Last Tuesday, the Congress of El Salvador reformed a law to eliminate the collection of taxes on capital transfers from abroad, including remittances, in order to encourage investment.
“We have reformed the Income Tax Law (ISR) to eliminate that barrier that limited (international) investors from injecting capital into El Salvador,” said the president of Congress, Ernesto Castro.
The reform was approved with the votes of 69 of the 84 deputies of the unicameral Congress, dominated by allies of President Nayib Bukele, who in his X account commented that with the reform the rate is “lowering from 30% to 0%” any capital or money transfers from abroad.
The deputy of the ruling New Ideas party, William Soriano, pointed out that the regulations will benefit natural or legal persons that inject money into the country’s economy for investment or working capital.
Also exempt from tax collection is the sending of family remittances made from abroad by some three million Salvadoran emigrants, residing mainly in the United States, which totaled US$8,181 million in 2023, close to 26% of the gross domestic product ( GDP), according to official figures.
Currently, the ISR law establishes that income equal to or greater than US$150 thousand must pay 30% as a tax.
For and once morest
Salvadoran representative Claudia Ortiz pointed out that although the measure approved by the Assembly seeks to attract investment, it denotes improvisation in economic and fiscal matters “and is an attempt to attract more money to the economy, so that there are more deposits in the banks.”
But Congresswoman Suecy Callejas refuted that “investors will be able to inject that capital directly into the economy in El Salvador and when a Salvadoran abroad wants to return to the national territory, their money will not pay taxes,” she stated.
“It is to attract investment from our own people, from people who had to leave our country,” said representative Ana Figueroa.
Information and position that were made known by the AFP agency, La Prensa Gráfica and El Diario de Hoy.
In Guatemala: “Investment must be encouraged”
Regarding the changes to the ISR in El Salvador, Juan Carlos Zapata, executive director of the Foundation for the Development of Guatemala (Fundesa), expressed that it is observed that said country has structural problems regarding civil guarantees, but it is generating a better climate of attraction of capital that will allow it to increase its foreign direct investment.
He adds that the ISR was not reduced only to investments and transfer prices, but also to others such as infrastructure, human capital and remittances, in addition to the promotion that that country has had on reducing the homicide rate.
“These modifications add to a series of actions that El Salvador is doing to be more attractive, and what we need in Guatemala is for the Congress of the Republic to focus on laws that might increase investment” such as the general infrastructure law road, the reforms to the Anadie law to promote public-private investments and tax incentives for foreign investment, taking advantage of the nearshoring.
“This is a call to Congress to focus on issues that promote investment and not scare it away, like those laws that we have seen from Prodeco or the labeling law that includes taxes.”
Asked if the laws approved in other legislatures are already being reflected in attracting capital, Zapata said that this legislation is part of the economic reforms that the country has had “but what happens is that we are very far behind, especially in infrastructure, which includes roads, ports and airports.
Economists doubt effectiveness
The Legislative Assembly approved including exclusions of instruments from the application of said tax. However, economists point out that these already existed, and have not generated results, according to information published by local media in El Salvador.
The Legislative Assembly approved on Tuesday reforms to the Income Tax Law (ISR) to incorporate financial instruments to the exclusions of said tax, with the idea of facilitating the arrival of capital to the country that can be injected and boost the economy.
This was justified by the ruling parties in the Assembly, although the explanations regarding the major details of the reform were not addressed either in the finance committee, last Monday, or in the plenary session, yesterday.
Last Monday, the Nuevas Ideas deputies assured that the reform was aimed at excluding remittances from the payment of the ISR. On Tuesday, the president of the Legislative body, Ernesto Castro (Nuevas Ideas) put forward another argument and said that it was to eliminate barriers for foreign investment.
“They made it so that the capital that left the country did not pay taxes, but that the capital that entered paid 30% of the income. It goes without saying why they did it. They shielded themselves so that any foreign investment, which they saw as competition, would be expensive to be able to compete with the group that monopolized it,” said Castro, who tried to exemplify the above with the privatization of the banks, which occurred in the 1990s.
Despite the above, three economists agreed on several points regarding the reform, and in considering that it has a long way to go if it is to be effective, and that it incorporates as excluded instruments elements that already experience this situation, it was added.
Furthermore, they qualified Ernesto Castro’s argument and described it as a “euphemism”, since they indicated that each country in the world charges income tax on capital income, explained in La Prensa Gráfica.
“After the global crisis of 2008-2009, developed economies realize that a large amount of resources are required to support local economies, giant economies,” said Rommel Rodríguez, coordinator of the macroeconomics and development area of the National Foundation. for Development (FUNDE).
“In this context, they begin to treat capital income equitably in all countries, or else capital will dance from one side to the other. The argument given by the president of the Assembly is limited very exclusively to the local case and does not see the international context,” he added.
Rodríguez also explained that capital taxation is important to avoid instability in the flow of capital.
“The free mobility of capital, without measured tax treatment, can generate a very rapid flow of resources that is called ‘hot money’, which causes economies to destabilize. If there were absolute free mobility, without taxation, some capital would be here now, next week there, from there they would move to here,” he noted.
Then, in more depth regarding the content of the reform, economist Tatiana Marroquín indicated that the reform is not new in relation to investment attraction policies applied by ARENA and the FMLN during their governments.
Both ARENA and the FMLN approved frameworks to attract investments through tax exemptions without much result, neither in attracting investments, nor in economic growth, nor in employment. So not only is it an old recipe, it is a recipe that has proven to be ineffective,” said Marroquín.
In addition to the above, Marroquín pointed out that the reform meets criteria to be considered “regressive” in nature: “It weakens income from progressive taxes, that is, taxes that make those who have more pay more. In 2022 and 2023, the need to reduce VAT on food was insisted on, for example, and the government did not want to; Now it removes taxes from large companies and capital movements, which does not directly benefit the majority of the population,” he explained.
One of the gray points of the reform is that it was not approved with data on how much the country will no longer receive with the approved exclusions, which include operations such as obtaining credit, custody funds, repatriation of capital, income from of securities, remittances or others.
However, economist Rafael Lemus pointed out that there is also a but: “nowadays, without this reform, if you bring capital, you do not pay; If you bring remittances, you do not pay ISR.” “It is a very relative effect: with or without reform, the tax is the same. There I have my doubts regarding this,” he stated.
With information from AFP, La Prensa Gráfica and El Diario de Hoy.
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