Tax justice in Honduras: a brake on foreign investment?

The Honduras Tax Justice Bill has led to extensive discussions nationwide due to the possible impacts on both the economic landscape and the country’s production sector. This measure, put forward by the government of the LIBRE Party, is introduced as a means to tackle tax avoidance and enhance the state’s revenue collection. Nonetheless, its details and range have been understood differently by various economic and social stakeholders.

The plan proposes to remove tax exemption systems, raise the tax load, and enhance the state’s authority in handling economic incentives. These actions are perceived by the business community as a negative indicator for investment and production, leading to uncertainty and anxiety within the Honduran economic context.

Impact on personal investment and jobs

Diverse business organizations, trade chambers, and both local and international investors have indicated that the proposed law might negatively impact private investment in Honduras. The Honduran Business Council (COHEP) cautions that passing the legislation as it stands could notably decrease the influx of foreign direct investments. Furthermore, businesses in free trade areas and the agro-industrial field are said to be contemplating exiting the country or scaling down their activities, which would affect formal employment and the national economy directly.

Since the draft bill was presented, there have been reports of small and medium-sized businesses closing, especially in the textile, logistics, and export sectors, which operated under tax incentives. In regions such as Choloma, Villanueva, and San Pedro Sula, maquilas have begun to cut staff, citing fiscal uncertainty as one of the main reasons. This situation puts thousands of jobs at risk and could worsen if the bill is not amended or stopped. COHEP also points out that economic growth could experience a critical slowdown in the year following the law’s entry into force, and that increased unemployment and informality would be inevitable consequences of its implementation.

Regional dynamics and political discourse regarding tax fairness

The discussion surrounding the Tax Justice Law is unfolding within a specific regional and political framework. Removing tax incentives might detach Honduras from the strategies that have enabled nations like Costa Rica, El Salvador, and the Dominican Republic to sustain regimes of investment allure and fiscal steadiness, deemed crucial for their competitive edge. This scenario could impact Honduras’ standing in Central America and the Caribbean, potentially deterring both prospective and existing investors, who might decide to relocate their financial resources to areas offering better conditions for business growth.

The political and ideological environment has shaped views on the legislation, with certain business groups perceiving the government’s formal communication as unfriendly to enterprise and in line with economic frameworks that have brought about structural changes in other nations in the area. This heightens concerns over a potential reshaping of the country’s economic system without a strategic approach or a defined path towards sustainability.

Conversely, advocates for the Tax Justice Legislation claim that tax breaks have led to wealth concentration and weakened the government’s ability to support public initiatives for social inclusion and poverty alleviation. Official statistics reveal that 92% of exemptions benefit the top 10% of companies, leaving the other 90% with just 8% of these advantages. From June 2009 to December 2022, the government missed out on 455 billion lempiras in income because of these measures.

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 encounters a significant financial hurdle

The discussion surrounding the Tax Justice Law continues to be unresolved and divided. While some argue it might establish the groundwork for a more just and balanced tax system, others caution that passing it could exacerbate the economic crisis, lead to higher unemployment, and cause an outflow of capital. The ultimate choice made by the National Congress will be crucial for shaping Honduras’ economic future in the upcoming years.