Opinion / Politics

Honduras' Tax Bill Is Tough on Exemptions. The US Government Should Applaud It

El Faro
El Faro

Monday, April 17, 2023
Vicki Gass

The Honduran government’s announcement that it would reform tax incentives and exonerations for foreign and national businesses provoked an unnecessarily dire response from U.S. Ambassador Laura Dogu. She publicly decried the move last October, asserting that President Castro “is sending a clear message to businesses that they should invest in other places, not in Honduras,” and that “the U.S. Congress is worried about the treatment of foreign investors.”

More recently, on International Women’s Day, Dogu expressed concern that the proposed Tax Justice Law will negatively affect job creation and economic growth, claiming that energy and labor costs were already “too high”. Opposition parties quickly joined the chorus attacking the reforms. The National Party caucus, for example, recklessly claimed that the proposed tax reform would risk thousands of jobs and tax remittances. Representatives of COHEP, the Honduran Council on Private Enterprise, called the bill dangerous and a “massacre against private sector businesses that create the most jobs.”

These remarks are unnecessary and alarmist. Even the International Monetary Fund (IMF) has called for a revision of the tax exemptions in Honduras. Rather than drawing fear-mongering, the Castro administration’s actions should be supported as sound and responsible fiscal management. Critics should also take a hard look at the facts.

Honduras has a long history of granting tax privileges to national and international businesses, beginning with the ZOLI (Law of Free Zones) in 1976, the RIT (Regime of Temporary Imports) in 1984 and the ZIP (Industrial Zones of Export Processing) in 1987. Today, there are a total of 19 special regimes covering various sectors, with nine created after the 2009 coup.

Typically, beneficiary companies move to a new tax regime when the time expires under the current benefits or reforms are made to existing regimes to extend the life of the benefits. For example, in 2020 the benefit was extended to 25 years for companies under the ZOLI regime, to 2045. The Honduran Association of Maquilas boasts on its website that companies do not have to pay any income, municipal, or sale taxes and are exempt from taxes on petroleum-based fuels used for production.

The Central American Institute of Fiscal Studies (ICEFI) reports that, over the last few decades, the differentiated tax treatments were approved in more than 100 laws as a result of strong lobbying by a small group of people.

The United States and national private enterprises have argued that tax regimes are necessary to attract investments in order to create jobs and alleviate poverty. Tax exonerations are certainly a tool to support incubator industries and reach policy development goals. But, in the case of Honduras, have they?

A tax exemption analysis by the Honduran SAR (Revenue Administration Service) with the IMF, the Inter-American Development Bank (IDB), and the ICEFI found that many of the development or employment objectives behind the exemptions have never been met. For example, companies benefitting from exemptions generated 246,000 jobs in 2021, just 6 percent of the economically active population of 4,313,000. And despite energy firms receiving incentives in order to lower energy costs —as the U.S. ambassador recently noticed— those costs in Honduras continue to be the highest in the region. Moreover, imported fuel that was exonerated from paying taxes was later resold on the black market and 40 percent of the companies enjoying exemptions for products intended for export sold the goods on local markets, creating unfair trading practices. Finally, companies whose declarations to the SAR showed non-compliance with tax regulations were not investigated or sanctioned.

An even more damning 2022 report by ICEFI found that these exemptions have caused a distortion that outstrips the impact of corruption, tax evasion, and administrative weakness. Only 25 economic groups (13 families and 12 transnationals) through 142 companies receive 66.8 percent of the profits from 2019 to 2021, equivalent to HNL 30.791 billion (USD 1.25 billion). Among them are companies like Dinant, owned by the wealthy Facussé family, Cargill, and Chiquita Honduras. The remaining third is divided among 7,000 companies. One company receives 10 percent of the total profit. To put this into perspective, the tax privileges in Honduras in 2020 represented 35 percent of the tax burden — the highest in Latin America, where the average is 22 percent.

Rather than allow a tax holiday for a minority, the government’s Tax Justice Law will, if approved: place a limit of ten years on exemption regimes; revoke benefits in ten tax exemption regimes due to abuses; establish regulatory and institutional frameworks to control abuses, including audits; create two new exemptions to develop domestic industry and attract foreign investment using internationally recognized practices; prevent legal tax evasion by eliminating tax debt forgiveness; establish tax transparency by ratifying the OECD’s Convention on Mutual Administrative Assistance; and require the naming of the main beneficiaries to prevent tax evasion through complex ownership chains that hide actual profit.

The government is also proposing a constitutional reform that would make tax collection progressive and require those with the largest incomes to pay taxes rather than placing the tax burden on the poor majority. If approved, the new law would also increase tax revenue, providing the government with sufficient resources to fund development programs and meet social needs so that Hondurans are not forced to migrate in search of a better life.

Addressing the root causes of migration has been a main policy of the Biden administration toward Central America. A key pillar of that strategy is fighting corruption because of its role in eroding public trust in democracy and robbing government coffers of the resources it needs to implement education policies, respond to public health crises, or establish equitable business environments. Through the proposed Tax Justice Law, the Honduran government is tackling corruption and attempting to put the country on more solid financial footing. The U.S. government should not only loudly applaud, but also support this initiative in Embassy statements and by providing technical expertise.

Vicki Gass has been working on Central American social and economic justice issues since 1984 and has lived in El Salvador and Honduras. She has worked as director of the Rights and Development Program at the Washington Office on Latin America (WOLA) and Senior Policy Advisor for Central America & Mexico at Oxfam America. She is currently an independent consultant.

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