The Impact of Tax Exemptions on Honduras’ Public Finances

Aida Sierra

Aida Sierra

Co-autor: Lenin Díaz

It is no secret that tax exemptions are at the center of debate due to their impact on public finances. Recently, SAR (Tax Administration Service) reported that in 2023, tax exemptions totaling L56,560 million were granted in Honduras. This note explores the significance of these exemptions and analyzes their effects on the country’s finances.

Tax exemptions, in short, are tax reductions granted to certain individuals, companies, or economic sectors for various reasons, such as encouraging investment, promoting economic growth, or fostering job creation.

In light of the above, it is relevant to highlight the words of the German jurist Carl Schmitt: “The fiscal agreement is the confluence of the economic, the social, regulated capitalism, and democracy.” These words become particularly relevant when we observe the current legal situation in Honduras and lead us to ask the following questions:

    • Considering the current legal situation, is it possible to reach a consensus on such debatable aspects?
    • And in such a scenario, what role do tax exemptions play?

It is important to recognize that not all tax exemptions are necessarily harmful. When designed and implemented properly, they can play an important role in stimulating economic activity and business development. They must be regularly evaluated to ensure they meet their intended objectives.

Digging deeper into this topic, the executive director of the Honduran Council of Private Enterprise (COHEP) mentioned in a statement, “We have no resistance to a review of tax exemptions.”

Another point worth analyzing and remembering is the words of ECLAC in 2019 regarding the issue, stating, “The main benefit of exemptions for developing economies is the possibility of stimulating greater investment and growth in economic activity.” It is of interest that the Economic Commission for Latin America and the Caribbean encourages developing countries to approve exemptions to stimulate their economies; however, they must adhere to the following recommendations when granting them:

    1. Provide tax incentives only through tax laws and consolidate them in a section of the tax code.
    2. Establish clear, simple, objective, and easily measurable eligibility criteria.
    3. Include the objectives pursued in the legislation.
    4. Periodically evaluate the costs and effectiveness of preferential tax treatments, so that the cost-benefit relationship can be determined.

Before concluding, it is worth recalling the famous Aharoni survey, which, although it is from 1966, sheds light on truths that remain relevant today. At that time, five hundred entrepreneurs with strong investments in different countries were asked the following question: “What led them to decide to invest in a particular country?” To the surprise of the interviewers, the majority, contrary to expectations, answered that exemption from income tax was a poor incentive, with one interviewee adding, “Tax exemption is like dessert; it’s good to have it, but it doesn’t help much if the main course isn’t there.” After studying these surveys, it can be concluded that investors are more influenced in their decisions by market and political factors than by tax exemptions.

Furthermore, we recommend following the considerations issued by organizations such as ECLAC to improve the effectiveness and transparency of tax exemptions. Consolidating tax incentives in legislation, establishing clear eligibility criteria, and regularly evaluating their impact are crucial steps to ensure that these measures not only boost economic activity but also promote equitable distribution of tax benefits.

In conclusion, the analysis of tax exemptions in Honduras exposes the need to find a balance between economic incentives and the financial stability of the state. While these exemptions can serve as incentives for investment and economic growth, their application, without adequate supervision, poses considerable risks to public finances and tax equity. Exemption policies must be subject to stricter regulation and constant evaluation to ensure they effectively contribute to sustainable economic development and the welfare of the population.

Only through a comprehensive and rigorous approach to managing tax exemptions can Honduras fully harness its potential to stimulate economic growth and improve the quality of life of its citizens.