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Tax Expert: Fiscal Reform Shows Gov’t’s True Colors

Nica News Dec. 18


Is Nicaragua’s Democracy Maxed Out?


Tax Expert: Fiscal Reform Shows Gov’t’s True Colors

MANAGUA – Despite Sandinista rhetoric about implementing a “new model of government” based on the principles of socialism, a recently passed tax reform promoted by President Daniel Ortega offers compelling evidence that the ruling party’s economic orientation is different than advertised, according to one of the country’s leading tax experts.

Julio Francisco Báez, president of the Nicaraguan Institute of Tax Studies and Investigations (INIET) and coauthor of the multi-edition book “Everything about Taxes in Nicaragua,” says the recently approved Reform to the Law of Fiscal Equality has “not one element of equality about it.”

Instead of trying to implement a more progressive tax system by limiting exonerations for the wealthy and adjusting income taxes on the working poor, the new tax law protects bankers and increases the tax burden on Nicaragua’s already pinched middle class and lower-income workforce, Báez said.

Indeed, even Sandinista union boss and lawmaker Gustavo Porras, who lobbied zealously  on behalf of expanding income-tax exemptions for workers earning salaries of 100,000 córdobas (less than $5,000 a year), silently voted against the measure when it came time to push the buttons in the Nation Assembly. Instead, the new law expands the income-tax exemption for the working poor to a more modest 75,000 córdobas ($3,750 a year). Those who earn $4,000 a year will now have their income taxed at 10 percent.

Even fiscal conservatives, such as opposition lawmaker and former banker Eduardo Montealegre, argued in favor of expanding the tax exemption to 100,000 córdobas. And some economists and labor leaders argued it should be expanded to at least 150,000, to cover those making around $7,500 a year.

After the vote, Montealegre accused Porras of being a “neoliberal,” despite all his populist posturing leading up to the vote.

Báez says the best way to judge any government’s real commitment to social policies is to look under the hood at its tax policies. And the Sandinistas’ fiscal reform measures are not the work of a socialist government, he said.

“If you tell me what fiscal policies a government has, I will tell you what kind of government it is,” Báez told The Nica Times this week in an interview. “But if you don’t change the tax system, don’t even talk about social justice.”

Third Time’s a Charm

After unsuccessfully trying to pass various tax reforms on two earlier occasions this year, the Sandinista government finally presented a much less ambitious reform on Nov. 27, after consulting with business mogul Carlos Pellas and other top representatives of the banking sector and the Superior Private Business Chamber (COSEP).

Five days later, the Sandinistas’ law was passed with support from the Nicaraguan Liberal Alliance (ALN) and members of the Liberal Constitutional Party (PLC). Twenty three lawmakers from Montealegre’s  “Democratic Voting Bloc” and the left-leaningSandinista Renovation Movement (MRS) voted against the law.

Unlike the government’s first two attempts at tax reform this year, the law that passed Dec. 2 has a much more limited scope, aiming to generate only $45 million in additional revenue in 2010.

The Sandinistas’ first attempt at tax reform was in August, when the administration presented a nebulous proposal based on 40 power-point slides and no supporting documentation. The second attempt was in October, when it put forth a much more ambitious and controversial tax-reform package aimed at generating $170 million.

The 319-article tax-reform bill was widely rejected by the opposition and private sector, forcing the administration to put it on ice and return to the drawing board to come up with something more palatable (NT, Sept. 4).

With the help of recognized business leaders, the Sandinistas drafted a third and notably narrower tax bill that mustered enough support to pass, thereby helping the government comply with its obligations to the International Monetary Fund (IMF).

The Ortega administration is hailing the tax law as a product of consensus. The more ambitious tax-reform measures, the government says, will be brought back into play next year.

“The most important thing here is that the consensus prevailed among the private sector, labor and the government,” said Finance Minister Alberto Guevara. “It is an important step to assuring financing for the 2010 budget and the first phase of improving fiscal equality and justice.”

Báez, however, thinks the first step will also be the last.

“The government’s earlier tax reform package is in the freezer, but remember that morgues have freezers too,” Báez said.

Báez said the government missed its opportunity to pass a substantial tax reform. If the administration couldn’t get it done this year, he said it is “unthinkable” that they will be able to do it in 2010 or 2011, as country slides back into election mode.

In that sense, he said, the Ortega government has lost some of its political capital.

“[Former Presidents] Violeta Chamorro, Arnoldo Alemán and Enrique Bolaños all passed tax reforms during their administrations, but Ortega couldn’t do it or didn’t want to,” Báez said.

The law that was passed, he said, is too “weak” and “gelatinous” to even be considered a true tax reform.

What the New Law Says

The new tax reform provides various new sources of revenue generation: a 10 percent dividends tax; a 10 percent tax on bank interest generated from savings deposits in Nicaragua banks (the amount will be deducted automatically); a 10 percent tax on loans from foreign banks and financial institutions; a new casino tax; a 1 to 2 percentage point increase on property-transaction taxes; a .5 percentage-point increase on agricultural-transaction taxes; and a 1 percent Minimum Payment Tax (IPM) on all businesses, regardless of their size.

The IPM tax is the most controversial part of the law, because it will be calculated based on a company’s gross income and not to its profit margin, as it is under the current law. That means that starting next year, even companies that report economic loses will still be required to pay income taxes, Báez said.

Representatives of Wal-Mart, which owns local supermarkets Pali and La Unión, said that if the IPM law passed, it could result in layoffs and business closings here. The government rejected that position as blackmail.

The biggest winners in the new law, according to Báez, are the tourism sector – which was threatened under the Sandinistas’ first attempt at tax reform, but untouched in the law that passed – and the financial sector, which dodged the bullet all together, in part, Báez says, because bankers helped to draft the law. Pensioners were also let off the hook, after being threatened with taxes in the first reform proposal.

Most foreigners living here probably won’t be affected too much by the new law, other than noting slight, progressive adjustments to property transaction taxes and the 10 percent tax on interest earned from local bank deposits, Báez said.

However, those who are part of the export sector will see a difference. But, Báez said exporters could be affected even greater by the scheduled end to the 1.5 percent fiscal credit incentive that is scheduled to be phased out May 6, 2010. The incentive, passed in 2003 with a seven-year sunset clause, could still be extended next year. But if the government was serious about extending the incentive it could have easily included it in the new tax-reform law, Báez said.

Holes in the Law

While the new tax reform is pretty mild, Báez said there are several omissions and exceptions to the law that could pose “potential dangers” later on, once the law’s regulations – or the set of legal operating procedures – are drafted next year.

For example, he said, there are sections of the law that confuse tax terms, making it unclear what exactly will be taxed.

Plus, Báez adds, the law creates certain loopholes, such as a clause that says “immature” business projects are exempt from paying taxes. According to the law, a group of government ministries will determine which businesses are “mature” and which are not yet ripe for taxation, opening the possibility for arbitrary application of the law and protection of certain businesses.

“When you have a law with this type of exemption, it opens doors, not windows,” Báez said.

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