Income tax withholding to workers

The Law for Economic Development and Fiscal Sustainability After the Pandemic COVID-19, enacted in the Official Gazette 587, Third Supplement, on November 29, 2021, amended the Tax Code and, among others, the Internal Tax Regime Law.
 
On December 29, the President of the Republic issued the corresponding regulations. CorralRosales will summarize the most important changes introduced by the indicated regulations in several bulletins. The following analyzes the main elements to be considered for calculating the income tax withholding to workers.
 
Employers must withhold income tax from their employees on a monthly basis. For this purpose, they must follow the following procedure:

1. The taxable income of the employee for the fiscal year must be projected.
2. From such value, the amount of the contribution to the Social Security Authority must be deducted.
3. The amount obtained will be the income taxable base, over which the tax rate must be applied according to the following table:

4. The amount of the tax obtaining from applying the tax rate must be reduced by the discount for personal expenses.
5. The result must be divided by 12 to establish the monthly rate to be withheld to the employee.

In order to calculate the maximum amount of the personal expense deduction, employers must apply the following procedure:

1. The value of the employee’s personal expenses projected for the year must be informed to the employer. The maximum amount of personal expenses is equal to the value of the Basic Family Basket (BFC) of December of the previous fiscal year multiplied by 7. For the calculation of the monthly withholding of the fiscal year 2022 the maximum value for the personal expenses is US$5,037.55 which is equal to the value of the BFC of December 2021 (US$719.65) multiplied by 7.
2. The employee’s gross annual income must be determined. This is equal to the total value of the employee’s income, including exempted income.
   1. If the employee’s gross annual income does not exceed US$24,090.30, the tax credit to be discounted from the income tax will be 20% of the value of the projected personal expenses (maximum US$5,037.55).
   2. If the employee’s gross annual income exceeds US$24,090.30, the tax credit to be discounted from the income tax will be 10% of the value of the projected personal expenses (maximum US$5,037.55).

The personal expenses to be considered for the calculation of the tax credit are those incurred for housing, health, food, clothing, tourism, and education, including art and culture.

* On the Circular NAC-DGERCGC21-00000007 issued by the Internal Revenue Service on December 30, the value of the FBC as of November 2021 was used as an example, since the value of December 2021 was not known at that date.

Specialist in Tax
Andrea Moya, partner at CorralRosales
amoya@corralrosales.com
+593 2 2544144