Prisma Micro-finance, Inc. is a for-profit company. That means we are subject to taxes on our operating profit (revenue/income minus allowable expenses). In both countries, we are charged 30%.
It works just like in the US. If you have revenue/income of $100,000 and allowable expenses of $90,000, you end up with $10,000 in operating profit. Taxes would be $3,000.
What throws people who find taxes too confusing is the concept of estimated taxes owed subject to withholding. As in the States, the government wants your estimated taxes on a monthly basis if you're employed by a company, or on a quarterly estimated basis if you are self-employed. The government gets to use your money during the year. You do your year-end tax return and most likely receive a refund from having had too much estimated taxes taken from your paycheck during the year. I found this confusion to be very prevalent in countries of the former Soviet Union. Prior to independence, the concept of estimated tax withholdings did not exist.
In Honduras and Nicaragua, the governments need more cash flow. They base their estimated taxes on the revenue/income side only. You have to send in an estimated amount each month based on 30% of the revenue/income. At the end of the year, you most likely receive a substantial refund as the actual taxes owed with allowable expenses considered is much lower.
My managers tried to tell me that we were being charged 30% on our revenue/income and another 30% on our operating profit. That's not true. The first 30% is just estimated taxes which gets adjusted at the end of the year when you file your taxes.
Just remember: the tax rate doesn't equate to what you actually pay.
- In our case, we send the tax authorities an estimated 30% of revenue/income each month.
- At the end of the year, we file a full tax return. We pay taxes based upon revenue minus allowable expenses = operating profit. The estimated taxes (over-inflated because it's based only upon revenue/income with no expenses accounted for) sent to the government during the year is now used to cover the 30% taxes on our operating profit. The excess amount paid can be carried over to the next year or be refunded to the company.
If an MFI tells you that the local government is charging 26% taxes, it's most likely in the form of estimated taxes withheld based upon revenue/income. Taxes are then filed at the end of the year based upon operating profit (revenue/income minus allowable expenses.) A much lower basis.
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