El Salvador reforms tax laws in bid to attract more foreign direct investment

Photo of author

By LatAm Reports Editor

Former president of the BCR points to “des-stimulating” effect for reforms that would affect multinational groups not qualified by deposits in foreign financial or exempt income in another country.

Three economists consulted by Diario El Mundo say that the reform of the Income Tax Law to be passed on Tuesday in the Legislative Assembly seeks to attract more capital to El Salvador, however, they have doubts.

Economist Carlos Acevedo, former president of the Central Reserve Bank (BCR), believes that the spirit of the reform is to “incentivtain the arrival of capital from abroad,” such as Salvadorans abroad, to invest in the country.

Rafael Lemus, an economist who works with the opposition bench Alianza Republicana Nacionalista (Arena), agrees with Acevedo, assuring that in the background the reform seeks to “attract more capital, more resources to the country” with any figure, whether with loans, capital investment, remittances, remuneration, “there is an interest that money enter the country and being more lax,” he said.

The amended article 3 expands the list of what is excluded from the payment of Income Tax and adds to all values received in any concept, obtained abroad or any movement of capital, remuneration or emolument, in money or species,” such as credits, repatriation of capital, remittances, funds to invest or others.

It seems that the spirit of this reform is to encourage the arrival of capital from abroad, for example, from the diaspora, to invest in the country.”
Carlos Acevedo,
Former president of the BCR.

A third economist consulted also said that “these measures have an impact on tax collection” and believes that “Hacienda should present the effects that this measure will have on collection,” either whether it will contribute more to the collection of Income Tax or reduce it, and would cause a more “porous” tax system with greater “opportunities to avoid taxpayers” payment.”

Lemus further explains that the tax exemption from the income tax regulated in the amended Article 3 will also apply to institutions subject to the supervision of the Superintendency of the Financial System, such as banks, financial, savings and credit cooperatives.

However, he explains that the reform will exempt two figures, which are interest on securities or deposits, and that they are from a multinational that does not have certain qualifications. “These elements will allow the Treasury to say by these criteria the qualification and say ‘this multinational can have the tax benefit and therefore will not pay taxes,” Lemus explains.

I would say that it is a reform that is basically looking for how to attract more capital, that more resources come to the country, that more funds can be owned from abroad, capital, whether for loans, any figure, but that allows money to enter the country, there is an interest that enters money into the country and being the most lax; the government is clear that the fiscal problems can become smaller if the economy grows.”
Rafael Lemus,
I’m not an economist.

However, Acevedo identifies in the reform some provisions that are likely to have a “desstimulating” effect on foreign investment and likely to upset foreign companies such as multinationals.

One is the reform of article 16, which adds a final subparagraph, which indicates that exempt income obtained in another country by entities belonging to an unqualified and domiciled multinational group in El Salvador will be considered “taxed income in the country” and must be added to the net or taxable income (tax subject) in El Salvador and will therefore have to pay the respective tax.

“It was the scope of article 16 of the RSI Act by including in taxable income those obtained by multinational groups and unqualified entities that are domiciled in El Salvador. This is likely to upset some foreign companies, especially multinationals, and have a destimulating effect on foreign investment,” Acevedo warned.

The economist foresees the same displeasure of the same groups the reform of Article 27, which includes within taxable income the income that multinational groups and unskilled entities obtain from deposits in financial institutions. Article 27 indicated that entities belonging to an unqualified multinational group shall declare rent in El Salvador for deposits in foreign financial institutions even if they have paid the Income Tax or another in the country where they obtained such income.

“As in the previous case, this reform will probably not be to the liking of such groups,” he told El Mundo. For that reason, the former president of the BCR believes that reform will not help much to promote foreign investment, although he considered that it is okay for them to pay.

The doubt or limitation presented by this reform, for Lemus, is different from that raised by Acevedo and is about legal uncertainty. “Are I going to be able to get this money out in five years’ time when you are an authoritarian government, violate the Constitution and the laws? These incentives are fine, but they forget the most important thing, which is to create a real investment climate and this government has been concerned with destroying it,” he questioned.

Marvin Sorto, director general of internal taxes at the Ministry of Finance, says it is distorted that El Salvador is becoming a country of “null taxation” as it will be excluded from the payment of the Income Tax “the income of that money to the country” but that money will generate a “value chain” that at some point would generate taxes.

This article has been translated from the original which first appeared in Diario El Mundo