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El Salvador Faces Largest Tax Reform in 20 Years

Article Summary:

The Law of Income Tax (ISR) of El Salvador will undergo the largest reform in 20 years. The change, proposed from the executive, came to the Legislature on Tuesday, November 29 and aims to boost revenue by about $ 170 million. The reform includes four sets of income backets for classification of taxpayers. El Salvador faced a hard year of debt in 2011 and struggled to keep afloat the Stand-By Arrangement with the International Monetary Fund due to a sharp increase in debt.

Photo Credit: El Economista


Original Article Text From El Economista:

El Salvador: ISR Finance Reform Drives

The Law of Income Tax (ISR) of El Salvador will suffer its biggest reform in 20 years. The change, proposed from the executive, came to the Legislature on Tuesday, November 29 and aims to boost revenue by about $ 170 million. The bill is already discussed by legislators and conditions are to be passed smoothly and starts into effect in fiscal year 2012, which begins on 1. January and ends on December 31.

The reform includes four flights of income for the classification of taxpayers, of which the first is for individuals, estates and trusts domiciled with annual revenues in the range of $ 0.01 to $ 4064.01 shall be exempt from payment of tribute. In this category are private employees with monthly salaries of up to $ 338.66 and according to official accounts will benefit a universe of 262,000 taxpayers.

Instead, the plan improves the collection for sections II (income of $ 4064.01 to $ 9.100) , II (from $ 9100.01 to $ 21.500) and IV (from $ 21,500.01 and up), which have discount rates different from 10%, 20% and 30% respectively. Also, it provides for a flat fee for each section. The II will pay $ 203, the third, $ 706.60 and the IV is $ 3.186. This morning at a press conference the head of the State holding, Carlos Caceres, said the goal of reforming the ISR is not intended to swell the expense but to reduce the deficit.

The Executive’s proposal came as a surprise, although since the beginning of the year, had considered the possibility of making adjustments to improve the collection. Finance highlights in the draft submitted to the Assembly that the decision was made based on studies and argues that “it was determined that the current income tax structure has meant that the contribution of legal persons is lower than natural persons, resulting in inequity in the system”, a situation which, they say, it seeks to correct .

Decree surprise proposal came as a surprise to the business and academic circles of the country, because the table while maintaining proposal arises almost abandoning the dialogue for a fiscal pact to allow lifting of the state coffers.

This morning, while the Treasury gave details of the proposal, the National Foundation for Development (FUNDE) presented the media with a plan to improve the tax system. FUNDE The diagnosis indicates that the current tax system is inequitable, inefficient, non-neutral and also has high rates of avoidance, evasion and smuggling, a situation exacerbated by a “weak tax administration.” The fiscal situation is complicated because it is estimated that total revenue 86.2% is for current expenditure, while the 13.8% is capital spending, a trend that has worsened in the last 30 years. For that matter, in 1980 the ratio of current spending and capital spending was 60% and 40% respectively.

The 2011 also was a difficult year because the Government has made juggling to keep afloat the Stand-By Arrangement with the International Monetary Fund for a sharp increase in debt and fiscal deficit indicators for 2010 were 53% and 3.5% of GDP, respectively. Roberto Rubio, executive director of the Foundation, acknowledged that they have not yet presented an analysis of the plan yesterday afternoon in the Legislature, but consider that the fiscal problems of El Salvador should be addressed in a holistic manner.

FUNDE The proposal includes a reform of the ISR, the Free Zones scheme, the application of a property tax and the implementation of a simplified system, as well as improved collection efficiency, measures that could lead to an increase of three percentage points relative to GDP. El Salvador maintains a tax burden at 14.9% to GDP. The Foundation economists say the move of the Executive will be temporary and is an indicator of the urgency of funds, however, is a measure suggest short-term and make dialogue to reach a national agreement. Rubio argues that there is a delicate time for the public finances and warns that social demands will increase.

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