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.
By approving the changes to the Special Law for Exploration and Exploitation of Hydrocarbons, the country's oil sector contractors are exonerated from all taxes.
The amendments stipulate that transfers of agreed contracts shall not pay taxes during the exploration period, and the direct or indirect assignment or transfer of all or part of the rights derived under any modality for the activity of exploration and exploitation of hydrocarbons shall be exempt from any capital gains tax.
The reform proposal to Nicaragua's Energy Stability Law contemplates the elimination of the tax on the purchase and sale of electricity for users who generate their own energy and decide to market their surpluses.
On November 21, the Ortega administration sent to the National Assembly the initiative, which seeks to exonerate from the marketing tax, generators who sell their surplus electricity to Disnorte-Dissur.
The non-tax exemption of equipment that generates solar energy, together with the gaps in its regulation, are some of the factors that make investments more expensive in Nicaragua.
In Nicaragua, the tax exemption that benefited the import of products such as canned sardines, prepared soups, toilet soap, rubber gloves, among others, was eliminated.
With this change, the products concerned will be applied the Import Tariff Rate (DAI), which is a tax contained in the Central American Import Tariff and is applied to products from countries outside the Central American region, on the value of them, the taxes have variable rates that can range between 5% and 15%.
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 2017-2018 Guide by the Nicaraguan - German chamber of commerce provides details on tax exemption regimes by sector, requirements for foreign investors and other data.
Until 2023 renewable energy projects in Nicaragua may opt for the exemption of import duty on machinery and equipment, VAT, income tax and municipal taxes.
The National Assembly approved a reform proposed by the Ortega administration to extend the term of tax benefits for energy generation projects with renewable sources.The law established that the maximum period to opt for exemptions was January 2018, but now they will remain in place until January 2023.
In Nicaragua, the Ortega administration is proposing to extend tax benefits for energy generation projects using renewable sources for another five years.
Continuing with the strategy of promoting energy generated from renewable sources, the government is proposing extending tax incentives for these types of projects, as it did in June 2015.At that time, the benefits were extended until January 2018.
In 2016, the ratio between total expenditure of central governments of the countries of the region and GDP remained almost unchanged from the previous year, going from 18.3% to 18.6%.
From the report "Macroeconomic Profiles: 8th edition", from the Central American Institute of Fiscal Studies (Icefi):
The Central American Institute for Fiscal Studies (Icefi) presented its most recent edition of the Macro-Fiscal Profiles of Central America, which contains an analysis of the fiscal situation of Central America and each of the countries of the region, at the end of fiscal year 2016, as well as the main lines contained in the budgets approved for 2017.The publication includes in this opportunity a revision to the main indicators related to the fulfillment of the Sustainable Development Objectives 2030 -ODS 2030- and raises the urgent need to make progress in a new fiscal agenda that allows the effective attention of these commitments in the short term.
According to the ICEFI, "tax incentive policies seem to be a lost opportunity because of permanent tax expenses and the lack of tangible social benefits."
From a statement issued by the ICEFI:
Within the framework of the international meeting on Tax Justice and Transnational Fraud, held in Costa Rica, a study was presented on October 20 entitled 'The effectiveness of taxincentives for investment in Central America' in which an analysis was undertaken of the Central American experience in investment attraction through tax incentives.
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 new legislation extends the tax benefits enjoyed at current export processing zones, to free trade zones in other sectors such as logistics, outsourcing and agricultural exports.
As a measure to discourage smuggling, the taxable limit for withholding income tax on the export of live cattle has been reduced.
The Federation of Livestock Associations of Nicaragua (Faganic) welcomed the decision to reduce the limit for incurring income tax, believing that it will be an incentive to reduce smuggling of cattle and allowing more to be exported through the formal market.
If Central America does not strengthen the institutions that ensure a stable legal framework and full respect for contracts, foreign investment will not come and national investment will go to other countries, no matter how many incentives and tax exemptions are offered.
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