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El Salvador's Leader Pushes Tax Reform

by Mike Godfrey,, Washington

10 December 2009

El Salvador president, Mauricio Funes, has challenged the National Assembly to approve his tax reform package by the end of the year – and the signs are he may have approval by the end of the week.

The reforms aim to increase tax collection by USD220-250m in 2010 and raise tax collection from 13% of GDP to 17% of GDP over time. El Salvador has the second lowest tax collection rate in Latin America and both the International Monetary Fund and the Inter-American Development bank are urging increased taxation and more social spending to relieve the 40% official poverty that exists.

The new proposals include streamlining administrative processes and judicial procedures to ensure tax compliance and measures to combat tax evasion and smuggling, estimated to cost USD400m a year in lost revenue.

There will be not much in the way of tax increases; value-added tax and income tax are unaffected, but special taxes on alcohol, tobacco, weapons and ammunition will be increased alongside the first vehicle registration fee and insurance tax.

For the first time there will be a tax on investment income, including dividends and bank interest, above a threshold of USD25,000. Official sources indicate that 90% of El Salvadorans have savings and investments of less than USD8,500. Thus it is argued that the tax would affect no more than 5% of the population.

Approval of the reform requires a simple majority of 43 votes in the Assembly – Funes's left oriented FMLN ruling party, installed only for the last six months, has 35 seats; having just gained the support of the Catholic Church, some press commentators are forecasting early approval of the measures.

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