Latin America is a region with an appallingly poor tax record, extremely low levels of tax collection (on average around 16 per cent of GDP) and regressive tax systems. Guatemala is one of the region’s worst performers. According to the Guatemalan tax authority, the country collected only 11.3 per cent of its GDP in tax in 2008.
One reason for its extremely low tax collection is the country’s generous tax incentives. Since legislation was passed in 1989, companies that qualify for ‘maquila’ status are exempt from import duty, income tax, taxes on the repatriation of profits, VAT, asset taxes and municipal taxes. The term maquila refers to the textile sector, but Guatemala’s legislation has been repeatedly expanded, meaning that many more companies benefit from concessions. While the benefit is supposed to be temporary in nature – for example income tax exemptions are for 10 years – the practice prevalent in Guatemala is for businesses to close and then reopen with another address.This way they can apply again for exempt status.
These tax concessions have a huge fiscal cost.The tax authorities calculated losses under the maquila legislation as reaching US$524 million in 2005.This represents a huge chunk of Guatemala’s tax take – 15.9 per cent of total tax collected that year.The practice of gathering and publishing this data has since been abandoned, but currently costs would be much higher as a law modifying the maquila regime was adopted in 2004. It has allowed many more companies to be able to apply for maquila status and benefit from the exemptions. Companies qualifying as maquilas include Colgate Palmolive C.A., Kellogg C.A. and Nestlé Guatemala as well as many other well-known, national firms. A Guatemala CSO, CIIDH, has been monitoring the tax issue and advocating for tax reform for a while. It now says that: ‘The law no longer even resembles a law to promote investment and has now become a mechanism which firms can use to avoid paying taxes.’