Insight - Valuation analysis of the municipal tax regime: Judgements and their application in the face of the National Tax regime

Rita Pilar Soriano Cabrera, Senior Attorney at Estrella Tupete Abogados, offers her insights on the municipal tax regime in the Dominican Republic.
Rita Pilar is a member of the Dominican Republic Bar Association and focuses her practice on administrative law, administrative litigation, tax law, constitutional procedures, arbitration, and legal business.

l.- The municipal councils as local government bodies

The National District, the municipal councils and the district boards, pursuant to the provisions of Articles 199 and following of the Dominican Constitution, constitute the basis of the local political administrative system. In that order, they have been granted legal status under Public Law and, therefore, have, among other powers, regulatory, supervisory, budgetary, administrative and land use autonomy.

The aforementioned autonomy, constitutionally recognized, is complemented by a law that determines the parameters within which the municipal councils and district boards may act. To this effect, Law No. 176-07, of the National District and the municipalities, establishes a whole regulatory system for local governments.

Pursuant to Article 31 of Law No. 176-07, the municipal councils are administrative entities exercising the local governments of the municipalities existing or to be created in the territory of the Dominican Republic, which are constituted by two complementary management bodies: one of a regulatory and supervisory nature, called the Municipal Council, and another of an executive nature, called the Mayor’s Office.

II. - Taxation power of the municipalities

Taking into consideration that the City Councils are the bodies that govern the administration and local government of the municipalities and the municipal districts that comprise them, according to the combined interpretation of Article 200 of the Constitution and Article 255 of Law No. 176-07, the City Councils have been granted the power to establish municipal taxes to be applied both in the municipality and in the municipal districts.

In this sense, it becomes imperative to evaluate the content of Article 200 of our Constitution, which establishes:

"Article 200.- Municipal taxes. The municipalities may establish taxes within the scope of their demarcation expressly established by law, provided that such taxes do not collide with national taxes, with intermunicipal or export commerce or with the Constitution or the laws. Disputes arising in this matter shall be heard by the competent courts".

The above transcribed means that, in effect, the municipal councils are constitutionally empowered to create and impose taxes, taking into account the budgetary autonomy and the regulatory power that -in the same way- is recognized to them through Article 199 of the Dominican Constitution. Now, when does a tax collide with a national tax? In order to determine this, it is necessary to differentiate the concepts that, from the jurisprudential and doctrinal perspectives, have been defined.

Pursuant to the provisions of literal "b" of Article 271 of Law No. 176-07, municipal taxes must be established through municipal ordinances that must emanate from the Councils of Aldermen of the municipalities, since this is the hierarchical entity of the administration and local government of the municipalities empowered to dictate the rules and general guidelines to be implemented in the municipalities and in the municipal districts under its jurisdiction.

Although it is true that -as previously established- the municipal councils are constitutionally and legally empowered to impose municipal taxes, it is no less true that, in accordance with Article 200 of the Dominican Constitution, such taxes may not conflict with taxes of a national nature.

This has been, precisely, the object of consideration on several occasions by the Constitutional Court. The supreme body of constitutional interpretation and control has had to decide on different issues related to the local tax regime.

III.- Difference between taxes, rates and levies

The first issue to be established is the distinguishing criterion between rates, excise duties and taxes. In this regard, the most common doctrine conjectures in the following sense:

"Tax is a debt imposed by law on citizens for the satisfaction of social needs. It is the contribution imposed on individuals to subsidize public expenditures.

Taxes are also called contribution, because they are established to make individuals contribute to general expenses, including in these expenses the debts of the State as well as the expenses of the various public services: Ubi emolumentum, ibi debet esse onus [where there is an emolument, there is also a duty]".

Taxes have, then, essential elements, without which they cannot exist, namely:

"(1) Taxable Subject Matter.
2) Generating Fact.
3) Rate or aliquot.
4) Subjects of the Tax.
5) Taxable Base".

On the other hand, the doctrine has considered the following to be the main characteristics of municipal taxes:

"Municipal taxes are taxes that are levied only in one locality of the national territory, either in one or several Provinces or in one or several Municipalities. These taxes are paid only by the inhabitants who live or travel in those localities, that is to say, due to their local character, they are not applied in the entire national territory. The purpose of these municipal taxes is to provide the Municipality or Province with economic resources, and they are generally obtained for the services offered by each municipality or for the use of public property belonging to that Municipality".

IV.- Assessment of the Constitutional Court

Municipal taxes have been considered by our Constitutional Court as follows:

"Municipal rates are taxes that the municipalities apply within the territory of their municipal district, as a consideration for the services rendered to their municipalities or for the use that these give to one of their goods".

The fundamental difference lies in the fact that taxes are established in consideration for a service that the individual uses for his own benefit, while a tax is a contribution of individuals to the maintenance of the State, considered as an institution necessary for the subsistence of collective life.

Municipal taxes can be of two types, namely:

a) Fees: which correspond to the consideration for a service that the person administered uses for his own benefit; and,

b) Special contributions: these are contributions made for the benefit of the municipalities as a consequence of the execution of public works or the establishment or extension of public services of a municipal nature.

In effect, Article 291 of Law 176-07, of the National District and Municipalities, of July 1, 2007, establishes the contribution as follows:

"Special Contributions. The municipalities may establish special contributions on the obtaining by the taxpayer of a benefit or an increase in the value of its property as a consequence of the execution of public works or the establishment or expansion of public services, of a municipal nature".

The Constitutional Court has intended to safeguard the principles that, according to Article 243 of the Dominican Constitution, sustain the local tax regime, which article prescribes:

"Article 243.- Principles of the tax regime. The tax system is based on the principles of legality, justice, equality and equity so that every citizen may comply with the maintenance of public charges".

The Dominican Constitutional Court has also had the opportunity to clarify issues related to the municipal power in tax matters. An example of this was the result of judgment TC/0418/14, which analyzed the approach made, in the joint claim promoted by the Association of Industries of the Dominican Republic, Inc. (AIRD, for its acronym in Spanish), together with other organizations, through a direct action of unconstitutionality against the following provisions:

(a) Article 35, literal "f" of Resolution No. 2719-05, issued by the Council of Aldermen of the City Council of the Municipality of Santiago, which stipulated the following:

"All illuminated signs, billboards and signs without illumination shall pay an annual tax as indicated below: (...)

f) Rolling advertising in automobiles, buses, trucks, shall pay RD$400 (four hundred and 00/100 pesos) for each square meter or fraction of a square meter". (Emphasis added).

b) Article 25.5 of Resolution No. 46-99, issued by the Council of Aldermen of the City Council of the National District, which established the following:

"(...) 2. For the concept of advertising placements called ordinary signs and placements placed on vehicles shall pay RD$125.00 per each square meter or fraction of square meters".

c) Article 15, literal "f" of the Resolution without number, issued by the Council of Aldermen of the City Council of the Municipality of Puerto Plata, which indicated the following:

"Article 15. All lighted billboards shall pay a tax as indicated below: (...)

f) Rolling advertising of local businesses (trucks, buses, vans, etc.) shall pay forty pesos ($40.00) for each foot² for the first 24 feet² and fifty ($50.00) thereafter".

Evidently, in this case, the purpose of the constitutional proceeding in question was to verify the impertinence -in terms of tax and constitutional principles- of the municipal taxes imposed on rolling advertising, in the face of taxes of general scope.

To this effect, through judgment TC/0418/15, the Constitutional Court declared that the articles described above were not in conformity with the Constitution for violating the same principles and fundamental rights enshrined in the Dominican Constitution. Precisely, the Constitutional Court was able to verify that the taxes imposed by the municipal councils of Santiago, Puerto Plata and the National District with respect to rolling advertising violated, at least, the principle of legality, since, through the resolutions by which they were ordered, the necessary definition of the taxable event and its basis for liquidation purposes was not observed.

The principle of tax legality recognizes that "(t)axes only generate obligations if they have been previously embodied in law in its substantive and operative form. Likewise, exemptions can only be enjoyed or taken advantage of if they arise from a legislative act (specifically a law or congressional contract)".

It is clear, then, that through the different municipal resolutions, the municipalities did not establish what the taxable event was. This violates the principle of legality. Now, the Constitutional Court not only assessed the lack of definition in order to declare the transcribed provisions unconstitutional, since they violate the principle of legality, but also assessed the lack of determination of the base for liquidation purposes as a fact that violates the same tax principle.

In that order, it has been established that "There is a discussion in the doctrine as to whether the law must also establish modalities for the collection of the tax. On the one hand, the opinion is that the Legislative Power cannot delegate to the Executive the power to issue norms in tax matters ’but only in what concerns the time, the modalities, and the form of collection’. However, this, at least in the local case, is not entirely sustainable, since the Constitution establishes that the management of the tax must also be made explicit in the law".

Likewise, according to the Constitutional Court’s assessment, the creation of municipal taxes on rolling advertising goes beyond the nature of a tax and creates a tax, a matter that has been constitutionally placed in charge of the National Congress, as defined above.

The collision expressed above is made manifest in Law No. 12-01, which levied a national tax on advertising. In other words, had any of the provisions that provide for municipal taxes been applied to rolling advertising, a "double taxation" would have been configured.

What are the situations that must arise for taxation to constitute double taxation or duplicity of charges? The most qualified doctrine states the following:

a) When the laws levy two or more national taxes on the same fact or activity;
b) When a law levies a fact or activity with a national tax and at the same time that same fact or activity is levied with a municipal tax; and,
c) When the same fact or activity is taxed by two or more municipal taxes.

In the case in question, the double taxation was more than evident. There cannot be a national tax levied on advertising and a municipal tax that, at the same time, imposes payments for the same concept as that collected by the central government.

V.- Conclusions

Taking into consideration each of the aspects evaluated in this analysis, it is necessary to ask ourselves: is our local tax system really efficient?

The Organic Budget Law No. 423-06 complements the will of the constituent by ordering that a proportion of the national budget be destined to the nation’s municipalities. However, in a recurrent manner, this provision is cheerfully "suspended" by the annual budget law.

This situation entails multiple clear constitutional infringements. In particular, it undermines the effectiveness of the constitutional provisions that provide the municipalities with budgetary autonomy and sufficient resources to guarantee the execution of their attributions.

In this order of ideas, the Constitutional Court itself has already judged the unlawfulness of similar cases. In its judgment number 001/2015 it reflects the following:

"It has been rightly said that money is the vital principle of the body politic, and as such sustains its life and movements and enables it to fulfill its most essential functions. For this reason, its adequate distribution among the powers and organs of the State constitutes one of the aspects that determine the effectiveness of the principle of separation of powers and the system of checks and balances designed by the Constitution. It is not possible to guarantee the adequate functioning of the fundamental powers and organs of the State if they are not allocated sufficient funds in the General Budget of the State. Thus, for example, the Judicial Branch and the Public Prosecutor’s Office -the former a traditional power and the latter an autonomous constitutional body-, enjoy a budgetary specialization of organic-legal origin that cannot be ignored in the preparation (Executive Branch) and approval (Legislative Branch) of the General State Budget. Consequently, these items may only be modified or repealed by a law of an organic nature and not by the ordinary budget law".

Law No. 166-03, dated October 8, 2003, states through Article 3, the following:

"For the year 2004, the participation of the Municipalities in the amounts of the revenues of the Dominican State pated in the budget law of public revenues and expenditures shall be 8% and as of the year 2005, 10% (ten percent) shall be appropriated, including additional revenues and surcharges".

However, year after year the execution of what is foreseen is suspended, thus allocating less budget to local governments. This generates a continuous damage that is transmitted to the municipalities, because, as the appropriation of funds directly to the municipalities decreases, they are forced to create forms of collection that allow them to sustain their operations.

Our system of administrative organization, from its beginnings, has been the reflection of a centralized regime in all areas and, evidently, taxation has been no exception. From the distribution of funds to the collection attributions assigned to the General Directorate of Internal Taxes, they increasingly weaken the system of autonomous local government that is intended to be implemented.

In order to make our current system work efficiently, a restructuring of competencies in the tax system would be necessary. It would be necessary, in the first place, to allocate the budget allocation required by the municipalities and, gradually, to strengthen the processes established at the local level for tax collection.

Resources are more than necessary, but the way they are collected must be in accordance with the law. It is not enough that the intention of the municipal authorities is aimed at satisfying the needs of their communities, but it is even more necessary, from a democratic perspective, that the system established to collect the funds that allow them to meet the community’s needs, be in accordance with the principles that govern public administration in general and, especially, those that make up the tax system.

Undoubtedly, there is still a need for more awareness and training at the local level to ensure that our mayors and councilmen understand, in a comprehensive manner, the competencies that have been legally assigned to them for the imposition of taxes and excise taxes. A better-trained municipality -in terms of its tax regime- could achieve the autonomy that our legal system intends for local governments.