Italo Tugliani on ZOLITUR
Father of Bay Islands Free Zone Reflects on its First Five Years

October 26th, 2012
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Italo Tugliani, the Roatan lawyer who conceived and drafted the free-zone legislation for the Bay Islands known as ZOLITUR, says 90 percent of the law -- those provisions dealing with regional autonomy -- is not being used for lack of political will and leadership.

Italo Tugliani, the Roatan lawyer who conceived and drafted the free-zone legislation for the Bay Islands known as ZOLITUR, says 90 percent of the law -- those provisions dealing with regional autonomy -- is not being used for lack of political will and leadership.

(This interview was published in the Voice in November 2012)

Italo Tugliani, who has been living on Roatan since 1972, is generally credited with having conceived and drafted the free-zone legislation for the Bay Islands known as ZOLITUR (Zona Libre Turística), which went into effect five years ago next month. During a 90-minute discussion October 10 at his law office in Coral Stone, accompanied by his son and law partner Alejandro Tugliani, he said the original intent of the law had not been fulfilled, which he attributed to a lack of knowledge and of political will on the part of both the Central Government in Tegucigalpa and the people on the Bay Islands themselves.

ZOLITUR provides potentially lucrative tax incentives for investors on the Bay Islands, although beneficiaries commonly complain of nightmarish red tape that diminishes the value of those benefits. However, Tugliani says that, as originally conceived, ZOLITUR was to be much more than a preferential tax scheme. It gave the Bay Islands broad authority to adopt their own rules and regulations in essentially all areas, including the environment, education, health, immigration and public security. But he said Bay Islanders had not seized those opportunities, and central authorities have shown no inclination to delegate power as contemplated in the law.

Tugliani said even the tax provisions have not been implemented as intended. For one thing, provisions requiring the Central Government to remit back to the Bay Islands the taxes that are collected here, to be used for environmental protection and for other purposes, have not been implemented as intended. A dedicated $6 fee on international air passengers has never even been collected.

Excerpts follow, in Tugliani’s own words.

How ZOLITUR was Conceived

I was traveling to Nicaragua for a number of years doing business with the Sandinista Government, obtaining fishing licenses for the fishing fleet of Honduras for shrimp and lobster, and also getting people out of jail in ports on the north coast of Nicaragua. That’s how I was making my living for 10 years. I was a hungry lawyer. I used to go to Bluefields and Puerto Cabezas.

In Nicaragua I learned something from the Sandinistas. They had the Atlantic Coast of Nicaragua divided into two big areas: the North Autonomous Region and the South Autonomous Region – RAN and RAS. From Bluefields up was RAN, and from Bluefields down was RAS. That division was basically because the Sandinista Army had leaders in different regions. They wanted to be developed as they decided in that region, taking into consideration their environmental capacities, their natural resources, their ethnic idiosyncracies and their own business.

I compared this with another administrative model that we had during the military government here in Honduras in the ’70s – Regiones Departamentales de Desarrollo – where the military battalion commanders used to get together with the people in the chambers of commerce and the local businesses to plan the regional development.

So I thought that this was probably something that we could try in the Bay Islands. Because here the central authorities, the executive authorities, never go to the Bay Islands. It’s like an abandoned piece of territory. And why can’t we get the local brain to think about our own destiny? I started talking and talking and making some ideas, and I studied the Colon (Panama) free zone law. This was all about 10 years ago.

Then Jerry Hynds became a congressman (2006). At that time President (Manuel) Zelaya was like inactive. He stayed about a year like Forrest Gump, when he stopped, after running around for two years all across the United States and then everybody starts looking at him, and he says, “I gotta go home.” Mel spent 8-10 months like that, and everybody was criticizing him, because he didn’t appoint a new cabinet. He was carrying most of Maduro’s (Ricardo Maduro, President 2002-2006) ministers. And he wasn’t doing anything. He didn’t have a team; he didn’t have a plan. And Jerry there he is and, “What am I going to do now?” So I said, “Jerry, why not let’s approach President Zelaya and see if he will forward an idea to create an autonomous administrative region in the Bay Islands.”

A Bargain with the Tax Man

If you knew the Bay Islands before 2008, it was a disorganized area. The most typical activity here was fiscal evasion or contraband. Normally if you talk to the Minister of Finance about a free zone, immediately he figures out the following: a can and a hole, and water, or money, coming out of the hole. And I told the Minister of Finance, “This is not going to be like that. This free zone is going to obtain certain fiscal income, and we will be able to know who is doing business and what kind of a business.”

This was the game: If I reward you with a free-zone license, you are going to receive from the Government a gift: You will never ever pay income taxes, you will never pay customs duties, and you will never pay sales tax. Then you will ask the Government, “What do I have to do to earn such a big prize.” And the Government will tell you, “I want you to be my agent. If you do business with this guy who doesn’t have a free-zone license, I want you to withhold the sales tax from him. And I want you to report this withheld tax to the Government and return this money to me.”

The Tax Regime in Practice

The sales tax is very hard for the Government to collect. It’s a nightmare. Probably 50 percent of the sales tax is not collected, because of the informality of the system. It’s hard on the Mainland. Here, with ZOLITUR, it’s not. If you have a license and you’re not collecting the sales tax or putting it in your pocket, I will cancel your license.

The Bay Islands collects, just in sales tax, pretty close to Lps. 300 million a year. Before ZOLITUR, it was nothing; about Lps. 10 million, something like that. Just from cruise ship passengers, (after ZOLITUR) we were collecting close to Lps. 80 million a year, just in sales tax.

Then a big company here, a jewelry store, claimed that nobody told them (they were supposed to collect the sales tax). They got audited. The DEI (Honduran tax authority) said, “It’s in your license in big letters. If you don’t collect my tax, I am going to fine you and I’m going to cancel your license.” This was last year. When they got confronted, they hired a congressman who was an attorney. And they reformed the law to state that the tourists who are coming on the cruise ships, or something like that, are not committed to pay the 12% tax. And they interpreted the law so that it also included the past (retroactive).

(Alejandro: That changed the whole game. The free zone was conceived under the idea: I’ll give you tax exemptions and benefits, but you’re going to collect tax for me. It was going to be a win-win situation. You get your incentives and you come and invest here, and we the Government get at least Lps. 80 million a year from these passengers.)

So we lost that amount of money. The tourist activity was supposed to produce money to reinforce environmental infrastructure, etc. This is the only regime that allows a region of Honduras to collect money and requires the Government to give it back. Every three months, the Government has to return the money to the free zone. But they’re not doing that.

So so far, it’s been a beautiful dream.

A Neglected Blueprint for Bay Islands Autonomy

The fiscal part is just one small piece of this whole idea. By being a special regime, an autonomous regime, the free zone has the capacity to rule and regulate everything they want to put in place in terms of security, in terms of education, in terms of public health, in terms of environmental . . . You’ve heard about this what they’ve been talking about the last two months in Tegucigalpa with regard with the RED (redes especiales de desarrollo, aka “model cities”). Well, this is the local version of that. This is the Honduran, Italo Tugliani version of that crazy idea. This is a special regime that is totally defined with an authority, etc, that can rule and regulate everything. All the functions of the state can be delegated here.

(Alejandro: The Central Government could delegate all their functions and we could do it locally. It was meant to be that way. It doesn’t happen because they don’t want it to happen, and they don’t know how to do it. ZOLITUR could be the little government in the Bay Islands. All the offices could be represented in ZOLITUR . . . each ministry would have a separate convenio. But they don’t want to do it. They don’t want to do it because they don’t want to delegate. People here in the Bay Islands don’t know about the real capacity of ZOLITUR. They’re only interested in the import aspect of the law.)

Lack of Political Will

You need what you normally call “political will.” But what does “political will” mean? You cannot execute political will if you don’t have knowledge. It’s impossible.

When President Zelaya came here the day before this law would take effect, he climbed into a pickup truck in the middle of a big crowd and said, “From tomorrow on, no one of you will pay taxes in this place.” But that wasn’t the idea. He got it wrong.

The Minister of Finance, Rebecca Santos, knew about it very well. But after the . . . whatever happened to Mel Zelaya, whatever you want to call it . . . then it was different, because (Gabriela Nuñez) didn’t know about it. She just saw the can with the hole. Micheletti, he didn’t know what the heck this is.

The purpose of this law was to create a tool to move our local economy and to rule and regulate our delicate ecosystem and other ways of living here, to produce our own customized regulations or laws, etc., to satisfy our local needs.

The idea and the capacity of this law is for ZOLITUR to be like a regional congress. We would make deals with the Ministry of Security, we would present our security plan for our local police. We could have a local police. We could have our local medical system. We could have our local educational system. But we never used our own tool to develop our public education policy.

This could work if locals make alliances with business people on the mainland, with business people in the United States, with chambers of commerce of Mexico, El Salvador, Guatemala, etc. If these crazy idiots knew what they have in hand!

People in San Pedro Sula have been dreaming for years to have something like this. They call it the Comisión del Valle de Sula. Geronimo Sandoval (former mayor of San Pedro Sula) was here working as a consultant in ZOLITUR. When he read this thing (ZOLITUR law), he said, “I cannot believe what you have in hand. And you don’t use it!”

It’s like a spider web waiting for the fly to stick on it. It’s not going to work that way. We have to move. People have to move their asses, excuse me, in order to make this happen. Locals are not interested. All they’re interested in is that by act of magic they don’t have to pay taxes.

On ZOLITUR Red Tape

There is a lot of red tape. But it was worse what they had before. Because before we had contraband, before we had evasion. There were pirates! And they were living on this island off the crime all the time, with the complicity of the local authorities.

I legalized the damn contraband in here. Now they just have to put it to paper to make it legal. [/private]

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