With the Nicaraguan authorities confirming that they will review the Tax Agreement Law again in 2020, the business sector is calling for the correction of several measures that have decapitalized companies operating in the country.
On February 27, 2019, the reform to the Tax Harmonization Law was approved, which consisted in raising income tax from 1% to 2% for medium sized companies with higher income, and from 1% to 3% for large taxpayers.
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.
"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 good functioning of the institution in charge of collecting taxes is vital for ensuring economic development, as it means that honest companies who comply with their fiscal obligations are not at a disadvantage to those who don't.
EDITORIAL
In Costa Rica, better administrative management has made possible better income tax collection figures than those foreseen with simple tax increases.
In 2016 the size of the governments in the Central American countries grew very little, the tax burden reached 14.3%, and the average fiscal deficit was about 2.8% of GDP.
From the department of Fiscal Outlook for Central America, from the report "Macrofiscal Profiles: 7th Edition", by the Central American Institute for Fiscal Studies (Icefi):
From 2014 to 2015 the size of central governments remained constant at an average 18.5% of gross domestic product (GDP).
From the introduction of the report: "Macrofiscal Profiles: 6th Edition" by the Central American Institute for Fiscal Studies (Icefi):
2015 proved to be a period of low tax advance for the Central American region. On average, the size of central governments remained constant compared to 2014, at 18.5% of gross domestic product (GDP). However, not all nations maintained this trend in the same way. While the governments of Nicaragua, Costa Rica and El Salvador, some of the largest fiscally in the region, continued to increase their participation in the economy, reporting increases of 1.5, 0.7 and 0.7% of GDP, respectively, the Government of Guatemala - one of the smallest in the world became even smaller, being reduced by 1.2% of GDP. For its part, the Government of Honduras reported a small decrease of 0.2% of GDP, fully converged with its policy of fiscal austerity, while that of Panama had a transient contraction of 1.4%, reflecting a reorganization established by the new administration and that, according to the plans for 2016, will be reversed in full.
The problem with income tax exemptions is that they favor high-return projects that would probably have been made anyway.
From an IDB document entitled "The effectiveness of tax incentives: The case of export processing zones in Costa Rica, El Salvador and the Dominican Republic".
Introduction and Summary
Policies encouraging investment make use of a variety of instruments.
"Fiscal accounts for 2015 anticipate an additional burden of concerns about the sustainability of the public finances of the governments of the region."
From a report entitled "Macrofiscal Profiles: 3rd Edition" by the Central American Institute for Fiscal Studies (Icefi):
The close of fiscal year 2014 has left more uncertainties than certainties in the current panorama for Central America.
With the reform to the law on Tax Concentration non-resident investors in the country will have to pay 15% instead of 10% on income earned from capital.
According to Juan Sebastian Chamorro, executive director of the Nicaraguan Foundation for Economic and Social Development, the new reform "... is a positive thing for the country because it will generate an increase in the collection of such taxes but is a negative blow to natural and legal non residents because the Revenue Department will no longer deduct 10% on capital transfers, but rather 15 %. "
The asymmetry of investment flows makes the application of the concept of world income inevitably generates more revenue to the states of powerful economies than those of small ones.
In his opinion piece in Elfinancierocr.com, Manrique Blen points to the difficulties that countries with small economies face when they sign double taxation treaties, as, depending on the characteristics of the signed agreements, they can stop receiving tax revenues that they could have received had they not joined the treaty.
In the region the level of sales tax evasion is around 33% on average.
From a statement from the Central Institute for Fiscal Studies (Icefi):
The Central American Institute for Fiscal Studies presents the seventh edition of its analysis of the situation in Costa Rica.
Icefi: It is urgent that the two contending political parties specify a plan that will allow them to balance fiscal accounts and fulfill their campaign promises.
Tax revenues in relation to GDP increased in the Central American countries with the exceptions of Guatemala, where it fell, and Costa Rica, where it did not change.
A report entitled "Tax Statistics" prepared by the Organization for Economic Cooperation and Development (OECD), analyzes the behavior of tax collection in Latin America.
A critical view of the simplistic methods used in calculating the tax burden that supports an economy.
When analyzing a tax reform proposal, the first argument considered is what is the percentage of taxes collected by the state in relation to the Gross Domestic Product (GDP) of the country.
Juan Carlos Hidalgo, on his blog at Elfinancierocr.com, shows with solid arguments, the fallacy of comparing, without thorough analysis, the public figures of the ratio of tax revenue to GDP, which leads to erroneous conclusions which usually hide the main problem: the spending inefficiency demonstrated by the state with the money collected through taxes.
In El Salvador, the debate over the advantages and disadvantages of dollarization has been reignited, as the government is in need of resources for funding its programs.
President Funes has regretted that Dollarization has limited El Salvador from taking actions to combat the economic crisis. However, Augusto De la Torre, chief economist for Latin America and the Caribbean at the World Bank, repeated that dollarization is not an obstacle, and that in the case of Panama and El Salvador it has been key to relieve them from external pressures and exchange rate volatility.