New tax collection policies for real estate tax in Nicaragua

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Róger Pérez Grillo
Arias, Managua
roger.perez@ariaslaw.com

The real estate tax (IBI, due to its Spanish acronym) is a local or municipal tax levied against the ownership or tenancy of real estate properties within the jurisdiction of a determined municipality. For the purpose of this tax, a real estate property is made up of terrain, permanent or stable plantations, permanent or fixed constructions or facilities and other assets that are immovable due to their nature or as an accessory.

With regards to IBI, the value of a property may be determined through: (1) a municipal cadastral valuation made by expert technicians at the respective municipality or the Fiscal Cadaster Office of the Tax Authority; (2) a valuation made by the taxpayer through a description and assessment of the property and its improvements, using as a reference the value charts and formats provided by the municipality; or (3) the estimated value calculated using as a basis the book value of the property applying depreciation deductions, accordingly. For the cases described in (1) and (2) the taxable basis is equivalent to 80 per cent of the value set in the valuations.

In practice, the most common system used by the municipalities for the collection of this tax is the municipal cadastral valuation, through which the municipal technicians intend to determine the market value of a property, using manuals, rules and valuation procedures provided by the Tax Authority.

Decree No 3-95, which regulates IBI, establishes that the valuation tables must be updated annually by the municipalities based upon the consumer price index as at 1 November of the previous year, as published by the Nicaraguan Institute of Statistics and Census or the Nicaraguan Central Bank. The update must be approved by the Municipal Council and then published by the Municipalities during the year in which such tables will be effective. Nonetheless, this information is not published or shared by the municipality with taxpayers; therefore, taxpayers are unable to determine the formula or technique used to determine the value of their properties.

Since the 2018 socio-economic crisis in Nicaragua, the municipalities have heightened their efforts to collect the tax by applying new tax collection policies applicable to all municipal taxes, including IBI.

The municipalities have begun to notify taxpayers that the value of their properties has drastically increased though in reality the market value of most real estate in Nicaragua has substantially decreased as confirmed by authorised independent appraisers. For the calculation of this tax, the value of some properties for 2019 has reportedly increased up to four times compared with their value in the 2018 municipal cadastral valuation. The increase is seemingly unfounded, since the consumer price index in Nicaragua averaged 6.6 per cent as of August 2019, the last month published by the central bank of Nicaragua.

As aforementioned, the municipalities have not published the 2019 valuation tables used to determine the new value of the properties, nor have they included reference to the valuation parameters used in the notices sent to taxpayers.

Furthermore, for those taxpayers who have not cancelled the IBI in previous years, the municipality demands payment of all unpaid years, even though the statute of limitation for municipal taxes is two years from the date of the tax liability. At present the municipalities are acting hastily in demanding payment of unpaid IBI, for which the taxpayers are granted very short periods of time to meet at the collection offices of the municipality to either cancel their debt or to settle a payment arrangement.

Even though the taxpayers are entitled to use administrative recourses against the new valuations or the payment requests made by the municipality, which would result in the suspension of the effects of the charges until a final and binding resolution is taken, the municipalities in some cases have applied thorough methods to collect and are now seeking payment through an executive judicial process. In most cases, the municipality has sought the seizure of the assets and bank accounts of taxpayers to cover the debt. However, in other cases the municipality has also started criminal processes against taxpayers claiming the commission of tax fraud and requesting jail time for the taxpayer (if a natural person) or the directors and representatives of the taxpayer (if an entity), in addition to the fines established in the Criminal Code, even though in most cases there is no ground for a criminal case given that lack of payment of taxes is not a felony in itself and there are several circumstances that must be met for it to be considered a felony.

Unfortunately, these measures are part of the tax policy applied by the central government and its desperate attempt to collect taxes in a suffering economy that decreased by 3.8 per cent in 2018 and about five per cent last year, according to the World Bank. The next actions taken by the government will define the future of foreign investment in Nicaragua.