By María Inés Valle
Trade Center Coordinator in AmCham Guatemala
Recently, Guatemala has witnessed reforms under Decree 19-2016, with respect to the “Free Zone Law” (Decree 65-89). This issue has derived as a series of comments and the analysis, which have shown the impact such proposal has caused on different sectors of the economy of the country.
It is important to know what a Free Zone is, in order to understand what the new proposal is related to (within Decree 19-2016) approved by the Congress of the Republic of Guatemala; therefore, we must analyze the Nicaraguan case, a country that has dully worked under a law that has improved the economy. Finally, the direct impact that leads to count with a proper law of Free Zones, to attract investment to the country.
What is a Free Zone? According to the Ministry of Economy in Guatemala—MINECO, a Free Zone is “the area of physical terrain, bounded, planned and designed subject to a Special Customs Regime, where individual persons or legal persons are involved in manufacturing or trading of goods for export or re-export, as well as service delivery, related with international trade.”
Guatemala: Decree 19-2016: In March of the current year, at the time when the Emerging Law for Job Retention came into force, some modifications in that law where taken in account within the Free Zone Law of the country.
Under this decree (with retroactive effects), twenty-five where added (with no reasonable or solid foundation) to the list of activities that cannot be traded nor manufactured in a Free Zone (FZ), which are: cosmetics, footwear, plastic, pharmaceutical products, machinery, jewelry, furniture, paintings, processed food, amongst others.
It is estimated that some 1,070 maquilas and companies within Free Zones are not going to have access to the exemption of the Income Tax. According to data from the Free Zone Association in Guatemala, some 1,500 direct jobs will be lost. Furthermore, the tax collection will be affected from the FZ, with a Q600 million impact.
We must take in account that 70% of the companies located at the FZ come from Foreign Direct Investment (FDI). According to official data, from October 2015 to August 2016, fifteen companies have closed operations in such zones. After the Emerging Law for Job Retention came in force, eight of these fifteen companies left the country.
At the present time, Guatemala does not count with a FZ ruling yet, creating uncertainty and loss of investment that goes to neighbor countries which already have laws that benefit such companies.
Nicaragua…a good example for Guatemala: Nicaragua is a Central American county with the largest number of FZs with 49.
What has been the key issue for this country to have such a high number of FZ’s, and the ability to preserve them under a favorable and attractive status? The answers are as follows:
- Fiscal incentives.
- An excellent investment climate.
- A solid legal framework.
- Economic growth.
- Legal certainty.
- A specialized and productive labor force.
Ruling 917 (Regime Law of Free Zones) has improved the economic stability, attractiveness and growth of FZs in the country.
As a result of a positive law, FZs have created more than 110 thousand jobs until now.
Foreign Direct Investment (FDI) and the Free Zones Law: Within the range of incentives of a country that may grant to the foreign direct investment (FDI), it is important to count with an attractive law of free zones.
In Guatemala, the FDI, has been affected, due to situations that have recently happened. For example, in 2014, the FDI was placed in US$1 thousand 388 million, where in the year 2015 it decreased, being US$1 thousand 288 million.
Therefore, considering that our country could be attractive for the FDI, it should count with benefits such as a FZ Law that will serve entrepreneurs. In order to have an attractive law, it is necessary to:
- Count with political stability.
- Specialized labor force.
- Transference of technology.
- Clear legislation which benefit the sector.
- Tax exemptions and tangible fiscal incentives.
- A stable currency.
Taking in account the criteria that have been mentioned, this law will surely work in Guatemala by attracting more investors and creating major and better job opportunities; which just may result in an economic growth and a better quality of life for the citizens.