El Salvador tax reform proposes to exempt investments from abroad from paying Income Tax
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A recent El Salvador tax reform proposed by the Government to the country’s Legislative Assembly seeks to exempt entities that bring their capital from outside the country from paying Income Tax.
The bill, which seeks to encourage investment from abroad, was presented to legislators on March 8. The document proposes modifying Article 3 of the regulations, establishing the products and profits excluded from income tax.
It includes provisions 1, 2, and 3, travel and food expenses, all assets bequeathed or inherited, and assets granted as donations.
The proposed El Salvador tax reform would be a special regime
The proposal made by the Ministry of Finance seeks to add paragraph 4 to the article in question, which indicates that “all values received in any concept” obtained from abroad will be excluded from the El Salvador tax reform law, such as capital movements, remunerations, loans, remittances, and trust, among others.
“This is like a special regime, which allows income tax not to be applied to all those flows that bring capital into the country in its various forms, as broadly as possible; (the reform) even begins to list the figures that are allowed, but it says that it is not exhaustive, that is, there could be other figures,” explains economist Rafael Lemus.
For the economist, this modification translates into a way to bring capital into the country without paying taxes. Likewise, it points out that it applies to all figures or forms of bringing in money and, in turn, to all institutions subject to the supervision of the financial system, that is, banks, financial institutions, and savings and credit cooperatives.
The El Salvador tax reform also includes articles 3-A, 3-B, and 3-C, in which other financial products mentioned will be exempt from paying taxes, such as interest on securities or deposits from a multinational entity.
The goal is to attract more capital to the country
For economist Rafael Lemus, “It is an El Salvador tax reform that is seeking to attract more capital to the country. There is an interest in money entering the country in a way that investors do not pay income taxes,” adds Lemus.
For economist Luis Magaña, reducing capital taxes as a strategy to attract foreign investment is not a new idea.
For the academic, it is “a model that has at its base the idea that the fundamental decision of the movement of capital for investors is the tax issue.” However, he believes that “there is ample evidence that this is not the case.”
“Investors emphasize the importance of workforce qualification and legal security over taxes,” he stated.
In addition, Magaña refers to a Banco Central de Reserva (BCR) investigation, which indicates the type of investments stimulated by reforms of this nature, which are from rentier capital. “That is investments that only enter countries to use their resources but do not promote the development of the productive forces of local structures. They are the ones that are most involved in precarious salaries, exploitation of natural resources, and dispossession of land from communities,” he points out.
More investment will reduce the country’s fiscal problems
Lemus adds that these measures suggest that the Government is clear that the country’s fiscal problems can be reduced if the economy grows. “And the economy grows if there is more investment, and to see more investment, you need to have more resources, savings, and capital from abroad. In that sense, let’s say the logic is correct,” he says.
However, the expert points out that in the case of the proposed reform to the Income Tax Law, the problem lies in whether this benefit of not paying taxes is enough because, in his opinion, there is an even more critical issue for investors than “generosity.” It is whether “I will be able to recover my investment.”
Both experts agree that legal certainty is vital for investors, so the country’s efforts must be focused on creating a proper investment climate.
In conclusion, while the proposed reforms to exempt foreign investments from income tax in El Salvador aim to stimulate economic growth and attract capital from abroad, they raise concerns about their efficacy in fostering sustainable development. While tax incentives can be a tool for attracting investment, they must be balanced with measures to ensure legal certainty and promote the development of local structures. Achieving a favorable investment climate requires a comprehensive approach that addresses tax policies and factors such as workforce development, legal security, and promoting productive forces within the economy. Ultimately, a nuanced strategy that prioritizes long-term sustainable growth is essential for the prosperity of El Salvador.
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