Tax expenditure is the amount of taxes that the tax administrator fails to collect due to the different preferential regimes that cover certain activities, sectors and taxpayers, in order to encourage greater consumption of goods and services produced in the domestic market, strengthen commercial activity or increase employment levels, as well as productive chains. These exemptions are established in fiscal policy.
In this sense, the so-called tax privileges were equivalent in 2023 to 2.1% of the gross domestic product (GDP) for an amount calculated at Q17,326 million, which is the highest since 2013, when this indicator began to be measured.
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According to the study “Quantitative Results of Tax Expenditure” published by the Tax Collection Office of the Superintendency of Tax Administration (SAT) on June 30, the indicated figure is 0.3% more compared to 2022, when it was Q17,268 million. On that occasion, it represented 2.3% of GDP.
Distribution
The report presents the structure and amounts of the main taxes not collected, as well as the beneficiaries and the percentage that they represent in national production; to do so, it uses a methodology based on macroeconomic information.
Thus, the loss of internal taxes would have been Q16,499 million (95.2%) and Q826 million of taxes on foreign trade (4.8%). Of the same total, the amount corresponding to indirect taxes (taxing consumption) represented Q11,517 million (66.5%) and Q5,808 million (33.5%) was for direct taxes (taxing taxpayers’ income).
“The challenge of tax spending is to have better control of exemptions (largely constitutional) in order to prevent abuse of this benefit and, on the other hand, to analyze that tax spending can be positive for a global economy”
Abel Cruz Calderón, Vice Chancellor of the Mesoamerican University
There are two taxes that stand out in the structure and that support 60% of the state budget: income tax (ISR) and value added tax (VAT). The report details that for VAT -which includes domestic and import taxes- the amount was Q10,907 million, which is equivalent to 1.3% of GDP and income tax was the aforementioned Q5,808 million (0.6% of GDP).
The beneficiaries
The study by the Tax Collection Office cross-checks the beneficiaries of tax expenditure and shows that “improvements in the digitalization of the SAT, including annexes for exempt entities, have optimized the management of annual declarations.”
On that account, the constitutional beneficiaries of the exemptions did not pay Q3,285 million (19% of the total) and those authorized by ordinary laws saved Q14,041 million (81% of the amount).
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Among the constitutional beneficiaries are universities, educational centers, the Guatemalan Social Security Institute (IGSS) and the Guatemalan Olympic Committee (COG).
Meanwhile, those exempted by ordinary laws are those affected by the Law for the Promotion of Export and Maquila Activities (decree 29-89); the Law of Free Trade Zones (decrees 65-89 and 22-73); the Law of Preferential Interest to Facilitate Access to Social Housing (decree 27-2022); social assistance institutions; cooperatives; diplomatic and international missions; churches; commercial activities; financial intermediation; among others.
Regarding tax expenditure per beneficiary, the amounts of the main exemptions and the respective sectors are detailed:
- Individuals and families: Q6 billion 38 million.
- Commercial activities: Q1,682 million.
- Financial institutions: Q1,350 million.
- IGSS: Q1,306 million.
- Educational centers: Q1,270 million.
- Social assistance institutions: Q1,146 million.
No verification
Abel Cruz Calderón, vice-rector of the Universidad Mesoamericana, stated that it is necessary to have updated information for the decision-making of the Ministry of Finance, as the rector of fiscal policy.
In his opinion, the challenge of tax expenditure is to have better control of exemptions (largely constitutional) in order to prevent abuse of this benefit and, on the other hand, to analyze that tax expenditure can be positive for a global economy.
For example, the existence of a tax exemption for universities and school fees should generate incentives for educational fees to be accessible to the population, “but other types of exemptions and the real improvement in the economy in general must be reviewed, which must be an issue for the SAT in conjunction with the Ministry of Finance (Minfin) and the Finance and Economy Commissions of the Congress of the Republic.”
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When asked how to exercise greater control and determine what is really a tax expenditure, he replied that those that already exist should be applied:
- Continue strengthening online electronic invoicing and its widespread use; launch awareness campaigns on the issuance of invoices; and for exempt taxpayers, issue invoices with the corresponding certificate.
- Institutions that “authorize or approve” exemptions, such as the Ministry of Economy (Mineco), must strengthen the Directorates that control what is established in decrees such as 29-89 and 65-89.
Cruz Calderón also commented on the main inconsistencies of the aforementioned beneficiaries: “In general, tax expenditure has no inconsistencies. The challenge is to bring about improvements in the economy in general and thus generate more employment and more business opportunities. If this is achieved, what is not collected through this means (Q17,326 million) should be collected with more ISR from salaried people or higher billing from professionals and independent technicians. The key to all this is to generate more employment and a favorable business climate and then more revenue comes through ISR or VAT.”
Opacity in Mineco
When asked about the issue, the Central American Institute for Fiscal Studies (Icefi) stated that an evaluation of tax expenditure is currently underway, which will be published shortly, especially regarding the relevance of the existence of so many preferential tax treatments.
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The entity stated that the most important problem with tax expenditure, apart from the lack of evaluation by the State to verify whether they are worth it or not, is the lack of transparency, arguing that it cannot disclose who was given “tax forgiveness” for being a taxpayer.
“This creates a certain opacity in the administration of these mechanisms, especially by the Ministry of Economy, in maquilas and free trade zones; and by the SAT, with the rest of the taxpayers, even though society has the right to know who has had their tax payments forgiven by the State and to verify whether the effort is worth it.”
It was added that, in general, the tax expenditure data are slightly underestimated due to the lack of some aspects, but the data released are consistent, although before their presentation they should be approved by the Minfin, to properly demonstrate the performance of the tax system, concludes the position of the aforementioned research center.
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