Santo Domingo.- Every year, the Executive Branch includes provisions in the general budget bill of the Nation to temporarily modify the legislation in order to address challenges related to resource allocation and concerns about revenue reduction. One provision in particular deals with the annual inflation adjustment of the employee income tax (ISR) in the Dominican Republic.
Since 2017, the Dominican Government has frozen the ISR exemption at RD$34,685 per month, which remains unchanged despite inflation. As a result, employees are required to pay taxes on their income without any adjustment for the increased cost of living. If inflation had been taken into account since the establishment of this legal mandate, the ISR exemption for employees would now be no less than RD$45,000 per month.
This lack of inflation adjustment has a negative impact on workers who earn more than RD$34,685 per month, as their net income is reduced since they must pay taxes on the excess amount.
Although there have been calls for the elimination of the inflation adjustment, it is currently not included in the official government agenda. While there are no plans for tax reform this year or next, the government intends to maintain revenue estimates based on existing tax structures.
The Minister of Finance, Jochi Vicente, recognizes the importance of annual inflation adjustments for taxes on formal workers but affirms that the State cannot currently afford to forgo this revenue. He also highlights that the Dominican Republic offers one of the highest income tax exemption thresholds for salary levels in Latin America, with approximately 80% of employees being exempt from income tax.
However, the high proportion of exempt workers may suggest that the salaries of formal employees are generally below RD$34,685 per month.
To illustrate this point, the Minister compared the Dominican Republic with countries such as Costa Rica, where the annual exemption is $1,436, Paraguay with $3,200, Mexico and Brazil with $4,600, among others. The only regional exception is Uruguay, with an exemption of US$9,500.
This discrepancy arises because when converting the RD$34,685 monthly income to US dollars, it is equivalent to approximately US$7,350 at the current exchange rate.
Regarding the ISR for employees, the withholding table is based on annual income, although Dominican workers are usually paid monthly, often divided into two fortnights. The tax obligations for formal employees are determined by their monthly income levels:
– Those who earn less than RD$34,685 per month are exempt from income tax.
– Those who earn between RD$34,685 and RD$52,027 per month pay 15% ISR on the difference.
– For those who earn between RD$52,027 and RD$72,269.25 per month, their employers withhold 20%, in addition to the 15% deducted from the first tranche.
– Those with monthly income greater than RD$72,269.25 pay 25% on the amount that exceeds this threshold, in addition to deductions from the previous tax brackets.