Honduras: effects of eliminating tax exemptions on the economy

The Tax Justice Legislation in Honduras has ignited significant discussion nationwide because of its possible impact on the economy and the country’s productive sector. This proposal, advocated by the LIBRE Party administration, is introduced as a means to fight tax avoidance and enhance government revenue. Nonetheless, its details and reach have been viewed differently by a range of economic and societal stakeholders.

The plan proposes to remove tax exemption systems, raise the tax load, and enhance the state’s authority in handling economic incentives. These actions are perceived by the business community as a negative indicator for investment and production, leading to uncertainty and anxiety within the Honduran economic context.

Effects on private sector investment and job creation

Diverse business organizations, trade chambers, and both local and international investors have indicated that the proposed law might negatively impact private investment in Honduras. The Honduran Business Council (COHEP) cautions that passing the legislation as it stands could notably decrease the influx of foreign direct investments. Furthermore, businesses in free trade areas and the agro-industrial field are said to be contemplating exiting the country or scaling down their activities, which would affect formal employment and the national economy directly.

Following the introduction of the draft legislation, it has been reported that numerous small and medium enterprises have shut down, particularly within the textile, logistics, and export industries, which once benefited from tax breaks. In areas such as Choloma, Villanueva, and San Pedro Sula, companies in the maquila industry have started reducing their workforce, identifying fiscal uncertainty as a key factor. This scenario endangers thousands of jobs and could deteriorate further if changes to the bill are not made or if it is not halted. COHEP also warns that economic expansion might face a significant slowdown in the year after the law becomes effective and that rising unemployment and informality would be unavoidable outcomes of its enactment.

Discussion on tax fairness within the regional and political landscape

The discussion surrounding the Tax Justice Law is occurring within a distinct regional and political setting. Getting rid of tax breaks might alienate Honduras from the strategies that have enabled nations like Costa Rica, El Salvador, and the Dominican Republic to uphold their regimes of investment appeal and fiscal steadiness, seen as crucial for their competitiveness. This scenario might impact Honduras’ standing in Central America and the Caribbean, deterring both potential and current investors, who might decide to relocate their funds to nations offering more advantageous conditions for business growth.

The political and ideological environment has shaped how the bill is viewed, with some in the business community seeing the government’s official statements as antagonistic towards business and supportive of economic frameworks that have spurred significant changes in other nations in the area. This heightens worries about a potential overhaul of the country’s economic system without a systematic strategy or well-defined sustainability outlook.

Conversely, advocates of the Tax Justice Law claim that tax exemptions have led to wealth concentration and diminished the government’s ability to fund public policies focused on social inclusion and poverty alleviation. Official statistics show that 92% of the exemptions benefit the wealthiest 10% of companies, whereas the other 90% of businesses only receive 8% of these benefits. From June 2009 to December 2022, these regimes caused the state to forgo 455 billion lempiras in revenue.

The proposal does not establish new taxes nor does it raise current tax rates; instead, it seeks to close existing legal gaps and boost direct tax revenue from major corporations and the wealthy, aiming to lessen inequality in the tax system. Nevertheless, dismantling well-established taxation frameworks, like the Temporary Import Regime (RIT) that has existed for four decades, might compel numerous businesses operating under this system to shut down. COHEP has highlighted that the suggested assurance of immediate convertibility to the RIT could be seen as a move that impacts companies’ liquidity and viability.

Honduras encounters a significant financial hurdle

The debate over the Tax Justice Law remains open and polarized. While some believe it could lay the foundation for a fairer and more equitable tax system, others warn that its approval could worsen the economic crisis, increase unemployment, and trigger capital flight. The final decision in the National Congress will be decisive for the economic direction of Honduras in the coming years.