Caribbean & Central America - August 2008 (ISSN 1741-4458)

The government of President Alvaro Colom recently presented congress with the first of its proposals for a crucial tax reform, a thorny subject for any government given traditional resistance from the private sector. Colom's situation has not been helped by either the recent resignation of the head of the tax administration (SAT), Carolina Roca, or the country's spiralling inflation rate.

The latest in the exodus of senior figures to have left the government (see page 3), Roca announced her decision to quit on 5 August after three and a half years as SAT director. Her resignation - which she maintained was due to health reasons - came as a blow to Colom, as she was one of his most experienced officials.

She cited, among her chief achievements, a record tax-take for 2007 - accounting for 12.4% of GDP without raising VAT levels - as well as having cut VAT evasion from 34% in 2003 to 26% in 2007. After more than a week of deliberating, Colom named university professor and ex deputy Finance Minister Rudy Villeda as Roca's replacement.

Uphill struggle

Colom has been struggling to introduce a tax reform bill since April, encountering considerable resistance from the private sector and political opposition. On 11 August finance minister Juan Alberto Fuentes finally presented the first proposal of a watered down version of the government's original bill, which had been devised by a committee of experts and senior officials at the behest of the national peace accords council. Among other changes, the government scrapped a proposal to gradually increase the tax on capital income or dividends from 3% to 10% - a major victory for business.

Fuentes explained that the current bill seeks to increase the tax take by half a percentage point of GDP over a three-year period (from 12.4% of GDP at present to 12.9% in 2011) through increasing collection of indirect taxes such as VAT and vehicle tax. He added that the reform was aimed at modernising the tax system with measures to strengthen the SAT's monitoring facilities in order to reduce tax evasion and to create a civilian watchdog.

The government is due to present further proposals to congress, including a “solidarity tax" (ISO) to replace the extraordinary tax to support peace agreements (Ietaap), a tax on business, which expires at the end of the year. The government hopes that the ISO will raise US$240m annually, slightly more than the US$230m raised by the Ietaap.

• UNE secretary implicated

On 18 August national daily El Periódico reported that Juan José Alfaro Lemus, the secretary general of President Alvaro Colom's party, the Unidad Nacional de la Esperanza (UNE) was accused of fraud during his time as mayor of Escuintla in 2004. According to the findings of a report by the comptroller general, Alfaro Lemus wrongly approved cheques, which amounted to some US$2.2m, more than half of the municipal budget, to four members of the municipal council.