News

According to independent experts in economy, the cost of exemptions and exonerations on 2017 was USD 1,100 million, which equal 7% of the GDP. In repeated occasions, the International Monetary Fund has urged the Nicaraguan Government to carry out a revision to the exonerations and exemptions in order to reduce the Revenue deficit. Said revision would intend to increase tax efficiency and fiscal consolidation by avoiding abuse of the revenue expenditures. Recently, the possibility of a tax amendment that affects exonerations and exemptions seems more likely, since representatives of the private company and the Government has been holding conversations on the matter.

On principle, the purpose of establishing exonerations and exemptions—beyond the constitutional ones—is to promote investments in certain economic sectors, increase the productivity and exports, invigorate the economy through the creation of employment and the decrease of poverty rates, as well as trying to, as provided by the Constitution, reach a better distribution of wealth and revenue. However, considering that an important share of those benefits exceeds a decade since they were established, it is necessary to evaluate if the conditions for which they were implemented have changed and if the purpose by which they were authorized has been fulfilled. On that regard, the Tax Agreement Law (TAL) established the obligation for the Ministry of Finance and Treasury to publish information on granted exonerations and exemptions, but there are no current official figures on the impact of such incentives on revenue expenditures.

As a starting point, it is necessary to comply with the administrative systems for the control of exonerations and exemptions applied by the corresponding governing institutions for the sectorial policy in coordination with the Ministry of Finance and Treasury, in accordance with the conditions for exonerations and exemptions established in the Tax Agreement Law. Besides, an amendment calls for the creation of an exonerations and exemptions policy that is comprehensive and coherent with the sectorial development objectives of the country and a process of planning, monitoring and control of exonerations, with well-defined applications instruments and monitoring procedures.

In order for exonerations and exemptions to reach the intended purposes of maximizing the impact on economic development, it is essential to channel those benefits towards efficient productive sectors, which generate added value and have a great capacity of creating employment and increasing the exports. Otherwise, their effect will be creating artificially profitable sectors without industrializing the productive sector nor creating competition based on productivity.

For an amendment to the exonerations intended to improve the fairness of the tax system in the context of long-term tax sustainability, it is indispensable to comply with the provision of article 209 TAL and to work the proposal through a process of agreement pondering the impact of amendments to the different sectors of the population.

Michelle Avilés Murillo
Associate
García & Bodán
Nicaragua