Caribbean & Central America - March 2012 (ISSN 1741-4458)

Tax reform approved: Congress has approved the first part of a comprehensive tax reform which should lift the tax-take/GDP ratio (which reached 11.3%) to above the 12% target stipulated by the 1996 peace accords. A declared priority of Pérez Molina, given its necessity to the success of his government plan, the reform was based on the initiative put forward by Colom’s Unidad Nacional de la Esperanza (UNE) under the previous government, but which the opposition (led by Pérez Molina) had blocked. Pérez Molina has justified his volte-face by arguing that he never opposed the fiscal reform per se but conditioned approval on the institutionalisation of the UNE’s social programmes [RC-11-12]. Hailed by members of the international community, such as the UN’s High Commissioner for Human Rights (OHCHR), the reform will boost tax take by an additional Q$4.5bn (US$580m) over four years. The government identified as key areas in need of state funds, security, rural development and poverty, as well as the fiscal deficit (which reached 2.9% of GDP in 2011, up from an average of 1.7% between 2000-2008), and public debt, which represented 24.9% of GDP. Changes include: a new 5% dividend distribution tax (to substitute the current 3% paid in stamp duty); reducing corporate tax from 31% to 25% by 2014; boosting the tax on business profits under the optional regime to 7% from 5%; doubling the vehicle circulation tax; introducing a new tax on vehicles (Iprima) to replace import tariffs; and outlawing imports of used vehicles more than seven years old. The government also announced that it would present three additional fiscal initiatives, together with reforms to seven laws aimed at strengthening tax transparency by mid March.

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