Tourism Sector Fights Back
August 15th 2005
By Tim Rogers
Tico Times Nicaragua Correspondent
GRANADA - A lobbying campaign waged with the full muscle of
Nicaragua 's mighty tourism sector appears to be gaining ground.
The tourism sector, the country's main economic engine, has launched
a coordinated counter-offensive against recent efforts by the Finance
Ministry to roll back certain tax exonerations provided under Law
306, the Tourism Incentive Law.
After meetings with leaders of the Sandinista National Liberation
Front
(FSLN) and the Liberal Constitutional Party (PLC) - the country's two
leading political parties - the tourism industry is now confident the
tide has started to turn in its favor. Tourism leaders predict that
renewed bipartisan support for the industry will help thaw frozen tax
exonerations, as well as spur Congress to pass the long-awaited
Tourism Investment Bonds Law (BIT), which will offer tourism
developers an attractive new financing model.
"Our lobbying efforts have been very successful," said Nicaraguan
tourism-investment guru Raul Calvet, president of Calvet & Associates
Investment Strategies. "We have the support of the FSLN, and we are
close with the PLC."
Calvet, who has been spearheading lobbying efforts for the private
sector, predicts the National Assembly will reinstate the tax
exonerations and pass the tourism-bond financing bill during the next
congressional session in September.
URBAN DRIVE: Hundreds of brave - and foolish - Granadinos risked
their bodies last Sunday during the annual bull run through downtown
Granada. This Sunday will draw an even larger crowd to Granada for
the annual hípica horse show, considered one of the best in the
country.
Nica Times/Tim Rogers
PROBLEMS for the tourism industry became apparent last month, when
tourism chambers noticed that fiscal reform measures passed in May
had reversed - unbeknownst to them at the time - several of the tax
exonerations granted to them under the Tourism Incentives Law of 1999
(NT, July 22).
Hopes that the shift in government policy was a mistake were erased
when Finance Minister Mario Arana told The Nica Times on July 21: "We
can't keep offering new exonerations (to the tourism sector);
instead, we have to reduce them" (NT, July 29).
The Finance Ministry argues that the tourism sector ought to pay more
taxes to provide the impoverished government with much-needed
revenue. The National Tourism Chamber (CANATUR), meanwhile, contends
that the economic return on tax exemptions is at least three times
what the government would generate from tax revenue.
Both sides support their case with statistics that vary wildly, in
some cases by hundreds of millions of dollars. No independent
statistics exist on the economic impact of Law 306, allowing both
sides to bend the numbers to their convenience.
To help provide some semblance of objectivity, Calvet & Associates
last month hired independent fiscal specialist René Vallecillo,
former vice-minister of the economy under President Violeta Chamorro
(1990-1996), to conduct a detailed study on the pros and cons of Law
306 to assess its economic impact over the last five years.
Calvet predicts that the study, which will be presented sometime in
September, will serve as a justification for tax exonerations, rather
than support the Finance Minister's position.
IN its original form, the Tourism Incentives Law offers qualifying
businesses 80-100% exemption on income tax; total exemption on
property tax for 10 years; exoneration from import duties on business-
related items; exemption from sales tax on the purchase of equipment
and construction materials; exemption from luxury item import tax;
tourism support from the government; and trademark registration.
May's fiscal reform measures canceled only the tax exoneration on
luxury item imports, despite initial reports that 306 tourism
businesses would now be required to pay taxes on all imports.
But luxury tax alone becomes a big deal for new hotels that have to
import air-conditioning units, vehicles, bathroom fixtures and even
bed linens.
There are approximatley 30 items a new hotel project might import
that qualify as "luxury items," according to Calvet's estimate.
The reversal of the luxury tax exoneration has affected different
tourism businesses to different extents; it's difficult to measure
its impact in broad strokes. While some qualifying businesses may not
be affected much, others experienced a significant impact.
Grayline Tours, for example, was hit hard by the luxury tax when they
discovered last month that they now have to pay import taxes on new
buses - a critical element to the company's operation, but one that
is considered a luxury item nonetheless.
SINCE taking effect in September 1999, Law 306 has approved some $300
million in investment projects and created 6,000 direct jobs,
according to preliminary figures. But the law is just now starting to
bear some of its first fruits, tourism leaders claim.
"Five years is not enough time for the law to prove itself in a
country like Nicaragua, where we started with nothing," Calvet said.
Regardless, Finance Minister Arana claims that some of the
exonerations extended to the tourism sector are "very high," and
can't continue to be offered forever.
THE tourism sector insists that the tourism industry benefits the
entire country, not just a small special-interest sector. In
Nicaragua, where most hotels are small and medium-sized, the tourism
sector depends directly on other service industries, namely food
services, transportation, tour operators, handicrafts, cleaning and
landscaping.
The "multiplying effect" of the tourism industry here is estimated to
be $1.80 for each dollar spent, which is to say that money invested
in the tourism sector has a heavy ripple effect throughout the rest
of the economy.
" Nicaragua 's tourism model is not the same as that of Cancún or
Jamaica ; we're not a closed, all-inclusive destination," Calvet
said. "Our strength is that we are selling Nicaragua as a product:
its history, culture and nature."
CALVET said his Aug. 3 meeting with the Nicaraguan Tourism Institute
(INTUR) and Sandinista leaders Daniel Ortega and Tómas Borge,
president of the congressional tourism commission, went better than
expected.
The Sandinistas, he said, are friends of the tourism sector, in part
because many of them are owners of tourism businesses, but also
because the industry does not conflict with their leftist ideology.
(Even Cuba has embraced the tourism dollar.)
"The Sandinistas' official party position is that they are pro-
incentives to help small and medium-sized tourism operations, but
they are not against larger development projects either," Calvet told
The Nica Times last week during an International Living conference at
Norome Resort and Villas, on the Laguna de Apoyo. "The Sandinistas
are for eradicating poverty; and the solution to poverty is to give
people jobs."
The Sandinistas also support the BIT financing model, which has been
stuck in Congress since late last year.
THE BIT tourism bond model is based on a time-proven urban-renewal
financing model first used in the U.S. city of Chicago, known as "Tax
Increment Financing," or TIF.
The project allows for as much as 70% financing of qualifying
development projects through the sale of private bonds, which are
then repaid to investors with income tax revenue once the company is
generating capital.
The government, therefore, would exonerate qualifying companies from
paying income tax for the first 10 years so that money could be used
to repay private investors at a market-set interest rate, probably
around 10-12% (TT, Nov. 12, 2004).
The BIT law, coupled with a six-months-overdue bill to expand Law 306
to include smaller tourism projects, promise to help Nicaragua
reassert itself in first place on the list of attractive places to
invest in Latin America.
The politicians are in agreement on importance of tourism, Calvet
said, and it's only a matter of time before the recent fiscal reform
glitch is smoothed out.