We’re threatened by a tax reform from the catacombs

With the literary flair of a commentator on far less weighty topics, this tax law expert shares informed critical reflections on the process and probable content of the expected tax reform and on the “little reform” that came before it.

Julio Francisco Báez Cortés

Ever since President Ortega took office in 2007, he’s been promising a profound change in the country’s
tax structure. But he ended his first five-year term with virtually nothing. We’re now ten months into his second term and are still waiting, not for a cosmetic tax law like the one he passed during his first term, but something minimally serious. There’s no other case in the rest of Latin America of a government with an enviable legislative majority promising a complete fiscal renovation with no tangible results. I think the best approach to this labyrinthian issue is to address the different questions involved one by one.

The 2009 “little tax reform”

Let’s start with this first question: What’s the immediate background to the imminent tax reform scheduled to go into effect on January 1, 2013? Or to put it another way: why now and not in 2007?

During the final stretch of the Bolaños administration and the first three years of President Ortega’s, basically from late 2006 through 2009, an amorphous package of reforms was slowly sketched out with marked political somnolence. It coexisted with stunted and frustrated samples of mild reforms and with controversial reform bills presented between June and September 2009. On October 15 of that year President Ortega sent the National Assembly a bill whose elegant name had ostentatious sex-appeal: Law of Tax Concertation. Everything seemed to indicate that the time had finally come for Nicaragua’s serious fiscal reform.

The bill was nothing if not huge: it had 319 articles clothed in legal complexity. It contained some positive elements (for example a comprehensive income tax review, spending controls for companies with relations abroad known as transfer prices, and elimination of the fiscal incentives in the Agricultural Stock Market for all but small producers), while others were negative (for example, a timid reduction of tax exonerations for big businesses, the charging of income tax for retired people, and the onerous and unappliable fixed quota system).

The bill triggered a huge debate. As expected, the vested interests railed about “such fiscal aggressiveness.” Financial capital threw its weight around so much that President Ortega finally backed off, apologizing for his technicians having “gone too far.” Some of us maliciously maintained that he had been poised to back off from the outset and that launching such a complex project—with unconcealably alien elements—was just a political ploy to rattle people, so he could then benevolently calm those passions with a far milder bill and apologetically push it through with little opposition. In any event, the Tax Concertation Bill, with which nobody appeared to agree with, fell into a crushing state of catalepsy.

That was followed very quickly by the President pulling from his sleeve what he called the “Little Reform,” which was indeed a diminutive proposal in both content and scope. It began to be applied in 2010 and has been in effect ever since. Among other measures related to tax collection, this cosmetic reform changed the base on which minimum income tax (IR) would be applied from 1% of total assets to 1% of gross income, didn’t touch the regressive 15% value added tax (IVA) at all, and levied a 10% tax on certain definitive withholdings and a single IR payment of 10% on dividends and interest on loans to both residents and non-residents.

We know it’s coming,
but not what it consists of

Three years later, as we approach the end of 2012, the country is now awaiting the tax reform stubbornly insisted on by the International Monetary Fund amid rumor and speculation. The most surprising thing is that while we all know something’s coming, we still don’t have a clue what it is. Expectations have been raised, but no concrete data have been leaked or announced. The executive branch tosses out bits of information sporadically “for each person to interpret as he or she wants,” as a minister of State said, joking on the square. But so far it isn’t transparently laying its official scheme out to the nation.

I don’t mean to insinuate that the previous reform processes were ideal, but in 2009, for example, the so-called Tax Concertation bill was widely debated in general terms one way or another, although what finally came out of it was only the Little Reform. This time what we have is a tax reform from the catacombs. The proposal exists, but the government is working on it underground with its only interlocutor being the upper business echelons within the Superior Council of Private Enterprise (COSEP). No one else is participating in this process! Irritated by this lack of public information, the independent social and economic sectors are exclaiming: “Cards on the table, please!”

Monopolistic control of information

This situation brings us to our second question: Is it appropriate for the powerhouse sectors of a private enterprise umbrella organization such as COSEP to represent the national interest in an exclusive and exclusionary way in process of such scope and significance? It says a lot that COSEP is the government’s only interlocutor in deciding tax changes that concern us all. It says a lot that the business elite is serving the government in a kind of dialogue with mirrors—a two-way monologue if you will—in which both sides, united in common interests, talk, share viewpoints and negotiate in the catacombs of power. In the end those same business leaders will surely get the biggest slice of the pie, then bit by bit give the population a twisted, self-serving version of what went down while the government remains submerged in the customary muteness of its ministers.

I need to underscore the essential part of this critique: it is odious and unacceptable for the information manage¬ment and co-authorship of this tax reform to be the exclusive hunting preserve of an already privileged sector while all the rest of society has been excluded from input into something that intimately concerns it. This asymmetry in the access to information is the enemy of inclusion, with a handful of people managing it as they please while the majority, the main target of its results, knows nothing about it. It’s the perfect antithesis of social cohesion, and is offensive.

The spoils of COSEP

Apropos of the business elite’s corporatist stamp and of the imbalances caused by sequestering information on the tax reform, COSEP president José Adán Aguerri made a wonderfully magnanimous public offer to the rest of civil society, published by the pro-business national newspaper La Prensa on October 6. I’ll quote it verbatim, with no comment: “What we can very happily do for those organizations that are interested is receive them. We could find space on our agenda to receive them and talk to them to let them know our companies’ position. From the business point of view, we have no reason to be debating with that type of organization. Of course these decisions affect all Nicaraguans, but we are the organizations that have to do with, that know about the topic and have the capacity to bring enough information to the table to ensure the most appropriate decisions.”

Let’s stop here a moment to reflect on the arenas COSEP has gained access to with the current government. The most recent example is contained in a speech on September 8 marking the 40th anniversary of COSEP, in which Aguerri—who has now been president for six consecutive years, reelected five times so far—stated that “in the search for the appropriate framework businesses need to work, [COSEP today has representation] in more than 20 public-private entities.” He mentioned several of them: the National Institute of Technology (INATEC), the Airport, the Superintendence of Banks, the Central Bank… and the businesspeople have institutional-administrative functions in all of them.

So far there’s no major problem, but Aguerri went much further. Looking particularly pleased by the most recent of the appointments, he announced cool as a cucumber, neither modestly nor overbearingly: “We’re occupying a post in the Administrative Customs and Tax Court.” It’s scandalous that one of the new members of a public institution legally mandated to impart tax justice is presented in the COSEP president’s official written declaration as a chip put there by his organization and not what we’d all like to hear: as a specialist versed in tax issues, of recognized prestige, independence and moral and ethical integrity. He announced this new court member as if it were an inanimate chair belonging to COSEP. It’s disrespectful of the Court, an offense to the new member, a mockery of whoever named him, which is the Executive, and above all an abuse of the citizenry.

We can’t permit this game of marked cards

Now let me tell you an anecdote dripping with irony that will help round out this idea. When that court was set up, designated by President Ortega in 2007, COSEP sought redress from him “because the candidates the business people named weren’t selected.” They were annoyed because they didn’t get any “chip” in that court to play at democracy with. Now they’re announcing that they finally got it. Daniel Ortega alone signed the appointment. And I find myself wondering what difference there is between that insane way of proceeding and the current little system of the two parties to the pact, the FSLN and the PLC, putting their chips in the Supreme Court so that the justices there now impart justice with a party skew. COSEP is doing the same thing, happily announcing that it has “its” seat in the national institution in charge of tax justice. We must ask ourselves: When will salaried workers, retirees, cooperatives, small and medium businesses, teachers and other interested sectors be represented there? Isn’t that a germ of corruption? Isn’t that precisely the despicable game of marked cards we must eradicate from Nicaragua?

I still need to mention something even more ironic, which is like the epilogue to this story. In 2007 COSEP filed an appeal for legal protection with the Supreme Court against the members named to head up the new tax court. Those founding members have displayed signs of rectitude and institutional seriousness from day one of their labors, earning them unanimous recognition by people of all political persuasions for their professionalism and technical excellence. What does COSEP now think of its shameful suit filed to get them thrown them out? What would its upper echelons say today if someone did the same thing to prevent their business “chip” taking the post?

Much ado…

Now let’s move to the third question: what does the tax reform that lies in wait for us contain and when was it officially decided on? It all started on July 9 of this year, when the government announced it was presenting its proposal. What happened that day? In a plenary meeting of the economic Cabinet chaired by the President’s economic affairs adviser, Bayardo Arce, in which only the customs director general was absent, the government presented its document of intent on the 2012 tax reform to an auditorium with broad social representation: trade unionists, business owners, independent professionals... But, surprise, surprise!: the impeccable four-color bound pamphlet didn’t contain any proposals with goals or specific measures, much less quantifiable actions. It was just a document of objectives, a declaration of principles and aspirations. “It will be consolidated, resolved, ordered, corrected and carried forward; it will not be touched….” What the government was peddling that day as a “proposal” was just a set of fiscal policy topics. It can be found on the Treasury Ministry’s web site.

We have to recognize that the document did offer us something useful: an evaluation of the results of the Little Reform in which the government calculated the tax collection behavior achieved through it since 2010. While this was laid out as a quantitative balance sheet, with no appraisal, in a country like Nicaragua, where public information is treated as a state secret, it’s a big deal that we were provided some 10 pages of statistical information.

This allowed those of us who warned earlier the same year that the reform’s effect on tax collection would be nil or close to it, to see that we nearly on the mark: the official figures showed an increase of 0.8% of the gross domestic product (GDP) in contrast to the 0.7% of the pre-reform estimate. What was presented as a tax collection success thanks to the little reform is in fact the natural consequence of economic growth, and with it, of its correlate in taxation. With or without the little reform, the tax collection tendency would have been virtually the same.

You don’t have to be an oracle…

To conclude this question about the mysterious content of the next reform, I have to call attention to the following: what was written in the pamphlet is one thing and what Arce revealed at the end of that meeting is something else. President Ortega’s economic adviser told us that “this is the in-depth conceptual part, but if you want to see the concrete measures of the next tax reform, take a look at the Tax Concertation bill on the National Assembly’s web site, where you will find the proposal in detail.” Again the specter of the cataleptic project refrigerated in 2009? I recall saying in envío in April 2010 how one government spokesperson joked about that during a high-level meeting: “In any event, better frozen than dead, since if there’s a political stalemate we can always pull it out to calm the nerves of anyone who dares hassle.” That’s exactly what’s happening now, during the second half of 2012, although I have to mention that the project’s “resurrection” brings a fundamental differential element, which I’ll now explain, so pay careful attention.

Given the presidential adviser’s recommendation in the July 9 meeting to view the Tax Concertation bill as the basic body of the next reform, there’s an obliged reading of what has happened for the past three months, a period of intense government-COSEP black Masses whose content we don’t need to be oracles to discover. That bill, which so freaked out the business elite and finance capital in late 2009, was thawed out in July, or perhaps even earlier, and has been negotiated piece by piece, with the government and business leaders making mutual concessions in some cases, maintaining appearances in others and then burying the rest in shards. The fighting cock is back from that pit of October 2009, but with the major difference that this time the government-COSEP partnership is finally going to kill it to make a rich broth. And we know perfectly well who’ll get to lap it up and who’ll be left with the bones.

Five clues to the tax reform’s leanings

Now let’s move to the fourth question: What’s the tendency and the subtext of the tax reform the government insinuated that July 9? Without focusing on any measure in particular, the presidential spokesperson gave clear clues to some of the essential elements, five of which we’ll underscore by way of example in the search for interpretations with evidence.

Only income and not outlay. In the first place, the government told us that the reform isn’t going to touch the budget, that it will only affect taxes, in other words income but not outlay, not government spending. But why not seek improvements in the budgetary sphere, if the quality of public spending currently has many weaknesses and should be reviewed? In any reform that aspires to being compre¬hensive it is fundamental to address both income and expenses, both the rationality of tax collection and the quality of spending it. An authentic fiscal reform is only made by dealing with both aspects.

Municipal taxes won’t be included. In the second place, one point the government deliberately sidestepped in its presentation, then later expressly admitted in the question and answer session, is that the tax reform won’t address municipal government taxation. Why on earth not? A potable tax reform must take the local powers into account, since they are part of an indispensible linkage with the central government. Nonetheless, the economic Cabinet has already announced to us that the municipal governments won’t be included. The tax plans of the country’s 153 municipalities, which have existed for more than two decades and have thus suffered legislative mutilations through five presidential administrations and six municipal administrations, deserve to be modernized to benefit both the taxpayers and the mayor’s offices.

The economic Cabinet solemnly told the municipal governments, “Oh well, maybe another time, but not now.” Meanwhile, with the exception of Managua’s Plan, exports will continue to be charged an archaic municipal income tax, which will continued to be a cascade tax, a technical incoherence that seriously affects the local economy. Nor will municipal exonerations and other special privileges be touched. “It’s more practical and democratic for the mayor’s offices to negotiate with each recipient. The invisible hand will know how to adjust it all,” pontificated someone at the time.

Exonerations won’t be touched. In the third place, Bayardo Arce let fly with this fatal volley: “The [national] exonerations will be respected.” When we heard this we began to get the tremors, because it’s one of the most questionable and sensitive issues of the reform that the government-COSEP are formulating behind closed doors. If the executive branch were to recheck the studies done in 2010, it would see that the exonerations are undermining the State’s financial sustainability by the equivalent of nothing less than 7.8% of the GDP—which amounts to 40% of what was collected in taxes that year! So why not evaluate them? What’s the government waiting for to present the country with an overall balance sheet on exonerations and special treatments, as well as a proposal to correct such national spending?

Quite to the contrary, the document of the official objectives ironically “clarifies” something that’s actually pathetic: “Only those exonerations without a legal basis will be touched.” But that doesn’t even need to be said, because whatever is outside the law is inadmissible coming out of the gate! When the document “commits itself” to reviewing exonerations, it’s just words, which conclude with the following brutal sentence: “In the review [of the exonerations] new sectors could leave or enter.” So we are to understand that not only will the existing exonerations be treated with kid gloves, new ones could be born and multiply.

The International Monetary Fund, the World Bank and the Inter-American Development Bank, world renowned fiscal experts, governments and Nicaraguan academics have unanimously argued for over a decade that Nicaragua’s tax system is structurally cracked and eroded due to the irresponsible granting of exonerations and that you can’t have a tax reform even minimally worthy of the name that doesn’t involve cutting or even totally dismantling them. Why, then, does the government claim the opposite, arguing extravagantly that “exonerations are indispensible incentives”? Why not incorporate into the 2013 budget law the annual cost that society will pay for these “incentives” in the name of transparency, even if only for reference purposes? Given its relevance, we will return to this issue later on from other angles.

It won’t collect more. In the fourth place, it was announced that nothing extra will be collected, stating that the government prefers simplicity and modernization instead of more tax collection, as if they were mutually exclusionary. But how is a tax reform not about collection? Why claim that the reform will try to fill the huge holes in our “Swiss cheese” fiscal system, perforated by so many exonerations, at the same time assuring that there’s no plan to collect more? Increased collection is inherent to all tax reforms, so the debate has to center on how and where to achieve it, because you can do it violently, haphazardly and inequitably , or you can do it rationally, getting rid of privileges and working for distributive equity.

It will update income tax. Finally, the government announced that it will update the income tax rate floor for salaried workers, as if as if it took great fiscal prowess and weren’t a pending government obligation for the past six years. It explained, as if it were a big deal, that those with a gross annual salary of 100,000 córdobas will pay no income tax. At the beginning of the Alemán government (1997) it was established that only workers whose annual gross salary exceeded 50,000 córdobas (at that time roughly US$5,200) would pay income tax. That remained until the 2010 Little Reform, when it was raised to 75,000 córdobas (only $3,600 at the exchange rate of that period). Now the government says the floor will rise to 100,000 córdobas (roughly US$4,200 at today’s exchange rate), as if this were somehow a substantial tax benefit for the population.

The celebrated Noam Chomsky comes to mind. In one of his “10 strategies of manipulation” he mentioned “the distraction plot,” which fits like a glove here: while updating the income tax rate will mean an annual state expense of 300 million córdobas—which the Treasury Ministry and COSEP incessantly cry over in the media—both the government and COSEP fail to mention the fiscal cost of their current proposal to gradually reduce the business income tax rate from 30% to 25%, which is far greater than that 300 million.

Tax exempt mega-projects will cost
Nicaragua a mind-boggling sum

Question number five might be: Given the proximity of a tax reform, which we hope will be a responsible one, are new exonerations and special privileges suspended until the reform is made official, or have such cases actually proliferated? It is contradictory that while pretending to put our fiscal house in order, the executive and legislative branches continue inviting the exoneration-benefitting bulls to make free in our fiscal china shop. Regrettably, we could fairly speak of a growing tax counter-reform form this year. A dual morality can clearly be glimpsed in those who state one thing while actually doing the opposite.

I’ll back this assertion by looking at three recent megaprojects: the Tumarín hydroelectric energy plant, El Supremo Sueño de Bolívar (Bolivar’s Supreme Dream) refinery and the Grand Inter-oceanic Canal. The media talk about these colossal investments every day, but in our view the articles lack the investigative teeth to get to the bottom of how much is at stake in these gigantic investments.

Tumarín. Let’s start with Tumarín. In 2009, when this investment was presented as a dam on the Río Grande de Matagalpa covering 55 square kilometers, to be executed in four years to generate 870 gigawatts, we were told it would cost US$800 million. And despite the fact that there’s already a special law for renewable energy projects—Law 532, published in La Gaceta no. 102 of May 27, 2005—that broadly exonerates projects of this type from IVA, municipal taxes, import duties and even IR for seven years, that didn’t seem sufficient to Tumarín so the National Assembly passed a new law exclusively for them (Law 695, published in La Gaceta no. 140 of July 28, 2009). That law increased the IR exoneration period to 15 years, as well as granting other tax privileges.

Then in the middle of this year, given the evident delay in getting the works started, the Brazilian investors started saying that the cost has shot up to US$1.1 billion, so they asked for a third law to extend the periods and thus “erase” their unjustified delay, at the same time hoping to increase the special treatments. The bill for this new law is about to be approved by the National Assembly right now, following a favorable finding signed unanimously with “reasoned votes” by opposition legislators, which is shameful because the finding is barely 10 words, written by hand.

The Brazilian investors’ demand triggered a public outcry by other concerned energy sector entrepreneurs who cautioned that the investment is becoming increasingly costly and would therefore increase the price of the energy Tumarín would sell to the distributors… and which of course would end up being passed on to all consumers. Other independent technical voices had already pointed this out some years earlier with timely concern.

As to the arguments the business executing the project employs to “demonstrate” that it hasn’t yet tired of asking for financial gifts from the Nicaraguan public’s coffers, prepare to hear something that has no name. Interviewed on Channel 8, Marcelo Conde, a representative of the Brazilian company, gave journalist Erving Vega the following reasons behind the incompliance with the deadlines and project cost: “It has happened because that region is really affected by hurricanes and rain and there’s also a geological fault there. We have had similar projects in Brazil, but in Nicaragua there are double or triple the adverse situations. We had prepared ourselves for a more conservative scenario [have they only realized that now, three years after the special law dedicated to them was approved?]. So we decided to go with a higher quality, more reinforced construction. It’s not that the other one wasn’t. It was a very good construction, but it was a dam that had clay and loose materials [shouldn’t these gentlemen be sued for such a confession of technical irresponsibility?]. Today we’re going for a solution that is 100% concrete and we’re sure that it is a project that will last more than a hundred years.” What are we to make of such massive effrontery?

How much would be the tax loss of the Tumarín project be? Preliminary estimates lead us to conclude that the fiscal cost of Tumarín—which includes third-party beneficiaries—will not be less than what Nicaragua would collect with ten tax reforms. It’s tragic that while the government is announcing imminent tax changes to the public it’s simultaneously ripping into the public treasury with such a dangerous tax counter-reform.

Bolivar’s Supreme Dream. The same thing will happen with this megaproject, a gigantic industrial complex that includes an oil refinery, a transoceanic oil pipeline and a petrochemical complex. We’ve been told that the first stage alone will cost US$3.638 billion. This appears in Law 810, published in La Gaceta no. 185 of September 28, 2012, the very month in which the government and COSEP, hand in hand, put the final touches to their “modern and competi¬tive” tax reform. That law, of unlimited fiscal benefit for this megaproject, is very similar to the one favoring Tumarín. In fact it’s a literal copy on some points.

The Grand Interoceanic Canal of Nicaragua. Designed as a mixed venture, it is the third pharaonic attempt being sold to us as a guarantee that development will come to our country. The project was made official in Law 800, published in La Gaceta no. 128 of July 9, 2012. According to article 3 of that law, the Grand Canal Authority will be exempt from any kind of tax, leaving many hazy areas about the feasibility of new and successive special treatments for owners and third parties. Given the law’s ambiguity on this issue, this could leave all aspects related to taxes in the power of that authority, which would be unconstitutional as article 114 of the Constitution establishes that only the National Assembly can approve, reform or eliminate taxes.

I’ll bet my head that this canal is never built. We all know it will never be a reality, but we also know what it’s going to cost us, because first hundreds of millions of dollars will be spent on feasibility studies and contracting experts and international consultants, all of which will be legally exonerated, leaving Nicaragua to lose mind-boggling sums. It’s an urgent challenge for universities, journalists, researchers, unions and all of us inform ourselves about the real financial, environmental and fiscal costs of these mega-projects.

The tax reform is being
falsely sold as a panacea

Now we come to a sixth question: Why aren’t we extracting some conclusive ideas in the form of proposals that could contribute to the process of imminent tax changes in the country? I’ve always said that playing the critic is worthless if it isn’t matched with proposals for action. Let’s review some statements we’ve already heard.

It’s being said that the 2012 tax reform will promote competitiveness, employment, productivity… and even peace, love and heaven! It’s being forgotten that no tax reform—or fiscal system in general—ensures an economy’s success. Taxation and tax reform are something else. Tax reform has to be very careful with everything that is moving in the economy; it can’t meddle or obstruct; it mustn’t discourage investment. But to present a tax reform as the “key to development” is over the top, a fallacy, pure ideology to confuse us.

Permit me to quote the great taxation guru Vito Tanzi: “My thinking is that the fiscal system can almost never drive or push the economy, although it should indeed facilitate its development, without putting brakes on it or obstacles in its way.” Said simply, like someone who translates Aramaic into Spanish, this means “he who doesn’t get in the way, does a lot.” Taxation, and in particular tax reform, would do a lot by not getting in the way. Selling it with these ambitious but false objectives is simply an illusionist’s technique by the government and COSEP. They do it that way because the more the reform is sold with such a grandiloquent tone and the idea is bought that the tax reform is mother and cause of competitiveness, labor stability, investment attraction and job generation , the more untouchable the tax privileges for vested interests disguised as “guarantee of progress and happiness” become.

The most scandalous case
of unjustified tax exemption

The next tax reform must take measures regarding a phenomenon that affects productivity by continuing to promote exonerations that are nothing other than technically unjustifiable subsidies. Let’s look at the most scandalous case. Operations are conducted for a conservative figure of more than US$20 billion a year under the cover of a scheme called the Agricultural Stock Exchange, which doesn’t always take place in a physical location, because it operates as a legal fiction anywhere. Those who buy and sell agricultural products “there” don’t pay the 30% income tax at the end of the period; they only pay either 1.5% or 2% of the value of the transaction, depending on whether it was for agricultural or livestock products. That’s it; nothing more. Official declarations from the executives of this business expose a more than revealing piece of information: “Between 50% and 55% of the national agricultural production transacted in the country goes through the Agricultural Stock Exchange.”

I’ve said many times, and today’s no exception, that this special privilege doesn’t exist in any other Latin American country. The Tax Concertation bill, that ghost stuck in the freezer, established elimination of the Agricultural Stock Exchange, but the sleight of hand at the end of 2009 that I mentioned earlier aborted everything. How will the executive branch explain on the one hand that the Tax Concertation bill is the reform as such, while on the other ignoring the technical criteria proposed for abolishing the Agricultural Stock Exchange?

We need to see an evaluation
of unjustified exonerations

Another proposal that has been a common theme in this critique is the government’s obligation to present the nation with a comprehensive balance sheet of the exonerations. But it never does it. To calm things down, the government announced that it will only get rid of “unjustified exonera¬tions.” But which ones are those? The government isn’t saying. That’s another important void. Is there any government evaluation that indicates why the stimulus to grant exonerations to certain economic activities didn’t work? And if it’s shown that some are negative, must the government continue granting them? This is another incongruence: no matter whether the government wants to deal with some or all exonerations, just tickle them or reduce or get rid of them, it first has to evaluate them, something that’s never been done in Nicaragua. Or if it has, the public has never seen the results.

A special privilege—which is what an exoneration subsidy really is, let’s remember—makes no sense when an investment would be made in any event, with or without it. It’s predictable that there will be a pretense of eliminating them in the final government-COSEP proposal by gradually lowering them over time with end points put off again and again and again and thus never come. We’ve already seen with the exonerations for the agricultural sector, with the National Assembly repeatedly putting them off annually or semi¬annually…

Why subsidize other countries?

This brings us to another proposal that entails an explanation: the government sometimes grants exonerations to those who pay their taxes in their country of origin. But we’d be idiots to pardon the paying of taxes to someone who will unfailingly pay them elsewhere. And that’s because there’s a world income system, which doesn’t function in Nicaragua, but does in the United States, for example. The system operates like this: wherever the business subject to the world tax system is physically operating, at the end of the period it must calculate all its income and expenses and file its tax declaration in the registered country of its corporate headquarters, obviously paying its taxes there.

Many free trade zones are made up of businesses fiscally subject to the world income system. They pay no tax in Nicaragua, but do pay it in the country in which they are fiscally accredited. Is it logical to exonerate companies covered by the world income system from paying taxes in Nicaragua? Must we continue being idiots, subsidizing the tax system where the companies pay the taxes that are pardoned here? Because, let’s be clear, what’s being subsidized isn’t the business but the tax system in its home country. The government justifies these outrages by claiming they attract more investment and make Nicaragua more competitive within Central America. Is that ignorance or complacency? That point and many more have been explained with impeccable clarity by Professor José Luis Medal.

Nicaragua frequently exonerates “flabby” activities, as one of my students calls them. They are those that have no or very few productive linkages that would justify the privilege granted to them. An example of a flabby activity is enclave tourism, such as Punta Cana in the Dominican Republic and the various copies that already exist or are popping up in our country. They are major luxury tourism complexes, with enormous fiscal privileges, but barely any job creation for a captive population and characteristics that make them more costly for the country to subsidize through exonerations than any advantages they provide. Wouldn’t it make more sense for our fiscal policy to support productive chains that multiply economic activity in equal conditions to those that lack such characteristics?

Speaking of proposals, regrettably we couldn’t echo or constructively back—although we would have been delighted to do so of course—the two pages on COSEP’s web site containing a 31-paragraph pronouncement it titled “COSEP’s considerations, comments, proposals and actions to improve the tax concertation proposal.” If one compares this with the government proposal presented by Bayardo Arce on July 9, it is evident that these points are a business sector replica of the government’s document, without adding a single original thing. That makes the title of the COSEP document honest in its simplicity, as it isn’t a position paper or a contribution to the 2012 tax reform, but rather simply support for the document of its strategic ally, the government.

How do we wake people up to
the seriousness of the problem?

A seventh question would seem to require the following: After this display of ideas, concerns and implicit proposals, might we attempt some conclusions that would help separate essence from appearances? Although this tax reform represents a latent danger, the majority of the population doesn’t sense it; they don’t perceive how much it’s going to affect us and thus those of us who are working on this frequently taste the bitterness of powerlessness. Although our economy is flooded with exonerations—which aren’t going to be touched according to the government’s unfortunate mandate—it’s difficult to create a clear national awareness of the money that’s going down the tube and thus won’t be received by society.

It’s hard to comprehend, for example, that if we have a nominal 15% IVA and a nominal 30% business IR, the effective rates are only 7% and 2%, respectively! And it’s all because of exonerations, evasions and contraband, which combined produce a monumental loss equivalent to 14-15% of the annual GDP, in other words of all the wealth in goods and services produced by Nicaragua over the course of a year.

It‘s dramatic to verify that more than half the potential IR and IVA aren’t collected in Nicaragua for these same reasons. But regrettably such figures don’t actively awaken the collective sensibility, even though the population’s lack of this sensibility isn’t its fault. So, here’s the challenge: to create awareness, to promote and spread these ideas, never tiring of getting indignant together against the status quo, always with attitudes that are informed and thought-through, so we can learn and help others learn what lays beneath these optical illusions clouding our eyes and the horizon.

It’s also about them selling us the messianic idea that the tax reform will bring justice. They want us to believe that justice will be done against the tax evaders concentrated in the Oriental Market. They tell us the den of all tax evaders in the country is located there and nowhere else. Let’s not swallow that pill, because it’s poisonous. Economist Adolfo Acevedo has amply shown that the evasion in Managua’s Oriental Market—certainly the largest of its type in Central America—is relatively irrelevant with respect to overall national tax evasion. I don’t mean to applaud it or fail to pay critical attention to those who are evading taxes in the Oriental or anywhere else, but nor should we make a mountain out of a molehill, because if there are big merchants in the Oriental who are exploiting the fixed quota system to commit a crime, the full weight of the law should fall on them. But the crime of tax evasion isn’t resolved with entelechies of a tax reform; it’s dealt with by simply applying the law, which for some time now has been called the Penal Code. Using a tax reform as a red herring, supposedly seeking the solution to that problem with it, is to act in complicity with the much bigger tax dodgers we’ve been talking about here.

Conclusion: a tax reform isn’t a catacomb dialogue between the official elite and the business elite. Nor is it a pure and simple legislative process or just any old law that is formally learned about only once it gets to the National Assembly. A tax reform is a socioeconomic process of national agreements.

To wrap up, I want to leave you a few conundrums as homework: How can we give the government the benefit of the doubt with respect to the quality of the 2012 tax reform we have been promised, while the words of President Daniel Ortega at the commemoration of the 33rd anniversary of the revolution concerning how he conceives the fiscal privileges that are lacerating equity still ring in our years? On that occasion, he said: “Exonerations are nothing more than an incentive, protectionist measures that the developed countries have used and continue using but have prohibited us from using.”

Public plaza rhetoric or strategic alliance with big capital? Will it be possible to suss out the logic of the proposal the government-COSEP binomial is formulating clande¬stinely before it sees the light of day? Will they extract inoffensive elements—cosmetic ones at the end of the day—from the old Tax Concertation Bill to form the essence of the reform? Will the International Monetary Fund, indisputably omnipresent in the country, let its beloved student—the government—continue playing its tax pranks? How far will it allow it to go? Could it be that the government and the IMF want to paraphrase Karl Kraus to tell us: “When the sun of fiscal responsibility is low, even little reforms will cast long shadows”…?

So what should we do? We are going through a stage of great social ebb in Nicaragua. And in response to that, the fundamental task left to us is to disseminate thinking and knowledge, to train, educate and educate ourselves in the participation of the people… We mustn’t tire of opening our own and other peoples’ minds to new ideas and calling people together for discussion. Each of us can do it. These are seeds that are not going to germinate tomorrow, but some day the light will reach them and they will flower.

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