Abusive tax paquetazo from Honduran Congress

Honduras Congress
Image: La Prensa

Nacionalistas enacted a huge blow to the poor and middle class of Honduras in the middle of the night last night (Friday), railroading through a tax paquetazo that will cause prices of virtually everything in Honduras to rise. The Honduran twitterati was afire last night as many watched the 11-hour long process on the congressional television channel. Outrage is the best way to describe the reaction.

Since Nacionalistas have a sufficient majority in Congress (until Jan 25, 2014) to pass any law, they were able to force dispensing of the required three congressional sessions for discussion, enabling them to railroad the new law through in one night – a Friday night before Christmas holidays no less. This was done despite the opposition congressmen complaining that they hadn't even received the law before the session or had time to read it nor had citizens had any advance knowledge of the law or opportunity to provide input. While the party in power said that this was such an important law that it needed to be passed immediately, the opposition responded that it was such an important law that it needed more time for study and analysis. Article after article was passed with the right side of the room (Nacionalistas) voting 100% in favor and the smaller left side (the other four parties) voting 100% against. The session ended at 1:00 a.m.

Let's put this in order!

The law is called the "Ley de Ordenamiento de las Finanzas Públicas, Control de las Exoneraciones y Medidas Antievasión" (translated something like Law of Public Financial Management, Control of Exonerations, and Anti-Evasion Measures). Sounds good, doesn't it? President-elect Juan Orlando Hernández has been promising a reduction and consolidation in the "obese" government and initially I thought this law might have something to do with that. We definitely need some new measures in this bloated, inefficient government on the verge of bankruptcy and incapable of providing the most basic services to its people. The government can't even pay its bloated salaries much less have any money left over for the services those employees are paid to provide. Tax evasion by the rich and powerful is the rule, not the exception. Unfortunately, the name of the law disguises its real purpose, increased taxes.



Just like the name of the law, the document was written in such a tricky manner that it cannot be understood without reading the 50 or so laws which it amends. For example, in many cases, you wouldn't know whether this new law was increasing or decreasing taxes by the way it is written, though we all instinctively know that it is increasing taxes. By how much are the numerous taxes being increased? You won't have any idea from reading this law. Even congressmen didn't know in many cases. The increase in sales tax was disguised as a "3% special contribution" in one short sentence. In one case, a paragraph full of business types was listed without specifically stating whether they were being subject to a tax or exempt from a tax. That may be clarified in the final law.

This law does much more to hurt the average Honduran than it does to manage tax evasion or cut government expenditures. The government won't go after the powerful so they pick the pockets of the middle class who are much easier targets. Honduras already has tax evasion laws; the problem is that they are rarely enforced, except against small businesses. The Minister of Finance who was in the session to answer questions, said that in addition to the new "contributions", the law will represent a reduction in public expenditures of approximately L.16 billion (US $780 million). That figure seems unbelievable to most, with the current annual deficit at L.24 billion and projected to be L.36 billion in 2014 if the changes aren't made. Maybe he was referring to an impact over the next 10 years. If not, you have to wonder why some of these changes weren't made sometime during the past four years.

Here some of the highlights of the new taxes:

Sales tax

Called a "Special Contribution", sales tax will be increased from 12% to 15%. Supposedly, the estimated extra L.4.5 billion (~US $220 million) generated by the additional 3% will be used for social programs. However, like most special funds (Petrocaribe or the Security Tax, for example), it's doubtful that citizens will ever get a true and complete accounting of where the money was spent and the definition of "social programs" is often not what most would think.

Food

Additionally, numerous previously tax-exempt food items in la canasta basica (the basic food basket items) will now be subject to a 15% tax. Tax-free basic food items were reduced from around 150 items to 35, with 10 of those being various forms of beans, rice, and tortillas. (I have to point out that corn tortillas are tax free but flour tortillas are taxed.) Not too long ago the exemption for beans and rice purchased pre-packaged was removed, so I presume this exemption still only applies to beans and rice purchased at the markets. These food exemptions were taken away despite the fact that a proposed increased sales tax on alcohol from the current 15% to 18% was removed! Oh no, we don't want to discourage drinking, do we? But eating carrots, green beans, or ground meat? Those are taxable luxuries according to congress. I know that a price increase of 15% will affect the purchasing and eating habits of the poor. Maybe soon we'll be seeing contraband carrots and broccoli being sold on dark street corners.

Beef or pork ribs, stew meat, whole chicken, and whole fish are the only meat items that remain exempt from sales tax. In the vegetable category, the only non-starch veggies that remain tax-free are tomatoes, onions, cabbage, and white corn (used mostly for tortillas and tamales). In this land of abundant, healthy tropical fruits, the only tax-free fruits will now be oranges and bananas. On the other hand, white bread, sugar, salt, and hydrogenated vegetable fats will remain tax free. So much for promoting healthy eating. Honduras has high rates of diabetes, obesity, and high blood pressure, as well as mothers who will feed their children only rice because it costs one lempira (~US 5 cents) per pound less than more vitamin-rich red beans. I really wish the proponents of this law had gotten some input from the medical community.

Update: The list of tax-free food items was increased to 72 items in the published law.

Fuel

The tax on gasoline will be increased by about 5 lempiras per gallon making the total tax per gallon US$1.40 for super and US$1.24 for regular. Other types of fuel will be taxed as follows: diesel US$0.86, bunker US$0.42, kerosene US$0.15, LPG US$0.15/per 25 lbs., and jet fuel US$0.03. We currently pay around US$4.50 per gallon of gas.

Electricity

The electric subsidy was reduced from customers who use 150kw/month or less to those who use 75kw/month or less. A cash subsidy of L.120 (~US $6) per month will be paid by banks to the La ENEE client in person. An amazing 600,000 or so (somewhere around half!) of the government-run electric monopoly customers enjoyed free electricity in the past, including many foreigners and owners of palatial vacation homes used only part of the year. A couple of interesting aspects of this clause apparently did not occur to the law makers. One is that new consumers eligible for the subsidy have to be of low income. How do you prove that? Is there somewhere you can get a certificate of non-employment or poorness? The other is that the very poor often do not live anywhere near a bank or have money for transportation to get to a bank to pick up their subsidy. If they do have a job, it probably won't be convenient to take off half a day's work every month to go stand in line in a bank to collect their L.120. They might even lose half a day's pay to collect the equivalent of half a day's pay. You might think that a direct subsidy posted through La ENEE's computer billing system would be the simplest and most efficient answer but that would mean that you don't know Honduras and the infinite ways any system can be corrupted.

Not included in this law, but also announced yesterday, is the revision of the calculation of electricity charges which will result in an estimated 5-9% increase for users beginning in January.

Communications

Cell phone and cable TV usage are now subject to a 15% tax. Originally internet usage was also included but in one of the few changes proposed by congressmen, internet service was ultimately exempted from this tax in the interest of education and advancement of the country. Land line telephone services provided by the government monopoly were also excluded from this tax. According to my receipts, cable TV and internet were previously tax-free. I don't know about cell phone charges.

Property tax

A new tax of 10% will be charged to property owners based on the amount of increase in the valuation of their property or capital gain. This will be charged each time there is a registration operation in the Institute of Property.

Income Tax

In addition to regular income tax, all businesses except importation and tourism companies will pay an "Aportación Solidaria" (tax) of 5% of their net taxable income over L.1,000,000 (~US $50,000) beginning in 2014. If, however, the importation or tourism business is subject to income tax, they will pay this tax also.

Tourism businesses must now pay income tax in accordance with the expiration of their benefits granted by the Tourism Incentive Law. Tourism related companies (which was broadly defined and included all fast-food restaurants) were granted 10 years relief from income tax as an incentive to open new businesses in Honduras. However, this period was extended by congress over the years so that the US fast food franchises continued to not pay taxes, a real sore point among many Hondurans.

Foreign transportation companies (air, land, or sea) operating in Honduras may pay a new tax of 10% of their gross Honduran income but it is impossible to understand exactly what this article is saying without finding and reading the original law which it amends. (I'll bet congress didn't do this either!)

Previously granted income tax exonerations established by decrees and special laws are now revoked. Several specific exceptions are made for exonerations granted by the Constitution, including those to all teachers, unions, political parties, retirees and others, as well as those granted by the international treaties and the Free Zone Law (Zolitur). Others, such as call center operations, the diplomatic community, and government organizations and institutions, also will continue to be exempt from paying income tax. Businesses may also be excluded from income tax on the profit from government contracts

Businesses which have gross income above L.3 million (roughly US$150,000) will pay a tax of 1.5% of gross income when the calculated tax on net income is less than 1.5% of gross income. In other words, companies can suffer losses and still be required to pay income tax. In a last minute change, it was decided that bread producers would be exempt from this tax because bread is a staple of life and such companies typically have a very large gross income due to volume, but a very small profit margin.

This 1.5% tax will be reduced to 0.75% for the following products and services: production and distribution of cement, medicines, and petroleum, and public services provided by the government. (Many prominent Honduran families are involved in the specified businesses.)

Not subject to this clause are persons receiving a salary, businesses whose gross income is less than L.3 million, businesses in their first two years of operations or for two years for businesses suffering loss due to natural disasters or other catastrophes - sufficiently vague enough to provide for future exemption for friends and family.

Dividends received in Honduras will now be taxed at 10%.

The law provides for a 4% retention of tax on certain transactions of non-residents. I tracked down and read the original law this paragraph is amending to try to understand what this is but I still don't. The only thing I know is that it was previously 2%. (Article 16 of the new law, if anyone can help me out here.)

Import Exonerations

The law repeals all import exonerations and tax exemptions for merchandise imports, including those of the government.

Especially sad is that the law specifically revokes all import exonerations granted to private non-profit volunteer organizations, regardless of their activities. This was no doubt done due the extreme amount of tax abuse of the congressmen and other government officials themselves who use fraudulent NGOs to import products for their businesses and personal use. Unfortunately, honest, non-profit NGOs serving the poor of Honduras will suffer for the illegal acts committed by the dishonest. This is typical of Honduras laws: the government is incapable of routing out the bad guys so they pass abusive laws that punish everyone instead.

Exonerations granted by the constitution, international treaties, and decrees in favor of Honduran non-residents, as well as sports delegations, churches, the National Coffee organization, handicapped persons, and those granted by the Law of Free Speech, among many other laws, will continue. Of special interest to my expatriate readers, the one-time exoneration in the immigration law for pensionado or rentista residents to bring in their household goods and one vehicle tax-free when they move here will continue.

There is more...

I almost forgot to mention that earlier this week, congress voted to extend for 10 years the 'temporary' Security Tax law, previously discussed here. This is a 0.2% tax on withdrawals from business bank accounts with a balance of L.120,000 or more and business or personal checking account dispersals. Thankfully, this law wasn't changed to include individual savings accounts. We're still waiting to find out what the heck they spent those billions on.

...but that is it for your Honduran tax lesson today. My head is pounding from reading and translating this crap with four hours sleep last night after staying up into the wee hours watching those politicos in action. My best advice if you have a Honduran business: get a good tax accountant or lawyer to explain it to you after the law is finalized and published in La Gaceta. The law could always be changed before it is published and the opposition congress will have a majority (collectively) at the end of January, so actually anything could happen. I really don't expect significant changes but you never know what will happen in Honduras' congress.

Merry Christmas from our new President

So, Hondurans can look forward to higher prices in 2014 for food, electricity, communications, transportation, and anything else transported or imported which includes the vast majority of consumer items. This congress resumes sessions on January 6 until the new congress is seated on January 25, so there may be more surprises in the future.

There also is no doubt that if this law had been passed in November, Juan Orlando Hernández would not be president-elect of Honduras. Good job keeping this all a secret until December, JOH! There is no question that this bill was imposed by president-elect Hernández. He is the one who has been calling the shots regarding appointing ministers, firing officials, and passing laws in congress since election day. Many tweets sarcastically commented: "Welcome to the nueva vida (new life) promised by JOH". Others joked: "These taxes will not apply to Nacionalistas, will they? Please confirm." I noted that some of the very high-profile congressmen did not appear to be in the session last night. I guess that is so they can deny being involved with this paquetazo during their future presidential runs. Congressman Dario Banegas and a few others fought the good fight but they were vastly outnumbered by those whose party loyalty is much greater than their loyalty to the people who elected them. Banegas noted that it was the ninth paquetazo of this administration and that this one will probably not be enforced or show results any more than the previous eight.

The Honduran government has been under pressure for years from the International Monetary Fund and other international donors to reduce the size of government and to increase the tax base and tax collection. All of that would be wise and fiscally responsibly, but I wonder if this law is what they really had in mind.

Nobody likes paying taxes. Hondurans would just like to be sure that everyone is paying and that the taxes are put to good use for the benefit of the people, neither of which has ever been true in Honduras. We'll see what happens. Maybe we really will see a more austere government. Or maybe not.

And one last thing....

For sticking with me through all of this, here's a little treat:

Image: El Heraldo

This is controversial diputado Sergio Castellanos stripping his own shirt from his back after he made an emotional outburst against the new tax law to the cheers of his personal audience. He said this was to demonstrate how congress was leaving the public (shirtless) and in more squalor than ever. The government television cameras were quickly taken elsewhere, but El Heraldo reporters captured this image.