San José, Costa Rica, since 1956

Tourism Sector Fights Back

GRANADA – A lobbying campaign waged with the full muscle of Nicaragua’s mighty tourism sector appears to be gaining ground.The tourism sector, the country’s main economic engine, has launched a coordinated counter-offensive against recent efforts by the Finance Ministry to roll back certain tax exonerations provided under Law 306, the Tourism Incentive Law.After meetings with leaders of the Sandinista National Liberation Front (FSLN) and the Liberal Constitutional Party (PLC) – the country’s two leading political parties – the tourism industry is now confident the tide has started to turn in its favor. Tourism leaders predict that renewed bipartisan support for the industry will help thaw frozen tax exonerations, as well as spur Congress to pass the long-awaited Tourism Investment Bonds Law (BIT), which will offer tourism developers an attractive new financing model.“Our lobbying efforts have been very successful,” said Nicaraguan tourism-investment guru Raul Calvet, president of Calvet & Associates Investment Strategies. “We have the support of the FSLN, and we are close with the PLC.”Calvet, who has been spearheading lobbying efforts for the private sector, predicts the National Assembly will reinstate the tax exonerations and pass the tourism-bond financing bill during the next congressional session in September.PROBLEMS for the tourism industry became apparent last month, when tourism chambers noticed that fiscal reform measures passed in May had reversed – unbeknownst to them at the time – several of the tax exonerations granted to them under the Tourism Incentives Law of 1999 (NT, July 22).Hopes that the shift in government policy was a mistake were erased when Finance Minister Mario Arana told The Nica Times on July 21: “We can’t keep offering new exonerations (to the tourism sector); instead, we have to reduce them” (NT, July 29).The Finance Ministry argues that the tourism sector ought to pay more taxes to provide the impoverished government with much-needed revenue. The National Tourism Chamber (CANATUR), meanwhile, contends that the economic return on tax exemptions is at least three times what the government would generate from tax revenue.Both sides support their case with statistics that vary wildly, in some cases by hundreds of millions of dollars. No independent statistics exist on the economic impact of Law 306, allowing both sides to bend the numbers to their convenience.To help provide some semblance of objectivity, Calvet & Associates last month hired independent fiscal specialist René Vallecillo, former vice-minister of the economy under President Violeta Chamorro (1990-1996), to conduct a detailed study on the pros and cons of Law 306 to assess its economic impact over the last five years.Calvet predicts that the study, which will be presented sometime in September, will serve as a justification for tax exonerations, rather than support the Finance Minister’s position.IN its original form, the Tourism Incentives Law offers qualifying businesses 80-100% exemption on income tax; total exemption on property tax for 10 years; exoneration from import duties on business-related items; exemption from sales tax on the purchase of equipment and construction materials; exemption from luxury item import tax; tourism support from the government; and trademark registration.May’s fiscal reform measures canceled only the tax exoneration on luxury item imports, despite initial reports that 306 tourism businesses would now be required to pay taxes on all imports.But luxury tax alone becomes a big deal for new hotels that have to import air-conditioning units, vehicles, bathroom fixtures and even bed linens. There are approximatley 30 items a new hotel project might import that qualify as “luxury items,” according to Calvet’s estimate.The reversal of the luxury tax exoneration has affected different tourism businesses to different extents; it’s difficult to measure its impact in broad strokes. While some qualifying businesses may not be affected much, others experienced a significant impact.Grayline Tours, for example, was hit hard by the luxury tax when they discovered last month that they now have to pay import taxes on new buses – a critical element to the company’s operation, but one that is considered a luxury item nonetheless.SINCE taking effect in September 1999, Law 306 has approved some $300 million in investment projects and created 6,000 direct jobs, according to preliminary figures. But the law is just now starting to bear some of its first fruits, tourism leaders claim.“Five years is not enough time for the law to prove itself in a country like Nicaragua, where we started with nothing,” Calvet said. Regardless, Finance Minister Arana claims that some of the exonerations extended to the tourism sector are “very high,” and can’t continue to be offered forever.THE tourism sector insists that the tourism industry benefits the entire country, not just a small special-interest sector. In Nicaragua, where most hotels are small and medium-sized, the tourism sector depends directly on other service industries, namely food services, transportation, tour operators, handicrafts, cleaning and landscaping.The “multiplying effect” of the tourism industry here is estimated to be $1.80 for each dollar spent, which is to say that money invested in the tourism sector has a heavy ripple effect throughout the rest of the economy.“Nicaragua’s tourism model is not the same as that of Cancún or Jamaica; we’re not a closed, all-inclusive destination,” Calvet said. “Our strength is that we are selling Nicaragua as a product: its history, culture and nature.”CALVET said his Aug. 3 meeting with the Nicaraguan Tourism Institute (INTUR) and Sandinista leaders Daniel Ortega and Tómas Borge, president of the congressional tourism commission, went better than expected.The Sandinistas, he said, are friends of the tourism sector, in part because many of them are owners of tourism businesses, but also because the industry does not conflict with their leftist ideology. (Even Cuba has embraced the tourism dollar.)“The Sandinistas’ official party position is that they are pro-incentives to help small and medium-sized tourism operations, but they are not against larger development projects either,” Calvet told The Nica Times last week during an International Living conference at Norome Resort and Villas, on the Laguna de Apoyo. “The Sandinistas are for eradicating poverty; and the solution to poverty is to give people jobs.” The Sandinistas also support the BIT financing model, which has been stuck in Congress since late last year.THE BIT tourism bond model is based on a time-proven urban-renewal financing model first used in the U.S. city of Chicago, known as “Tax Increment Financing,” or TIF.The project allows for as much as 70% financing of qualifying development projects through the sale of private bonds, which are then repaid to investors with income tax revenue once the company is generating capital. The government, therefore, would exonerate qualifying companies from paying income tax for the first 10 years so that money could be used to repay private investors at a market- set interest rate, probably around 10- 12% (TT, Nov. 12, 2004).The BIT law, coupled with a six months- overdue bill to expand Law 306 to include smaller tourism projects, promise to help Nicaragua reassert itself in first place on the list of attractive places to invest in Latin America.The politicians are in agreement on importance of tourism, Calvet said, and it’s only a matter of time before the recent fiscal reform glitch is smoothed out.

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