Economic impact in Honduras: debate on tax justice

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 proposal includes the elimination of tax exemption regimes, an increase in the tax burden, and greater discretion for the state in the administration of economic incentives. These measures have been seen by the business sector as an unfavorable sign for investment and production, which has generated uncertainty and concern in the Honduran economic environment.

Effects on private investments and job opportunities

Different business organizations, trade associations, and investors from both local and international spheres have expressed concerns that the proposed legislation might negatively impact private investment in Honduras. The Honduran Council of Private Enterprise (COHEP) cautions that passing the law as it is could substantially decrease the inflow of foreign direct investment. Furthermore, firms within the free trade areas and the agro-industrial field are allegedly planning to either exit the country or scale back their activities, potentially affecting formal job opportunities and the nation’s 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 debate on the Tax Justice Law is also taking place in a particular regional and political context. The elimination of tax incentives could distance Honduras from the policies that have allowed countries such as Costa Rica, El Salvador, and the Dominican Republic to maintain investment attraction and fiscal stability regimes, considered key factors for their competitiveness. This situation could affect Honduras’ position in Central America and the Caribbean, discouraging both new and established investors, who could choose to move their capital to countries with more favorable conditions for business development.

The political and ideological environment has shaped how the bill is viewed, with some in the business community seeing the government’s official statements as antagonistic towards business and supportive of economic frameworks that have spurred significant changes in other nations in the area. This heightens worries about a potential overhaul of the country’s economic system without a systematic strategy or well-defined sustainability outlook.

On the other hand, supporters of the Tax Justice Law argue that tax exemptions have contributed to the concentration of wealth and reduced the state’s capacity to finance public policies aimed at social inclusion and the fight against poverty. According to official data, 92% of exemptions are concentrated in the richest 10% of companies, while the remaining 90% of companies only have access to 8% of these benefits. Between June 2009 and December 2022, the state lost 455 billion lempiras in revenue due to these regimes.

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 economic issue

The discussion on the Tax Justice Law continues to be contentious and split. Some argue it might build a base for a more just and balanced taxation structure, while others caution that passing it could exacerbate the financial downturn, raise joblessness, and initiate an exodus of capital. The ultimate decision in the National Congress will be crucial for the financial trajectory of Honduras in the upcoming years.