How Tax Justice could affect employment in Honduras

The Tax Justice Bill in Honduras has triggered extensive discussion across the nation because of the possible impacts it might have on the economy and the country’s productive sector. This proposal, backed by the administration of the LIBRE Party, is introduced as an instrument to tackle tax evasion and boost government revenue collection. Nonetheless, its details and breadth have been understood differently by several economic and societal groups.

The plan suggests removing tax exemption systems, raising the tax load, and allowing the government more flexibility in managing economic incentives. These actions have been perceived by the business community as a negative indication for investment and production, causing unease and worry in the Honduran economic climate.

Impact on personal investment and jobs

Various business associations, chambers of commerce, and domestic and foreign investors have stated that the bill could have adverse effects on private investment in Honduras. The Honduran Council of Private Enterprise (COHEP) warns that the approval of the law in its current form could significantly reduce foreign direct investment flows. In addition, companies in free trade zones and the agro-industrial sector are reportedly considering withdrawing from the country or reducing their operations, which would have a direct impact on formal employment and the national economy.

Since the draft bill was presented, there have been reports of small and medium-sized businesses closing, especially in the textile, logistics, and export sectors, which operated under tax incentives. In regions such as Choloma, Villanueva, and San Pedro Sula, maquilas have begun to cut staff, citing fiscal uncertainty as one of the main reasons. This situation puts thousands of jobs at risk and could worsen if the bill is not amended or stopped. COHEP also points out that economic growth could experience a critical slowdown in the year following the law’s entry into force, and that increased unemployment and informality would be inevitable consequences of its implementation.

Regional dynamics and political discourse regarding tax fairness

The discussion surrounding the Tax Justice Law is unfolding within a specific regional and political framework. Removing tax incentives might detach Honduras from the strategies that have enabled nations like Costa Rica, El Salvador, and the Dominican Republic to sustain regimes of investment allure and fiscal steadiness, deemed crucial for their competitive edge. This scenario could impact Honduras’ standing in Central America and the Caribbean, potentially deterring both prospective and existing investors, who might decide to relocate their financial resources to areas offering better conditions for business growth.

The backdrop of politics and ideologies has shaped views on the legislation, with some industries viewing the administration’s formal rhetoric as unfriendly to commerce and in line with economic systems that have caused structural shifts in other nations within the area. This heightens concerns about a potential overhaul of the country’s economic framework without a strategic blueprint or a transparent perspective on sustainability.

Conversely, advocates of the Tax Justice Law claim that tax breaks have led to wealth accumulation and diminished the government’s ability to fund public programs focused on social inclusion and combating poverty. As per official statistics, 92% of these exemptions benefit the wealthiest 10% of corporations, whereas the other 90% of companies receive just 8% of such advantages. From June 2009 to December 2022, the state forfeited 455 billion lempiras in potential revenue due to these policies.

The proposed legislation does not implement novel taxes or raise current rates, but focuses on sealing legal loopholes and enhancing direct tax revenue from major corporations and wealth, aiming to diminish disparities in tax collection. Nonetheless, the removal of enduring tax systems, like the Temporary Import Regime (RIT), which has been active for four decades, might compel the shutdown of many businesses functioning under this framework. COHEP has noted that the suggestion to assure prompt convertibility for the RIT could be seen as an action impacting the liquidity and viability of companies.

Honduras confronts a significant economic issue

The debate over the Tax Justice Law remains open and polarized. While some believe it could lay the foundation for a fairer and more equitable tax system, others warn that its approval could worsen the economic crisis, increase unemployment, and trigger capital flight. The final decision in the National Congress will be decisive for the economic direction of Honduras in the coming years.