The Executive is proposing to reform the scope of the law and charge a "registration for coffee production fee" of $0.50 per hundredweight.
Despite the outbreak of coffee rust, the debt of $200 million and the funding crisis facing the coffee sector, the Salvadoran government intends to collect more taxes. Currently the bill raised by the Executive Branch is being analyzed by the agricultural legislative committee.
The government has agreed to modify the terms of the tax reform proposal to take into account criticisms made by the private sector.
Salvadoran private companies have outlined to officials the adverse effects that the country would face if the proposed new tax measures were applied, receiving signals of openness to a discussion from the Government, who for the first time since 2009 and 2010 has agreed to negotiate tax reforms with entrepreneurs.
The opposition in the Assembly is calling for government approval of the bill on fiscal responsibility before approving the issuance of debt of $1.15 billion and a proposed tax package.
The lawmakers argued that there is a need to thoroughly scrutinize the text of the proposed reforms, as there is uncertainty over the destination the government will chose for the proceeds as well as strategies to revive the national economy in order for the state to ensures there is liquidity rather continuing to generate more debt for the country.
A bill aims to tax properties of any value that either do or do not have constructions on them, and which do not have a specific use anywhere in the country, declaring them "luxury goods".
The proposed law states that "... property for recreation, leisure or rest, with or without construction or under construction, regardless of its value or location , such as houses, lots, plots, villas located in beaches, lakes, mountains or the city ...
Warnings have been given that the tax in the approval process in the Legislature would create more evasion affecting all sectors of society.
The new tax would be of 0.25% on financial transactions exceeding $750, applied to the deposit holders who ordered payments or transfers and financial entities performing loan disbursements of any kind.
Added to the normal negative effects of a new tax, such as being an incentive for evasion, discouragement of investment, and in this case generation of inflation, are also "... The ambiguity in the wording ... "it is not clear if this excludes tax remittances, since ' ... the majority of remittances entering the country are money transfers to third parties using an electronic system.'
The private sector is opposed to the conditions in the third reform package the outgoing government intends to implement, claiming that state expenditures should be reduced first.
More control of public spending and no new taxes are the demands from employers to the government, which aims to increase government revenues with a third reform and the issuance of $800 million in bonds.
If passed the new reform would create taxes for financial transactions, unproductive properties and newspapers.
Elsalvador.com reports that Carlos Caceres, head of the Ministry of Finance stated that "The President (of the Republic) has instructed the Ministry to evaluate a proposal acceptable to him and to society, that is politically acceptable and not damaging to the productive sectors and to the poorest people. "
ANEP, the Association of the Private Enterprise, stated its regret with the recently approved tax hike.
ANEP press release:
Regarding the tax increase approved by the FMLN, GANA, PCN and PDC, the National Association of Private Enterprise, ANEP, declares:
1. We lament that the representatives who voted for more taxes care more about what the government offers them in exchange for their votes, than the consequences of causing unemployment and deepening poverty in El Salvador.
The tax on corporate income will rise from 25% to 30%, while tax on dividends will be reduced.
The legislative body of El Salvador has approved the fiscal reforms promoted by the Executive, with 66 votes in favor and 17 against.
The major changes include increasing income tax for businesses, which will raise to 30%, except for companies with revenue of less than $150,000, who will continue to pay 25%.
And apparently for bureaucracies in general, including those of international organizations; an "expert" from the Inter-American Development Bank is supporting tax reform in Costa Rica.
Although officially the IDB "does not advocate a tax burden or specific tax policy," one of its officials warmly supports the project to increase the tax burden to support the Costa Rican economy, to the point of suggesting that the tax burden be similar to Argentina’s.
The business sector will present proposals to solve the fiscal deficit, which may also be the foundation of a social pact.
17 proposals will be presented, aimed at two large areas: reducing spending and increasing revenue.
Jorge Daboub, president of the Salvadoran Chamber of Commerce and Industry, explained: “We understand that the country has a serious fiscal problem, the deficit has worsened due to the country’s negative economic situation.
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.
2010 will be a difficult year for the region's Treasuries, and tax reforms will be one of the weapons used by governments to fight this crisis.
Nicaragua has recently passed a highly controversial fiscal reform. Panama approved tax hikes for companies in the Colón Free Zone, as well as tobacco, casinos and insurance companies. In Guatemala the government proposed a tax reform to increase the tax burden, which includes raising income tax from 5% to 6% and taxing mobile communications. The Salvadoran government intends to raise taxes to alcoholic beverages, tobacco, weapons and ammunition, as well as vehicle registration and commissions at insurance companies.
"If we want first-world services, we must pay first-world taxes" - Laura Chinchilla.
The tax burden in Central America hovers between Guatemala's 9.9% and Nicaragua's 17%. In Brazil its 29%, whereas Scandinavian countries have tax burdens around 40%.
Tax collection has been hardly hit by the economic crisis, making evident the need for fiscal reforms to solve the structural problems of the region's tax systems.
Farmers and growers have voiced their concern over the new taxes they will have to pay.
One of the most worrying topics, they argue, is the application of a 13% value added tax when importing capital goods. Although these amounts are deductible from income taxes, they have negative effects on the companies' cash flow. Additionally, value-added tax will also be applied to several export categories like coffee.