Reportage • Sammy Castro • July 6, 2023 • Leer en castellano

A proposed Tax Justice Law which proposes to eliminate tax breaks and reduce regressive taxation has ratcheted up tension between the government of Xiomara Castro and the corporate sector in Honduras. If adopted by Congress, the Tax Justice Law means those who earn more will pay more, allowing the State to increase tax revenues from large corporations.   

But Honduras’ powerful elite families enjoy enormous tax privileges, and they have stridently opposed the introduction of progressive taxes. Their refusal hinders revenue collection, paralyzing the state's ability to provide social programs and services to the majority of Hondurans. 

The adoption of the reforms contained in the Tax Justice Law (LJT) would recognize the principle of progressive tax collection in the Constitution: those who earn more should pay more taxes, and those who earn less, less. 

Honduras is one of the poorest and most unequal countries in the Western Hemisphere. In 2019, about half the population lived on less than $6.85 a day. This proportion is much higher than the average for Latin America, the Caribbean and Central America over the same period. 

According to Marlon Ochoa, the minister in charge of the Revenue Administration Service (SAR), the LJT will combat extreme inequality by repealing tax breaks contained in 10 active tax exemption regimes, putting an end to abuses by the corporations that benefit from them.

The proposed law proposes to create two new tax exemption regimes aimed at developing national industry and attracting foreign investment. It also aims to change the principle of territorial income to worldwide income so as to avoid the diversion of profits and earnings of large companies to tax havens. It eliminates banking secrecy for tax purposes for the same reason.

Between 2017 and 2023, $2.3 billion dollars (57 billion lempiras) in taxes were foregone as a result of a previous reform of the territorial income principle. Upon approval of the changes proposed in the LJT, 503 companies and individuals will start paying taxes on income earned abroad.

The private sector and private banks—represented by conservative parties in Congress—have fiercely opposed the Tax Justice Law. 

Hugo Noé Pino, who heads up the Congressional Budgetary Commission and is a member of the governing Libre Party, points out that the economic development of Honduras shows that wealth has been concentrated in few hands. Productive assets (land and other means of production), loans, technology, quality education and health services and otherwise, are concentrated in the country’s 10 richest families. 

Statistics compiled by the SAR reveal that through 157 companies, these 10 families had income of approximately $5 billion dollars, but only paid around $2 million dollars in taxes in 2021. In other words, for every four dollars that these families earned, they paid barely 1 cent in tax.

Elites vs. taxes

Big capital and the media ecosystem close to it have launched a smear campaign against the Tax Justice Act. 

They have gone so far as to claim the Law will slow economic growth, destroy jobs, reduce private investment, tax migrant remittances, destroy small businesses, and damage agricultural production. Their publicity has sown fear in the population. 

The Honduran Council of Private Enterprise (COHEP), which represents the country's largest companies, has recommended designing an alternative plan centered on the introduction of a simplified tax regime.

According to COHEP's proposal, "small taxpayers from the informal sector would enter the formal sector." This amounts to a proposal for more taxes on micro, small and medium sized businesses. Their suggestion is that the poorest pay more taxes, while large corporations continue to avoid paying their share.

Contrary to the narrative of these elites—who are the owners of Honduras—labor leader Carlos H. Reyes says that the Tax Justice Law has the support of every major labor organization in the country.

Reyes said the Government presented the tax reform proposal to labor leaders, emphasizing how it could work to stop the abuse of tax breaks and tax havens.

"We all share the sense that what’s most concerning is the way the opposition is mounting a campaign against something which is badly needed," Reyes said in an interview with Ojalá. "The opinion among our comrades is that this issue must be studied and analyzed, but that the Tax Justice Law has the support of the union locals."

Against the disinformation that feeds inequality

The traditional economic model has failed in Honduras. 

It has not generated massive and dignified employment as promised during recent political campaigns, nor has it provided social security, quality education and healthcare, equal employment opportunities, or ensured respect and guarantees of the human rights of Indigenous peoples, Afro-Hondurans and the LGTBQI+ community. This is especially true for youth.

It is in this context that the government presented the LJT to the congressional evaluation commission at the beginning of May. The approval of the bill was presented as not being about new taxes nor an increase in the cost of living, rather about incentives for investment and the introduction of new controls to avoid tax evasion. The law has also been profiled as a way to avoid corruption.

Representatives of the main labor unions in Honduras are against long-term tax breaks and tax havens, which have become a set of structural privileges for the powerful. The commitments companies make to create more jobs in return for tax relief have not translated into action. The working conditions in the jobs they do create are precarious and employees do not have access to social security as required by law.  

"What the government is doing now is an unprecedented intervention, fighting opacity, which is a secretive way of handling things, with information, knowledge, and by sharing the reality of the issue," said Daniel Durón, the secretary of the General Workers' Union (CGT), in an interview with Ojalá.

"We don’t have an ideological or political bias: the state is obliged to intervene when there are abuses," said the CGT leader.

"We are developing activities with the people, with popular organizations and territorial organizations because there is a strong media campaign by the representatives of the oligarchy, who are telling lies to the population," according to the presidential delegate for Popular Power, Sergio Rivera.

Organized labor ratified its support for the tax reform on May 1 in the context of International Workers Day, according to CGT Deputy Secretary Benjamín Vásquez.

The union leader argued everyone should pay taxes according to what they earn, and said it is not fair for the poor to pay more than the rich. "Here the people with the fewest resources are the ones who pay the most taxes; every consumer pays taxes, we pay all the time, while others do not pay at all," Vásquez argued.

In relation to demonstrations against the bill carried out by agribusiness workers in the southern city of Choluteca, Vásquez explained that employers have threatened  layoffs if the LJT becomes law. 

The repeal of the Hourly Employment Law—which violated workers' rights—last year, also brought with it the threat of massive layoffs. But those layoffs didn't happen, Vásquez said, because capital will always need labor.

"They make these threats all the time," said Vásquez. 

For her part, Liliana Castillo, who is the former president of the Honduran College of Economists (CHE), has said the bill is supported by all sectors, among them the IMF, because Honduras is the country with the largest tax breaks in relation to Gross Domestic Product in Latin America. 

Castillo says that in the other countries in the region, similar tax exemptions have been gradually reduced and now make up less than three percent of GDP. "In other words, it is necessary that they be reduced and that these resources, as the IMF rightly says, be used to generate more investment and support for social programs," said Castillo in an interview shared with Ojalá.

Part of the resources obtained from the application of the Tax Justice Law should be destined to public investment, she added.

It’s time to end the tax breaks                     

Tax exemption regimes in Honduras are rife with abuse. A clear example is the Free Zones (ZOLI) regime, which has enshrined special tax privileges for 71 years. 

In October of 2021, the government extended exemptions to more than 94 companies in the Tourist Free Zone Regime of the Bay Islands department (Zolitur) for an additional 15 years. This will allow these companies to avoid taxes for 33 consecutive years. These exemptions were set to expire in 2025.

Similarly, the Temporary Import Regime (RIT) was set up to last from 1984 to 2037 (53 years). Tax benefits have been granted to the companies involved. 

Then there are the Public-Private Partnerships (PPP), which work with money coming from the private sector and money provided by the public sector. But the profits stay in the private sector, which also enjoys exemptions during the life of the contracts. These contracts contain stability clauses, which allow them to extend tax exemptions to companies and employees. All of the risk is assumed by the people of Honduras through the state. 

In 2007 renewable energy became exempt from taxes over the life of contracts signed, that is, in perpetuity. The new Tax Justice Law seeks to cancel this type of exemption. According to the National Electric Energy Company (ENEE), energy producers in Honduras are business elites who want to continue making bank until the sector is privatized, enjoying tax benefits at every step of the way.  

Honduras’ National Congress is currently in recess, which has put approval of the LJT on hold. When the legislative activity resumes in July, negotiation efforts will continue in search of consensus, and a more just system to collect taxes from Honduras’ super rich.