After the announcement of the intention to increase the tax on the distribution of cement and fuel in Guatemala, businessmen believe that in this scenario of incipient economic recovery it is not a good idea to increase the tax burden.
In order to face the effects of the economic crisis generated by the covid-19 outbreak, Guatemalan authorities are already beginning to discuss the fiscal policy to be applied in 2021.
In this scenario of economic crisis, falling tax revenues and the need to finance recovery programs, in Guatemala and Costa Rica it is already proposed to increase current taxes and create new ones.
Guatemalan authorities are already beginning to discuss the fiscal policy they will apply in 2021, when the economy will have to face the effects of the economic crisis generated by the covid-19 outbreak.
In order to access the $1.75 billion credit requested from the IMF, the Costa Rican government proposes to tax financial transactions, increase the tax on the profits of companies and individuals, and increase the tax on real estate.
On the afternoon of September 17, and in the context of a severe economic crisis that had been going on since before the beginning of the pandemic, the Alvarado administration presented the plan with which it intends to mitigate the fiscal impact of the Covid-19 crisis, a proposal to negotiate an agreement with the International Monetary Fund (IMF) to obtain a credit of $1.75 billion.
Although Costa Rica and Nicaragua approved fiscal reforms this year, it is predicted that the expected results in terms of tax collection will not be achieved.
The document "Centroamérica: análisis sintético, por país, del desempeño de la recaudación tributaria en 2019", prepared by the Instituto Centroamericano de Estudios Fiscales (Icefi), explains that, in the case of Costa Rica and Nicaragua, the expected results in terms of improved collection are still in doubt.
In Costa Rica, the central government's financial deficit at the fifth month of the year maintained its upward trend as a result of higher interest expenditure and stood at 2.6% of GDP.
While the behavior of the financial deficit is largely due to interest payments, the increase in capital spending also shows significant variation, which translates into better infrastructure conditions needed to facilitate the mobility of goods and people, explains a newsletter from the Costa Rican Ministry of Finance.
The tax reform law that would be approved in second debate in the coming weeks, involves the exoneration of arrears and penalties for taxpayers who pay their debts in the first three months after the publication of the law.
The proposed measure consists of exonerating 100% of the interest on arrears and up to 80% of the penalty to taxpayers who pay in the first month after the Law is published in the official newspaper La Gaceta.
The business sector welcomes the progress achieved with the tax reform approval in the first debate, but notes that it does not fully solve the financial problems facing the government.
In the debate last Friday, the representatives approved the file number 20.580, known as the tax reform law. The approval was optimistically received by the Costa Rican Union of Chambers and Associations of Private Business Sector (Uccaep).
"Public debt in terms of simple average for the Central American region will continue growing, reaching 43.1% of GDP in 2018, after having registered 42.5% in 2017."
The Central American Institute of Fiscal Studies (Icefi) estimates that for the current year the size of public expenditure of the Central Government in relation to the respective Gross Domestic Product of each country will be 21.4% in Costa Rica, 20.4% in El Salvador, 20% in Honduras, 18.4% in Nicaragua, 17.6% in Panama and 12.1% in Guatemala.
The proposal to increase the tax on interest on financial investments in Costa Rica could eventually make credit more expensive for both the private sector and the government.
In the view of the National Securities Exchange (BNV) it is worrisome that initiatives such as an increase in tax on income from financial investments are being discussed without knowing in detail and clearly the impact that something like this could have on the stock market and the country's financial activities.
At the end of the first quarter of this year, the financial deficit increased to 1.5% of GDP, up from the 1.3% reported in the same period in 2017, accompanied by a slowdown in tax revenues.
According to the Ministry of Finance "...The fiscal results at the end of the first quarter of March show, once again, the need to have a structural reform that allows increasing revenues and slowing down of growth in public spending, an objective sought by the Public Finance Strengthening Project."
The Government and the private sector have started negotiations to create a proposal for fiscal reform, which could include, among other things, changes aimed at achieving the financial sustainability of the Social Security scheme.
Without revealing details of the first sessions, the Higher Council of Private Enterprise (Cosep) reported that the reform negotiated with the authorities is focused on preventing insolvency of the Nicaraguan Social Security Institute and guaranteeing the country's economic growth.
The Costa Rican Congress has approved a fast track bill that would transform sales tax into a VAT of 13% and establish a 4% rate on the purchase of packaging, wrapping and raw materials, among other things.
The bill that could be approved by the Legislative Assembly also includes "... taxes on books in all their formats, air tickets, purchase of packaging and raw materials, as well as equipment and machinery (except if there is an express exoneration) and services for agricultural and agroindustrial production."
In the opinion of the Central American Institute of Fiscal Studies, the only way to consolidate public finances in a sustainable way is to reduce tax breaks and increase tax collections.
From a statement issued by the Central Institute for Fiscal Studies (Icefi):
The Central American Institute for Fiscal Studies (Icefi) has proposed as a fiscal agenda for development: meeting the public demand for integrity and transparency; effective, efficient and effectual public spending as a tool for inclusive and democratic development; and financial viability with taxation being part of democratic accountability.
Despite several announcements of new taxes, the government will focus on controlling tax evasion and leave the decision to implement a tax reform to future administrations.
According to authorities at the Ministry of Finance, at the moment there is no consensus for fiscal reform. The priority now will be to pursue and strengthen tax administration in order to meet budget expenditures this year.
At the end of the December 31, deadline to qualify for the current moratorium, a 10% surcharge will be incurred by those behind in the payment of taxes on income or property.
According to some taxpayers this measure represents a "... Disguised tax increase, which contradicts the promise made by President Juan Carlos Varela not to raise taxes, despite the existing fiscal deficit.