The tax system is arranged through the governmental institution SRI. Income tax (Impuesto a la Renta) is 5% for a salary in between $11.270 USD and $14.360 USD per year. If your salary enters the next level (up to $17.950 USD per year), you pay 10% income tax per year.
When you get contracted, you have to fill out an overview of deductible costs through your employer. Based on this overview, the complete percentage of taxes, part of it or no taxes are deducted from your monthly salary.
In March of the consecutive year, you have to fill out the final form, based on invoices, which calculates if you have paid to right amount or not.
If you work freelance, you have to go through a similar system, but without the support of your employer. That is why many freelancers hire an accountant, at least once a year for taxes declaration in March.
On most products, consumer pay VAT of 12%, which is generally included in the price of products you pursue. In case of services, VAT is usually not included.
For freelance jobs, you have to increase your rate to 12% VAT on your invoice. If you decide to work as a freelancer, you have two invoice options: RICE or RUC. With a RICE, you pay a fixed amount of taxes at a monthly basis, whereas with a RUC the amount of taxes you pay depends on your income. Which option is best for you, depends on your type of income.
Check the website of SRI for more information.
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