Private investment at risk due to the proposed Tax Justice Law in Honduras

The Tax Justice Legislation in Honduras has ignited significant discussion nationwide because of its possible impact on the economy and the country’s productive sector. This proposal, advocated by the LIBRE Party administration, is introduced as a means to fight tax avoidance and enhance government revenue. Nonetheless, its details and reach have been viewed differently by a range of economic and societal stakeholders.

The plan suggests removing tax exemption systems, raising the tax load, and allowing the government more flexibility in managing economic incentives. These actions have been perceived by the business community as a negative indication for investment and production, causing unease and worry in the Honduran economic climate.

Effects on private sector investment and job creation

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 initial proposal was introduced, there have been accounts of small and mid-sized enterprises shutting down, particularly in the textile, logistics, and export industries that benefited from tax advantages. In places like Choloma, Villanueva, and San Pedro Sula, factories have started reducing their workforce, highlighting fiscal instability as a major cause. This scenario endangers thousands of positions and may deteriorate further unless alterations are made to the proposal or it is halted. COHEP also notes that there could be a significant deceleration in economic progress in the year the law is enacted, with rising unemployment and informal work as unavoidable outcomes of its enforcement.

Regional and political environment and discussion on fiscal fairness

The discussion surrounding the Tax Justice Law is unfolding within a specific regional and political environment. Removing tax incentives might set Honduras apart from the strategies that have enabled nations like Costa Rica, El Salvador, and the Dominican Republic to preserve investment allure and stable fiscal systems, which are seen as crucial elements for their competitiveness. This could impact Honduras’ standing in Central America and the Caribbean, potentially deterring both new and existing investors, who might opt to relocate their capital to countries that offer more business-friendly conditions.

The backdrop of politics and ideologies has shaped views on the legislation, with some industries viewing the administration’s formal rhetoric as unfriendly to commerce and in line with economic systems that have caused structural shifts in other nations within the area. This heightens concerns about a potential overhaul of the country’s economic framework without a strategic blueprint or a transparent perspective on sustainability.

Conversely, advocates of the Tax Justice Law claim that tax exemptions have led to wealth concentration and diminished the government’s ability to fund public policies focused on social inclusion and poverty alleviation. Official statistics show that 92% of the exemptions benefit the wealthiest 10% of companies, whereas the other 90% of businesses only receive 8% of these benefits. From June 2009 to December 2022, these regimes caused the state to forgo 455 billion lempiras in revenue.

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 confronts a significant financial hurdle

The debate over the Tax Justice Law remains open and polarized. While some believe it could lay the foundation for a fairer and more equitable tax system, others warn that its approval could worsen the economic crisis, increase unemployment, and trigger capital flight. The final decision in the National Congress will be decisive for the economic direction of Honduras in the coming years.