InSight Crime published an article examining tax rates paid by Guatemalan elites and their implications for the country’s security situation. Representatives from Guatemala's private sector respond to InSight Crime’s article below.
On June 27, InSight Crime published an article titled “Death but no taxes: How Guatemala’s Elite Foster Crime and Impunity.” The author wrote in an unequivocal tone about Guatemala, its tax rates and its people. As Guatemalans and as citizens concerned with its inclusive development, we agree that the issue of taxation is a critically important piece of our development puzzle. However, we disagree with many of the underlying assumptions and hence with many of the conclusions of the aforementioned article. We write this piece in the hope of debunking some misguided stereotypes about taxation so as to promote a deeper conversation about potential solutions going forward.
A simple fact-checking exercise:
1. The author claims “What's curious is that, on paper at least, Guatemala has fairly robust tax rates on the wealthy. The country's top individual income and corporate tax rates are at 31 percent.” This is completely false. The simple truth is that Guatemalan citizens pay very little in terms of income taxes. Our highest marginal tax rate for individuals is 7 percent and not the stated 31 percent.
The author also makes delicate accusations about the role of CACIF in keeping that tax rate low. The fact of the matter is that CACIF’s Fiscal Commission discussed and proposed raising the personal tax rates in 2012, but the proposal was rejected by the Pérez Molina administration and by members of congress who felt personally impacted by the proposal.
2. “The loopholes” the author wrote, “are largely the product of the economic elite’s influence over the political system.” He continues, citing a source to back up this statement who says that “economic actors are constantly looking for ways to build in exemptions and privileges and special regimes into the tax system so that they pay less or have a tax holiday for their economic activities.”
This is false. If the loopholes, privileges and exemptions for corporations were as high as what is implied, corporate income taxes in Guatemala would not account for 3.5 percent of GDP. This is before adjusting for high rates of informality and tax evasion as roughly 65 percent of the economy is informal and hence does not contribute towards corporate income taxes. The 3.5 percent level is similar to OECD averages and higher than the US contribution of 2.3 percent. According to CEPAL (2015), corporate taxes represented roughly 90 percent of all income taxes, as opposed to 20 percent in the US. Lastly, as opposed to searching for tax holidays, CACIF and FUNDESA wrote a joint paper in 2014 with concrete proposals on how to raise tax collections.
3. The author implies that consumers pay an undue share of the taxes: “more than 65 percent of all tax revenue (…) comes from indirect taxes like the Value-Added Tax (VAT).” This is partially true. The percentage of indirect taxes over total taxes is high, but that is mostly due to low collection rates on other taxes rather than an undue reliance on VAT. In fact, Guatemala’s VAT rate is the third lowest in the region -- only higher than that of Panama and Paraguay. As an added fact, 46 percent of VAT is collected at the time goods are imported, predominantly from law-abiding corporations. It is also worth noting that 46 percent is a much larger percentage than imports represent of the nations economy, again, due to the high degree of tax evasion by the informal economy.
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As the author describes, the Attorney General’s Office and the International Commission Against Impunity in Guatemala (CICIG for its initials in Spanish) uncovered a “massive fraud ring within the country’s customs office,” a network known as “La Línea” (The Line). Former President Otto Pérez Molina, former Vice-President Roxana Baldetti, the leadership of the Tax Authority (better known as SAT, for its initials in Spanish), among others, are facing trial on corruption-related charges. Even though this is a big step in our search for justice, the tax collection figures on imports have not budged, leading us to think that other “Lineas” exist. Another case, “Caso Redes” (Networks Case) illustrates how tax authorities were more interested in charging fees for themselves than in performing the role that was entrusted to them.
We would also agree that overall tax collections are low, and that additional investments are needed to promote the rule of law. The weakness of SAT and its rampant corruption are a major factor in explaining low collection rates. CACIF and FUNDESA have each been constructive actors in promoting legislative proposal 5056 “Law to Strengthen Transparency and Governance of SAT,” so that authorities can be more effective in collecting the dues mandated by law. This is not to deny that there might be some rotten apples among the many thousands of corporations operating in Guatemala, or that they should be recused of responsibility for any wrongdoing. Quite the contrary, we believe that due process should be applied and justice served promptly to anyone violating the law.
In Guatemala, the private sector has been collaborating hand in hand with the authorities to address short-term ills and to drive the long-term, inclusive development of the country. CACIF and FUNDESA, two independent institutions, have joined forces in promoting the Mejoremos Guate (Let’s Improve Guate) action plan, a holistic development agenda aimed at reducing poverty.
Through the work and proposals stemming from its Security and Justice pillar, the Mejoremos Guate initiative has strongly contributed to promoting the rule of law and the fight against impunity. One could cite many impactful examples, but perhaps the most salient is the recent signing of the National Strategic Plan for Security and Justice, a pledge towards finding and addressing the bottlenecks in the national security and justice chain. Implying that the private sector somehow benefits from weak institutions, rampant impunity and no rule of law is borderline absurd.
A former US ambassador once told us: “Don’t question their logic, question their assumptions.” If the premises are wrong, the conclusions will undoubtedly be wrong. Repeating a misguided stereotype does not make it any truer, no matter how many times it is repeated. Quite the contrary, regurgitating erroneous assumptions only makes constructive dialogue that much harder and leads us further away from possible solutions. Our hope in writing this article is simply to ask us all to question some of those “prevailing truths.” We will endeavor to do the same on our end. We would humbly ask for your help in questioning our own assumptions and in thus furthering our ability to help improve our country.
* Salvador Paiz is vice president of the Foundation for the Development of Guatemala (Fundación para el Desarrollo de Guatemala - FUNDESA) and José González Campo is president of the Coordinating Committee of Agricultural, Commercial, Industrial, and Financial Associations (Comité de Asociaciones Agrícolas, Comerciales, Industriales y Financieras – CACIF).