Worldwide VAT, GST and Sales Tax Guide
El Salvador
San Salvador GMT -6
EY
Torre Futura
87 Av. Norte y Calle El Mirador Complejo World Trade Center, Local 11-05 San Salvador El Salvador
Direct all inquiries regarding El Salvador to the persons listed below in the San José, Costa Rica, office.
Indirect tax contacts
Hector Mancía +503 2248 7006 (resident in San Salvador) hector.mancia@cr.ey.com
Rafael Sayagués +506 2208 9880 (resident in San José, Costa Rica) New York: +1 212 773 4761 rafael.sayagues@cr.ey.com
Guillermo Leandro +506 2208 9887 (resident in San José, Costa Rica) guillermo.leandro@cr.ey.com
A. At a glance
Name of the tax
Local name
Date introduced
Trading bloc membership
Value-added tax (VAT)
Impuesto a la transferencia de bienes muebles y a la prestación de servicios (ITBMS)
31 July 1992
European Union Central American Association Agreement
General Treaty on Central American Economic Integration
At the time of preparing this chapter, El Salvador was in the process of entering a customs union with its Northern Triangle neighbors – Guatemala and Honduras.
Administered by Ministry of Treasury (http://www.mh.gob.sv)
VAT rates
Standard 13%
Other Zero-rated (0%) and exempt
VAT number format Taxable person registry number (NRC) 7 digits (0-9)
VAT return periods Monthly
Thresholds
Registration
Annual turnover of approximately USD5,715 or fixed assets of approximately USD2,285
Recovery of VAT by non-established businesses No
B. Scope of the tax
VAT applies to the following transactions:
• The transfer of tangible goods or rendering of services physically taking place in El Salvador
arm’s-length principle, and consequently, established at fair market value. The tax authority is empowered to adjust the transaction value for VAT (and income tax) purposes when the tax resulting thereof was lower than the hypothetical tax that would have resulted from an arm’s-length transaction. The following rules are provided by the Tax Code to determine a fair market value:
• A fair market value in local operations shall be understood as the sale price of the goods or services in businesses or establishments located in the country that are not related to the taxable person, and that transfer goods or provide services of the same kind.
• In the transfer of goods or provision of services abroad, the market value shall be the price used by other entities different from the taxable person and not related to it, in the transfer of goods or provision of services of the same kind from El Salvador to the same destination country abroad. In the case of imports, market price will be the price that the goods or services of the same kind have in businesses or establishments not related to the taxable person, in the country where the goods or services were purchased, plus transportation costs or expenses, if applicable.
• To establish the market price when there are more than three providers of the goods or services, the price information of the three providers shall be sufficient for assessment purposes, and an average price will be used to this end.
• When in the national or international market there are less than three providers of said goods or services, the price information of existing providers, or of at least one of them, will be sufficient for assessment purposes. In the first case, the average price will be adopted and in the second, that of the only provider.
• In no case shall the taxable person or its related entities be included among the providers whose prices are used as the assessment basis of the fair market price; if this is done by the tax authorities due to a lack of visibility of the relation between related parties, the act should not be invalidated. If for any reason the fair market price cannot be determined, the tax authorities will establish it by using the price or consideration that the audited taxable person has received from non-related purchasers of goods or services, different from the ones to which the provision of goods or services at a lower or higher than fair market price was carried out.
C. Who is liable
Any individual or business that has an annual turnover greater than approximately USD5,715 or that owns fixed assets valued at approximately USD2,285 or more must register as a VAT taxable person. The requirement to register also applies to permanent establishments in El Salvador of foreign entities. In addition, entities and individuals must pay VAT when any of the taxable events occur.
Exemption from registration. Individuals qualified as “Excluded Subjects” should not register for VAT purposes in El Salvador. “Excluded Subjects” are individuals that have provided services or transferred goods (taxed and exempted) in the last 12 months for an amount of less than approximately USD5,715 and with total assets of less than USD2,286. If these thresholds are surpassed, such individuals should be considered taxable persons (i.e., VAT taxpayers) and register for VAT. For further information see the Excluded subjects subsection below, under Special schemes, Section I. Returns and payment.
Voluntary registration and small businesses. Individuals whose turnover is below the registration threshold may register voluntarily as VAT taxable persons. Apart from the registration requirements outlined below under the subsection Non-established businesses, they also have the option to register for VAT voluntarily, where they may want to do so to recover local input tax. No special regime exists for small taxable persons in El Salvador.
Group registration. Group VAT registration is not allowed in El Salvador.
Fixed establishment. In El Salvador there is no legal definition of a fixed establishment for VAT purposes. However, the tax code (TC) rules on permanent establishment (PE) also apply to VAT.
The Salvadoran tax laws and regulations do not provide for a PE rule in the traditional sense (i.e., a business presence test applicable to non-domiciled entities that would allow local authorities to tax profits attributable to such PE as income of a domiciled entity). However, there is reference to the concept of PE in the TC that states that entities are considered domiciled in the country for tax purposes where legal entities domiciled abroad, registered under the local commerce registry, which have branches, agencies or establishments that operate permanently within the country.
To this end, it is understood that the branches, offices or establishments operate permanently within the country whenever they maintain a fixed place of business, with infrastructure installations of their own or leased up, with personnel hired within the country and the taxable person carries out its economic activity therein in a material and perceptible manner in El Salvador.
Furthermore, the tax authorities provide guidance that a PE should be understood when a nondomiciled entity operates or carries out economic activities in El Salvador utilizing under any concept or title and in a continuous or habitual manner, facilities or fixed places of any kind in which all or part of the activity is carried out, or when acting in El Salvador through an authorized agent to contract in the name of and on behalf of the subject domiciled abroad, who habitually exercises said faculties. The following should be considered PEs: the headquarters of management, branches, agencies, offices, factories, workshops, warehouses, stores or other establishments, mines, quarries, oil or gas wells, agricultural explorations, forestry or livestock, any other place of extraction or exploitation of natural resources, and works or construction projects, installation, assembly and supervision.
Non-established businesses. A “non-established business” is a business that has no fixed establishment in El Salvador. In principle, a non-established business must register for VAT if it transfers tangible goods or renders services in El Salvador on a regular basis. To register for VAT, a non-established business must provide the tax authorities with the following:
• A copy of its Articles of Incorporation, legalized by a Salvadoran consulate (or with an apostille), together with an official translation into Spanish
• Any other documentation required by the tax authorities, including registration of a tax representative
Tax representatives. Businesses that are established outside El Salvador must appoint a resident tax representative to register for Salvadoran VAT purposes. The tax representative is jointly and severally liable for VAT debts with the business that it represents. The liability is limited to the value of the property or assets to be administered, unless the representatives had acted with malice or gross negligence, in which case the tax representatives are severally liable with their own assets up to the amount of the total tax due.
Reverse charge. The Salvadoran VAT law establishes a reverse-charge mechanism for businessto-business (B2B) supplies. Under this mechanism, the customer must self-assess and pay the VAT due. The reverse-charge mechanism applies if the taxable activities (services performed or used within the country) are rendered by a non-established business. The consumer or resident taxable person may offset the VAT paid for the services with VAT debits under the general VAT rules.
Domestic reverse charge. There are no domestic reverse charges in El Salvador. Digital economy. There are no specific indirect tax regulations regarding the digital economy.
Nonresident providers of electronically supplied services for both B2B and business-to-consumer (B2C) supplies are not required to register and account for VAT on supplies in El Salvador. Instead, the customer is required to self-account for the VAT due by way of the reverse-charge mechanism (see the Reverse-charge subsection above).
Leased assets. The taxable event for leased assets (movable goods) is the earlier of the issuance of the invoice or receipt payment.
Imported goods. The taxable event for imported goods is when the goods clear all customs formalities for importation (definite importation).
F. Recovery of VAT by taxable persons
A taxable person may recover input tax, which is VAT paid on the purchase of goods and services for business purposes. Input tax is generally credited against output tax, which is the VAT charged on supplies made. Input tax includes VAT charged on goods and services supplied in El Salvador, VAT paid on imported goods and VAT self-assessed on reverse-charge services. In general, the input tax credit is allowed for ordinary business expenditure that is indispensable to the taxable person’s taxable activity (i.e., the business activity that generates output tax).
There is no set time limit for a taxable person to reclaim input tax in El Salvador. This mean that effectively the input tax (VAT credit) may be carried forward indefinitely until its complete recovery. A valid tax document referred to as “proof of tax credit” or an “import declaration” must support every claim for an input tax credit. This documentation only needs to be available upon request from a tax audit but does not need to be presented when filing the VAT return.
Nondeductible input tax. Input tax may not be recovered on purchases of goods and services that are not used for business purposes (for example, goods acquired for private use by an entrepreneur).
Examples of items for which input tax is nondeductible
• Acquisition, importation or entry of supplies or food when it is not the taxable person’s ordinary business
• Purchase, import, leasing, maintenance, improvement or repair of new and used vehicles that by their nature are not strictly necessary for carrying out the ordinary business activities of the taxable person
• Use of any type of services in hotels and the lease or sublease of real estate or the use of any other services that are not used in core business activities
• Purchase of airline tickets, except those strictly related to business trips
• Acquisition, importation or sale of clothing, jewelry or shoes, if this is not the taxable person’s ordinary business, among others
Examples of items for which input tax is deductible (if related to a taxable business use)
• Acquisitions of movable, tangible goods destined to form part of the current assets
• Disbursements for the use of services in the ordinary course of business provided they are not intended for the construction or alteration of real estate property
• General expenses intended solely for the purpose of achieving the objects, business or activity of the taxable person
Partial exemption. If a taxable person makes both taxable and exempt transactions, it may not deduct the input tax incurred in full. It may deduct only the amount of input tax related to the goods and services used in taxable transactions and not the input tax that relates to exempt transactions. Where input tax is incurred that relates to both taxable and exempt supplies, the business must carry out a proportionality calculation to determine the amount of input tax recoverable. This situation is referred to as “partial exemption.” The apportionment may be calculated based on the value of taxable transactions carried out compared with the total turnover. No approval or confirmation is required from the tax authority for using this apportionment method. The calculation is only based on total turnover and no other methods are available.
Approval from the tax authority is not required to use the partial exemption standard method in El Salvador. This is a mandatory method for taxable persons that carries out both taxable and exempt transactions, and it is established in Section 66 of the VAT law.
Special methods are not allowed in El Salvador.
Capital goods. Input tax generated on the acquisition of capital goods to form part of the current assets may be recovered by the taxable person. If the operations carried out during the month are partially taxable, exempt and/or not subject to VAT, the input tax credited against the output tax will be determined proportionally to the taxable operations. If the input tax is higher than the output tax, the excess of the VAT credit may be carried forward to offset against output tax due in subsequent VAT periods. Currently there is no definition of capital goods in the Salvadoran legislation. The basis for the input tax calculation generally is the price or remuneration agreed in the supply of goods or services, or the customs value in imports and entries.
Refunds. If the amount of input tax recoverable in a particular month exceeds the amount of output tax payable, the taxable person obtains an input tax credit. The credit may be carried forward to offset against output tax due in subsequent VAT periods.
A cash refund or Public Treasury notes may be claimed only if the credit relates to export activities. An input tax credit related to export supplies may be carried forward to offset output tax in the following VAT period. If the credit cannot be fully offset against output tax within a tax period, the taxable person may request an offset of other tax liabilities, including input tax withheld, perceived or generated as a result of the import of goods, or a refund of the excess amount.
Pre-registration costs. Input tax incurred on pre-registration costs in El Salvador is not recoverable.
Bad debts. Output tax accounted for on supplies that do not get paid by the recipient (i.e., bad debts) cannot be recovered in El Salvador.
Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in El Salvador.
G. Recovery of VAT by non-established businesses
Input tax incurred by non-established businesses that are not registered for VAT in El Salvador is not recoverable.
H. Invoicing
VAT invoices. A taxable person must generally provide VAT invoices for all taxable supplies made, including exports. However, for supplies made to other VAT taxable persons, a “proof of tax credit” document must be issued. A proof of tax credit document is required to support a claim for the input tax credit. Proof of tax credit documents must be issued in triplicate (with two copies provided to the customer of the goods or services). Invoices must include an official invoice number (NCF), the taxable person’s registration number (NRC) and the VAT amount separately, among other requirements.
Credit notes. Price reductions, discounts or bonuses may be excluded from the VAT base if they are included in the proof of tax credit document or in credit and debit notes. A credit note must contain the same information as a tax credit document.
Electronic invoicing. Electronic invoicing is mandatory in El Salvador, for certain taxable persons. Scope of electronic invoicing. For B2B, B2C and business-to-government (B2G) supplies, electronic invoicing is mandatory for certain taxable persons in El Salvador.
acquire goods or services from these individuals should document these operations with invoices for excluded subjects.
If these thresholds are surpassed, such individuals should be considered taxable persons (i.e., VAT taxpayers) and register for VAT.
If a taxable person ceases to operate and no longer makes taxable supplies, it can deregister for VAT. If the taxable person starts operating again it should register for VAT.
Annual returns. Annual returns are not required in El Salvador.
Supplementary filings. No supplementary filings are required in El Salvador.
Correcting errors in previous returns. In the case of errors or omissions, the VAT return can be rectified online, on the same platform of the tax administration used to file the monthly VAT return. Taxable persons have a maximum of two years after the expiration of the term to file the return, to modify and rectify any amounts on such return.
The VAT debit may only be modified within three months of delivery of the goods or the receipt of payment of the services.
Digital tax administration. There are no transactional reporting requirements in El Salvador.
J. Penalties
Penalties for late registration. In the event of late registration, a penalty of three minimum legal wages would be applicable. This penalty applies regardless of whether interest and penalties are assessed for unpaid VAT.
Penalties that are calculated on the monthly minimum legal wage are based on the commerce and services sector (approximately USD365).
Penalties for late payment and filing. Late payment and filing are penalized as follows:
• Filed with no more than a month of delay: 5% of the unpaid tax
• Filed with more than a month but less than two months of delay: 10% of the unpaid tax
• Filed with more than two months but less than three months of delay: 15% of the unpaid tax
• Filed with more than three months of delay: 20% of the unpaid tax
If no unpaid tax is reported, the penalty will be equal to one monthly minimum wage (approximately USD365 ). However, no penalty for late filing should be less than two monthly minimum wages (approximately USD730).
A 75% penalty reduction is available if a voluntary filing and payment is done. A 30% penalty reduction is available if the filing and payment is voluntary, and the tax authorities have identified the noncompliance issue.
Penalties for errors. Filing a modified return to correct an incorrect payable tax is penalized with 40% of the unpaid taxes, which should not be less than one monthly minimum wage (approximately USD365).
Filing the return with incorrect data is penalized with 10% on the difference of the payable tax assessed by the taxable person and the payable tax determined by the tax authorities, which should not be less than two monthly minimum wages (approximately USD730).
Filing the return with missing, incomplete or incorrect information related to general information of the taxable person is penalized with two monthly minimum wages (approximately USD730).
Filing the return with missing, incomplete or incorrect information related to VAT documentation is penalized with four monthly minimum wages (approximately USD1,461)
All penalties are subject to a potential reduction according to the rules explained above.
The late notification or failure to notify the tax authorities of changes to a taxable person’s VAT registration details may result in a penalty equivalent to two monthly minimum wages (approximately USD730) according to Section 235 c) of the Tax Code. For further details, see the subsection Changes to VAT registration details above
Penalties for fraud. Criminal tax avoidance penalties are based on the amount of the evasion or attempted evasion. If unpaid taxes range from approximately USD11,430 to USD34,285, the penalty is imprisonment for four to six years. If the amount of unpaid taxes exceeds approximately USD34,285, the penalty is six to eight years of imprisonment.
In the case of VAT taxable persons that are obligated to apply a proportionality method on the input tax credit (i.e., partial exemption), the amount of the evasion will be determined on a 12month basis and the penalty is imprisonment for four to six years if the unpaid VAT ranges from approximately USD34,285 to USD57,140. If the amount of unpaid taxes exceeds approximately USD57,140, the penalty is six to eight years of imprisonment. The rules and penalties apply when the taxable person has input tax credit in one or more tax periods that affects other periods in which a tax avoidance was detected.
If the unpaid taxes plus the corresponding penalties are paid to the tax authorities, no criminal fraud penalties are imposed.
Penalties for tax evasion under the Salvadoran Criminal Code include imprisonment for a period of four to eight years.
The Salvadoran Tax Code regulates penalties for unintentional or intentional tax avoidance. If tax avoidance is considered unintentional, the penalty is 25% of the unpaid tax. For intentional tax avoidance that results in an underpayment of tax below the criminal amount, the penalty is 50% of the unpaid tax.
Personal liability for company officers. According to Section 43 of the Tax Code, the sole administrator or legal representatives of legal entities during the period that includes their management, may be held personally liable for events that lead to tax evasion. The liability of these representatives should be limited to the equity or value of the assets that they administered, unless such representatives acted with intent, fault or gross negligence. In that case, they should be considered as jointly liable and will respond with their own assets up to the total amount of the tax owed.
Statute of limitations. The statute of limitations in El Salvador is three years. The statute of limitations for the tax authority to review tax returns and the compliance of tax obligations is three years from the deadline to file the tax return and five years when no return was filed.
The tax debt cannot be reduced after three months following delivery of the goods or the provision of the services.