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El Salvador Passes Tax Reform Bill

by Mike Godfrey, Tax-News.com, Washington

06 August 2014

El Salvador's Legislative Assembly approved a tax reform package designed to enhance revenue on July 31, 2014.

The package includes a minimum corporate income tax equivalent to 1 percent of net assets, a 0.25 percent tax on certain financial transactions exceeding USD1,000, and the removal of a long-standing tax exemption for newspapers.

The proposed reforms, which were approved with 44 votes in favor out of 84, are intended to correct imbalances in the public finances, achieve macroeconomic stability, and develop social programs.

The measures are expected to boost tax revenue by roughly 0.4 percent of gross domestic product (GDP) when they are fully implemented in the fiscal year 2016.

Fitch Ratings welcomed the reform package, but argued that the proposed fiscal responsibility framework (FRF), which has not yet been approved by the legislature, would be of greater significance.

The FRF aims at improving El Salvador's fiscal position and debt dynamics over the medium term. In addition to an increase in the tax burden to 17 percent of GDP from the current 15.4 percent, the FRF's original goals included achieving primary balances and limiting current expenditure and wages, and reducing nonfinancial public sector debt.

There is no clear timeline for the discussion of the FRF, which was expected to be dealt with in tandem with the tax reform.

TAGS: tax | public sector | gross domestic product (GDP) | tax reform | El Salvador

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