Tuesday 7 December 2021

Construction will become more expensive with tax reform

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With the entry into force of the Value Added Tax (VAT) – Impuesto al Valor Agregado (IVA) in Spanish -, all services necessary to complete a construction process will increase by having to charge a tax of 13% on the invoices issued.

This is a component of the Ley de Fortalecimiento de las Finanzas Públicas, commonly referred to as the “Reforma Fiscal” (Tax Reform) which will go into force as of July 2019.

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At present the necessary services for the construction of a building or project, do not pay the 13% sales tax; for example, fees of a civil engineer, architect, subcontracted labor, surveyor, the subcontracting of a security company during construction, and the  insurance corresponding to the development of the work, among others.

According to German Morales, partner of the firm Grant Thornton, it must be taken into account, that as the transfers of real estate and personal property are not subject to VAT, the developer cannot charge VAT to their customers, however, it is forced to pay VAT on the purchase of goods and services where it will be directly reflected in an increase in the cost of the work, without being able to apply for the corresponding tax credit.

This situation leads to two possible situations: an increase in the final price of sale to the buyer, or that the business assumes a reduction in profit.

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