Proposed Tax Justice Law worries the private sector

The Tax Justice Bill in Honduras has ignited extensive discussions across the nation because of the possible impact it may have on the economy and the country’s productive sector. This measure, supported by the LIBRE Party administration, is proposed as a means to fight tax evasion and bolster state revenue generation. Nonetheless, its substance and intent have been perceived differently by diverse economic and social stakeholders.

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.

Impact on personal investment and jobs

Several commercial groups, business federations, and both local and international investors have expressed concerns that the proposed legislation might negatively impact private investments in Honduras. The Honduran Private Sector Council (COHEP) cautions that passing the law as it is could greatly diminish the inflow of foreign direct investments. Furthermore, companies within free trade zones and the agribusiness sector are allegedly thinking about leaving the country or cutting back their activities, which would directly affect formal employment and the national economy.

Since the initial proposal was introduced, there have been accounts of small and mid-sized enterprises shutting down, particularly in the textile, logistics, and export industries that benefited from tax advantages. In places like Choloma, Villanueva, and San Pedro Sula, factories have started reducing their workforce, highlighting fiscal instability as a major cause. This scenario endangers thousands of positions and may deteriorate further unless alterations are made to the proposal or it is halted. COHEP also notes that there could be a significant deceleration in economic progress in the year the law is enacted, with rising unemployment and informal work as unavoidable outcomes of its enforcement.

Regional and political context and debate on tax justice

The discussion surrounding the Tax Justice Law is unfolding within a specific regional and political environment. Removing tax incentives might set Honduras apart from the strategies that have enabled nations like Costa Rica, El Salvador, and the Dominican Republic to preserve investment allure and stable fiscal systems, which are seen as crucial elements for their competitiveness. This could impact Honduras’ standing in Central America and the Caribbean, potentially deterring both new and existing investors, who might opt to relocate their capital to countries that offer more business-friendly conditions.

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 Equity Law contend that tax breaks have led to wealth concentration and diminished the government’s ability to fund public initiatives targeting social inclusion and poverty alleviation. Based on official figures, 92% of these exemptions benefit the wealthiest 10% of businesses, whereas the other 90% of firms only receive 8% of such advantages. From June 2009 to December 2022, these policies caused the state to forfeit 455 billion lempiras in income.

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 confronts a significant economic issue

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.