The Constitutional Chamber of the Supreme Court of Justice in El Salvador has declared unconstitutional Legislative Decree Nos. 762, 763 and 764 (together, the Legislative Decrees), through which El Salvador reformed its Income Tax Law and Tax Code and enacted a financial transactions tax.
El Salvador enacted the following changes contained in the Legislative Decrees in 2014:
- Repealing income tax exemptions established in the Printing Press Law;
- Aligning El Salvador’s transfer pricing rules with the Transfer Pricing Guidelines of the Organization for Economic Co-operation and Development;
- Identifying when the statute of limitations on tax collections and the period for conducting audits and assessments are suspended; and
- Enacting a 0.25% financial transactions tax, which applies to certain financial transactions that exceed US$1,000, and a 0.25% withholding tax on withdrawals, deposits and payments that exceed US$5,000
Recently, the Constitutional Chamber of the Supreme Court declared the Legislative Decrees unconstitutional based on its determination that the Salvadoran Congress violated Section 135 of the Salvadoran Constitution by failing to carry out a parliamentary deliberation and discussion before approving the Legislative Decrees. Because the financial transactions tax was enacted as part of the Legislative Decrees, it was also declared unconstitutional. The Constitutional Chamber, however, focused on violations of the lawmaking process, not on whether the tax itself was unconstitutional.
