be made and what discount natural persons can aspire for personal expenses. The somewhat technical regulation indicates that “natural persons will enjoy a reduction in their income tax caused by their personal expenses, applicable before allocating tax credits to which there is a place”. He also cites two possible application formulas R = Lx20% and R = Lx10%. R is the possible reduction obtained from calculating personal expenses or the value of seven basic baskets. This multiplied by 10% or 20%, depending on the gross income value.

The formula of the law indicates that the gross income must be added (everything that the citizen receives), including exempt income, which means that they must be added to the 12 monthly salaries, the tenths and the reserve funds and must be verified if all this exceeds the value equivalent to 2.13 basic fractions, explains Pablo Guevara, representative of Andersen, a tax consulting company.

The basic fraction is $ 11,310, so the value to verify is $ 24,090.30. If your income does not exceed this value, then 20% of personal expenses may be deducted from the tax and if it exceeds it may be only 10% of said expenses. However, this discount has a limit which is the equivalent value of seven basic baskets determined by the INEC. At the moment the basic basket of the INEC is in $ 712.85 figure that if we multiply by seven it is $ 4,989.95. In the event that the income does not exceed 2.13 times the deducted fraction, then they may be discounted up to $ 996.98 (almost $ 1,000). If the income exceeds 2.13 times, then only $ 498.99 (almost $ 500) can be discounted.

Guevara explains that this formula applied to a person who earns $ 2,007 per month, dictates that he must pay $ 477.25 per year. But to get to this point, a series of calculations must be made, which we will try to summarize below. First you must establish the gross annual income: in this case $ 2,007 for 12 months. To this we add the thirteenth ($ 2,007), the fourteenth ($ 400) and the reserve funds that are equivalent to a monthly salary ($ 2,007). Thus this person has gross income of $ 28,498. This figure is greater than the 2.13 basic fractions, so it can only be deducted up to $ 498.99.

Now it is necessary to calculate the taxable base and for this the gross income minus the exemptions such as tenths, reserve funds and what is paid to the IESS are taken into account. Doing the corresponding subtraction, the taxable base is $ 21,809. The new income tax table must be applied to this value. In this case, the fifth line is applied, which goes from $ 21,630.01 to $ 31,630. The fraction has a tax of $ 949.40 and 15% of the excess of the fraction is applied to it, which is $ 178.99. Thus, the tax incurred is $ 976.24. The possible discount is applied to this amount, which is $ 498.99 and the value to be paid is obtained, which is $ 477.25 per year.

Doing the same exercise with a person who earns $ 5,000 per month, it can be established that this person has gross income of $ 70,400 and a taxable income of $ 54,330, so it is applied to the eighth line of the table. This person has an accrued tax of $ 7,759.3, but after applying the maximum discount (which is $ 498.99), he must pay $ 7,260 per year.

In general, the taxes paid by people who earn more than $ 2,007 are higher than those paid with the previous method. For example, for the person who earns $ 2,007, in 2021 and with the current game rules that allowed him to deduct up to $ 12,042 in personal expenses, his tax payment would have been $ 0, explains Guevara. In the case of the citizen who earns $ 5,000, he had to pay $ 3,687.86 in 2021, but now he will pay $ 7,260.40.

The idea of ​​the Government is to seek permanent income to lower the fiscal deficit and considers that people who have incomes of more than $ 2,000 a month and who represent 3.5% of the EAP, have a better position than the rest of the people who earn less than this amount.

Guevara considered that the purpose of the reform, in the case of natural persons and the income tax, what he sought was to limit the use of the deduction of expenses. This reform succeeds, but he believes there could be easier ways to do it, simply by lowering the deduction percentages. Consider that the formula that would be applied now is more complex than the previous one and will generate confusion.

Meanwhile yesterday the Legislative Administration Council was expected to set a date to know the bill and qualify it to send it to the respective commission for treatment. According to certain members it was thought that it could be summoned for this Sunday. The Government sent the project, which is one of the three components of the Opportunity Creation Law that it seeks to approve through the Assembly, but which in principle was not qualified by the CAL, arguing that the legal text contained several matters and that this was contrary to the norm.