Death by a Thousand Cuts: The ‘Review’ of ZOLITUR
While the Presidential Commission Deliberates, Island Firms Go Under

June 21st, 2013
by Robert Armstrong

I suppose I have to hand it to Marco Ramiro Lobo, president of the commission that is reviewing all Honduran tax exemptions, for sitting placidly and patiently for two hours at Plaza Mar June 13 while a parade of anxious local business people – from taxi drivers to RECO to the patronatos – related sob stories about the loss of ZOLITUR benefits for the Bay Islands. I would not have traded seats with him.

When the whine festival was over, Lobo defended the commission’s mission, which he said was to make the national tax system more rational and fair and reduce the country’s inequities. Then he got an ovation from the up-to-then hostile crowd when he said the commission would recommend to the National Congress that ZOLITUR be maintained.

It reminded me of when the plane ran off the runway in Tegucigalpa five years ago. People I knew who were on that flight told me that, as is the custom here, the passengers applauded as the wheels touched down on the runway (too far down it, as it turns out). Then the applause turned to screams as the plane skidded off the end of the tarmac, killing four and injuring many more. Moral: Hold your applause until the final act.

No sooner was Lobo through taking his bows than he dropped the other shoe: but the list of tax-exempt products will be reviewed, and only those items that island businesses “really need” will remain duty free. The devil is in the details, as they say.

I recalled another experience from another previous life, when I used to follow trade policy in Singapore in the early 1990s. The Association of Southeast Asian Nations (ASEAN) had been working toward a free-trade scheme for decades. They agreed in principle that trade among themselves should be duty-free. But certain “sensitive” products should be excluded. Of course, almost everything of relevance is “sensitive” to somebody. So when each country was through submitting its list of exceptions, the joke was the member nations, all located in the tropics, had boldly committed to regional free trade in snow plows.

Will that be how ZOLITUR ends up? The people of Roatan, Utila and Guanaja will be exempt from import duties on snow shovels?

That would be a ridiculous extreme, obviously. But an informed source tells us the comission is of a mind not to continue duty-free treatment for jewelry, perfume, alcohol and tobacco (see related article). Those just happen to be the principal products that international travelers buy at duty-free ports. Can you imagine an airport duty-free shop without those items? What would be left to buy? Handbags and watches? Raybans?

There was more bad news when the commission’s legislative proposal was posted on the ZOLITUR website June 14. Benefits would be available for only five years. They would be renewable for a second five years only if the commission deems that a company’s duty-free status was favorable to the economic and social development of the Bay Islands.

Who makes an investment, especially in a country considered “risky,” with a five-year time horizon? If the objective of ZOLITUR was to attract investment to the islands, that provision renders it effectively useless.

The other President Lobo, the one who runs the country, signaled his attitude toward ZOLITUR June 6 when he said the program needed to be cut back significantly because it was a “drain” on the treasury and benefits were going to people who had nothing to do with promoting tourism.

Perhaps this was inevitable after Congress amended the ZOLITUR law in 2011 so that licensees would be exempted not only from paying taxes themselves but also from collecting sales tax from their customers. As we reported last November, that turned the whole fiscal rationale for the law on its head, and from then on, ZOLITUR was seen in Tegucigalpa only as a fiscal hemorrhage.

Be that as it may, the damage that has already been done by this extensive “review” may be irreversible.

As we said here in February, it is perfectly legitimate for any government to periodically review its tax code to assure it is not being abused and that benefits and exemptions that have been granted by past Congresses are still justified. But why was it necessary to suspend the benefits while the review was underway? In effect, all businesses on the islands were being treated as guilty until proven innocent. And after all is said and done, what good does it do for a beneficiary to conclude that they may still qualify for tax benefits if, as a result of those benefits being suspended for six months, they are no longer in business?

One speaker at the June 13 forum said he had already laid off 30 people since January because of loss of ZOLITUR benefits. A ZOLITUR consultant tells us at least one client has closed its doors since January, and two more were expected to do so by the end of June, for the same reason. When will this end?

Fiscal crisis or no fiscal crisis, this is no way to run a government.

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