A Fiscal Reform… the right alternative for Guatemala?

A Fiscal Reform… the right alternative for Guatemala?

Within recent weeks, Guatemalans have been witnesses of a Fiscal Reform project that is wished to be implemented by the country’s current government. The project proposes to:

  • Raise sack of cement tax by Q5.00
  • Raise income tax to 29%
  • Raise the tax on petroleum based products, gasoline and diesel by Q3.00
  • Raise mining activity royalties by 10%

According to President Jimmy Morales’s declaration on the topic, this is the “right moment to implement raises. If not, investment gaps on the health, education, security, and justice sectors would just get even bigger.” However, it is important to analyze the situation from the point of view from some of the members on AmCham’s Board of Directors.

For Juan Pablo Carrasco (AmCham’s President), “a real tax reform includes issues related to fighting that act of smuggling, improving the management of imports and exports on behalf of customs, broadening the tax base, and the discussion over a fiscal pact that allows Guatemala have more of a competitive investment incentive. All of this on the national stage where we have growth and development within the country. The initiatives under discussion at this moment are specifically about taxes, in which this will not affect any of the economic criteria’s marked on the decline. Therefore, these kind of initiatives couldn’t have come at a more inconvenient time.”

Doctor Nicholas Virzi (AmCham´s Vicepresident) indicated, “Before raising taxes, we should retake the fiscal pact initiative and its focus on the quality of spending. This has been lost over the years at the cost of losing state credibility.”

 Finally, Roberto Castañeda (Board member) mentions that the tax reform “was not consensual.” Castañeda shows concern that the talk is about taxes when there is still so much to do to eradicate corruption in the government. “We as citizens just don’t know. The fate of these funds can be very much wasted just like they have been in the past.”

What can be concluded is the following, although it is evident that investment gaps exist within the education, health, security, and justice sectors; it is essential that the state:

-Show efficient public spending.

-Eradicate corruption.

-Remove social programs.

-Fight for transparency.

-Simplify procedures for passing taxes in the country.

However, I would like to take a moment and highlight the work that has been done. Currently, the government under Jimmy Morales is committed to the fight against corruption that has forsaken Guatemala over the years. There is no doubt that the fight against corruption is a task that must be faced daily.

Yet the reality of it all is that Guatemala has a recurring problem in which governments haven’t been able to properly plan the execution of spending funds correctly. Furthermore, they don’t understand that greater public spending and social programs lead to more poverty.

Leaving Guatemala aside, we are aware that the global economic situation is still not looking positive. Raising taxes will directly affect foreign and domestic investment just as much it will with consumption, trade and employment for the country.

Lastly, I would like to close this by mentioning the “Miracle of Singapore.” Singapore is an Asian country of only 700 Km², that has caused the admiration of many people all over the world. Between 1959 and 1990, Prime Minister Lee Kuan Yew wrote “Miracle,” thanks to certain actions that helped the country grow; such as:

– Having a free market economy with limited government intervention.

– A government that doesn’t spend more than what it earns.

– A country with laws that limit government borrowing.

– Application of a “Zero Tolerance” policy in order to eradicate corruption and insecurity

– A tax system with low corporate taxes of only 17%, an income tax that is one of the lowest in the world, a progressive tax ranging between 0% for income under US$20,000 to 20% for incomes over US$320,000.

Thanks to these strategies, Singapore is one of the most attractive locations for domestic and foreign investment. Proving to have a public sector that is both honest and just as competitive as the private sector within the country.

Therefore, after observing this analysis we must consider whether tax reform today, is the right choice for Guatemala. AmCham on one side will support a reform that strengthens government revenue and once there is transparency in public institutions and spending. A state that is properly grounded, functional, guaranteed legal certainty, transparent, and with clear rules… all factors are necessary for a positive outlook of the country, to create and maintain long-term business.

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