Tax Justice bill in Honduras: risks for investment

The Tax Justice Bill in Honduras has sparked widespread debate in the country due to the potential effects it could have on the economy and the national productive sector. This initiative, promoted by the LIBRE Party government, is presented as a tool to combat tax evasion and strengthen state revenue collection. However, its content and scope have been interpreted in different ways by various economic and social actors.

The plan suggests abolishing tax exemption systems, raising the tax load, and giving the government more leeway in managing economic incentives. The business community has perceived these steps as a negative signal for investment and production, causing unease and apprehension in the economic landscape of Honduras.

Effects on personal investment and job creation

Several business groups, trade chambers, and local and international investors have expressed concerns that the proposal could negatively impact private investment in Honduras. The Honduran Private Business Council (COHEP) cautions that endorsing the legislation as it is might greatly diminish the influx of foreign direct investment. Furthermore, enterprises operating in duty-free areas and the agribusiness sector are said to be thinking about leaving the nation or scaling back their activities, potentially affecting formal employment and the country’s economic stability.

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.

Regional and political context and debate on tax justice

The discussion surrounding the Tax Justice Law is unfolding in a specific regional and political context. Removing tax incentives might lead Honduras away from strategies that have enabled nations like Costa Rica, El Salvador, and the Dominican Republic to sustain investment appeal and financial stability systems, seen as crucial elements for their competitive edge. This circumstance might impact Honduras’ stance in Central America and the Caribbean, deterring both new and existing investors, who might decide to transfer their capital to countries offering more advantageous conditions for business growth.

The political and ideological climate has shaped how the bill is perceived, with certain business industries viewing the government’s public statements as unfriendly to businesses and supportive of economic systems that have caused major changes in other regional nations. This raises concerns about the potential reshaping of the national economic structure without a strategic plan or a defined approach to sustainability.

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 proposed legislation does not implement novel taxes or raise current rates, but focuses on sealing legal loopholes and enhancing direct tax revenue from major corporations and wealth, aiming to diminish disparities in tax collection. Nonetheless, the removal of enduring tax systems, like the Temporary Import Regime (RIT), which has been active for four decades, might compel the shutdown of many businesses functioning under this framework. COHEP has noted that the suggestion to assure prompt convertibility for the RIT could be seen as an action impacting the liquidity and viability of companies.

Honduras faces a major economic challenge

The discussion surrounding the Tax Justice Law continues to be unresolved and divided. While some argue it might establish the groundwork for a more just and balanced tax system, others caution that passing it could exacerbate the economic crisis, lead to higher unemployment, and cause an outflow of capital. The ultimate choice made by the National Congress will be crucial for shaping Honduras’ economic future in the upcoming years.