, CENTRAL AMERICA : TAX BENEFITS

CENTRAL AMERICA : TAX BENEFITS

Which are the tax benefits that Central America offer and that make multinationals prefer some countries more than others to establish? 

The competitive advantages offered by some countries in the region make multinationals choose them to settle, such as recently NIKE which chose HONDURAS to establish its production plant. The mentioned country offers 100% exemption from import and export taxes, as well as sales tax, both permanently. In addition, the 100% exemption from Income Tax (ISR) lasts 20 years, with the possibility of renewal. Another point refers to infrastructure and other figures, because in Honduras, companies carry out their customs procedures in industrial parks and free zones, so the containers go directly to the port. When it comes to making garments, companies prefer to settle in Honduras or Nicaragua because, for example, the cost of labor is cheaper.

In Guatemala Nike´s work generates about 1,500 jobs, in addition to other recognized brands that operate in the country through large contractors. It is recognized that the country must improve aspects such as road and port infrastructure, paperwork and permit and license approvals. Regarding tax benefits of Guatemala, the country manages several figures with fiscal and logistical benefits. Among these, that of free zones, for the promotion of maquila and exports and the Special Public Economic Development Zone (Zdeep) with various tax exemptions and terms. Among other benefits, the three figures exempt income tax for 10 years, under specific conditions. The Zdeep grants, among others, 100% exemption from Value Added Tax (VAT) and tariffs, as well as other charges for the importation of merchandise that enters for re-export. Although if the merchandise enters the national territory, it must pay the corresponding taxes. Free zones also provide exemption from taxes, customs duties and charges applicable to the importation of merchandise used for the transformation of re-exportable goods, exemption from VAT on transfers within and between free zones, and domestic VAT on the acquisition of inputs. locally produced to be incorporated into the final product. And the Law for the Promotion of Exports and Maquilas (Decree 29-89) includes temporary suspensions and exemptions from import taxes for different goods such as raw materials, equipment and machinery, samples. etc. In this regard, in this regime import taxes are not paid and there is always one year to re-export; but no tax can be exempted for more than 10 years according to the Tax Code. However, VAT is not paid because everything that is worked in this regime is exported and since it is a tax that is charged to the consumer, it always generates a tax credit.

Apart from the benefits mentioned, in the case of textile investments, they choose Guatemala because electricity is cheaper and that service often represents 70% of manufacturing costs. Putting the regulation for part-time work back into effect is becoming a strength for Guatemala because it helps reduce costs. This reduction can be had, for example, in the packaging and ironing areas since these personnel are left with no work to be done while the garments are being manufactured, so they could be hired by the hour or for several days a week. The Korean company Sae A, which announced an investment of US $ 400 million in Guatemala since 2019, so it has already acquired land in Palín. And motivated by the figure of part-time, a Mexican company has also shown great interest. Other positive aspects are the “anti-paperwork law”, the reforms to the free zone law to reintegrate sectors that were left out since 2016, and the Leasing law. It depends on the sectors Guatemala has a country risk rating higher than the rest of the nations in the region. With a strategic position, such as proximity to the largest market in the world, it is important to continue with the investment attraction strategy. However, the weakness depends on the sector to be attracted, because in the case of light manufacturing, the difficulty it faces is that minimum wages are very high, apart from the lack of capacity to implement differentiated minimum wages or regional In the case of technology, there are opportunities in programming, but people are lacking sufficiently prepared in English, mathematics and other disciplines.

Years ago, Intel decided to settle in Costa Rica and one of the decisive aspects was the much higher educational level. The company announced in December 2020 that it would install the Assembly and Test Operations in that country, and last July indicated that it would triple the expected payroll.

Meanwhile, the Bayer company announced in October 5 that it will invest US $ 200 million in the creation of a pharmaceutical plant, also in that country, for the production of long-acting reversible contraceptives, such as hormonal implants and intrauterine systems. Bayer also operates in Guatemala, and in 2019 invested US $ 41.5 million for the technological modernization and innovation of its drug factory.

Guatemala has many competitive advantages, such as cheaper energy, macroeconomic stability, and a current pro-investment management. However, there are also challenges, such as improving infrastructure, the issue of legal certainty and the preparation of skills in young people, especially in the English language. According to data from the National Competitiveness Program (Pronacom), foreign investment from January to August 2021 reached US $ 851.57 million, in around 60 projects and these are confirmed investments that will generate about 14 thousand jobs in sectors such as manufacturing, food and beverages, telecommunications, energy and agribusiness and others. Of that figure, US $ 240.25 million are from new investments in 25 projects and US $ 611.32 million in reinvestments for 35 projects. Therefore, the Ministry of Economy (Mineco) projects that it will reach US $ 1,200 million in foreign investment this year. The Nearshoring strategy is being strengthened (when a company decides to move its business processes to a nearby country) and other opportunities can be taken advantage of, such as being close to the United States. (*)

For more information contact us at info@central-law.com

(*) Source: Revista Estrategia & Negocios

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