LATIN AMERICA ADVISOR a DAILY PUBLICATION of the DIALOGUE Monday, July 27, 2020

LATIN AMERICA ADVISOR A DAILY PUBLICATION OF THE DIALOGUE www.thedialogue.org Monday, July 27, 2020

BOARD OF ADVISORS FEATURED Q&A TODAY’S NEWS Diego Arria Director, Columbus Group POLITICAL Devry Boughner Vorwerk What Tax Reforms El Salvador CEO, DevryBV Sustainable Strategies Arrests Former Joyce Chang Global Head of Research, Does Latin America Defense Minister JPMorgan Chase & Co. Over Gang Pact Paula Cifuentes Director of Economic & Fiscal Affairs, Need for Recovery? Salvadoran authorities arrested Latin America & Canada, former Defense Minister David Philip Morris International Munguía Payés in connection Marlene Fernández with a 2012 pact between the Corporate Vice President for government and the country’s Government Relations, Arcos Dorados main gangs. Page 2 Peter Hakim President Emeritus, Inter-American Dialogue BUSINESS Donna Hrinak President, Boeing Latin America Workers at Chile’s Jon E. Huenemann Former Corporate and Zaldivar Mine Government Senior Executive Accept Wage Offer James R. Jones Falling tax revenues and tax evasion are expected to pose challenges to Latin America’s Chairman, Workers at Antofagasta’s Zaldivar economic recovery from the Covid-19 pandemic. Brazil’s tax agency is pictured above. // File Monarch Global Strategies Photo: Agência Brasil. mine have accepted a wage offer, Craig A. Kelly averting a strike. Collective bar- Senior Director, Americas Countries in Latin America and the Caribbean face a steep gaining talks had earlier broken Int’l Gov’t Relations, Exxon Mobil drop in tax revenue due to the slowdown of economic activi- down. John Maisto Page 2 Director, U.S. Education ty amid the pandemic and lower prices for commodities, the Finance Group Q Economic Commission for Latin America and the Caribbean, Nicolás Mariscal ECONOMIC Chairman, or ECLAC, said in a report this month. In addition, tax evasion continues Grupo Marhnos to be a problem for the region, with ECLAC estimating a loss of $325 Chile’s Piñera Thomas F. McLarty III Chairman, billion—more than 6 percent of GDP—due to tax noncompliance even Signs Pension McLarty Associates before the recession. How important, and controversial, will tax policy Withdrawal Bill Carlos Paz-Soldan Partner, become as Latin American and Caribbean countries seek to reactivate Chilean President Sebastián DTB Associates, LLP their economies in the period ahead? What would the ideal tax policy Piñera signed into law a measure Beatrice Rangel that will allow citizens to withdraw Director, look like, and which sectors, if any, should see tax breaks during the a portion of their pension funds as AMLA Consulting LLC post-pandemic recovery? How big of a problem is tax evasion in the an emergency measure amid the Jaana Remes region, and what can governments do to ensure taxpayers, especially coronavirus pandemic. Partner, Page 3 McKinsey Global Institute companies, comply? Ernesto Revilla Head of Latin American Economics, Citi Manuel Baltazar Mancilla, chief executive of México Fiscal: Gustavo Roosen Chairman of the Board, “It will be of utmost importance to define an adequate tax Envases Venezolanos policy, aimed at strengthening the basic input and indus- Andrés Rozental trial sectors, since the service sector can wait a bit. Public President, Rozental & Asociados A policies might become very controversial, especially in those countries Shelly Shetty whose governments are betting on social welfare at a time when support Managing Director, Sovereigns Fitch Ratings is required for entrepreneurs. It is necessary to boost GDP and improve the population’s purchasing power, which can only be achieved by pro- moting employment. Tax evasion occurs to a greater extent with property taxes, so perhaps it is time to bet on consumption taxes. If we want to support citizens, we must exempt or reduce the burden on direct property Piñera // File Photo: Chilean Government. Continued on page 3

POLITICAL NEWS mediators and members of the [Organization NEWS BRIEFS of American States] and keep the president El Salvador Arrests of the republic informed of advances in the Guyana’s Court of Appeal process,” Munguía said at the time. Chacón to Issue Final Ruling Former Defense told the AP that he would ask a judge to allow Munguía to remain out of jail as he awaits trial Thursday on Election Chief Over Gang Pact because he is older than 70 and has enough Guyana’s Court of Appeal said Saturday that family ties in El Salvador to prevent him from it will provide a final ruling regarding ongoing Authorities in El Salvador have arrested former fleeing the country. While the pact was in force, challenges with the disputed March 2 regional Defense Minister David Munguía Payés in con- El Salvador’s homicide rate fell from about 14 and general elections on Thursday, the Jamaica nection with a pact involving the country’s main killings per day to five. However, the agreement Gleaner reported. The case is in connection gangs in 2012, the Associated Press reported fell apart in 2013 after the country’s Supreme with the Guyana Elections Commission’s Friday. Munguía was arrested for his alleged Court removed Munguía from his position move to make a declaration of the March 2 involvement in relation to the pact that was as defense minister and authorities ended elections, using votes by the national recount formed during the administration of then-Presi- privileges that they were providing imprisoned process, which the challenger alleges was dent Mauricio Funes, said the country’s current gang leaders. The country’s homicide rate then ruled unconstitutionally by the Caribbean Court attorney general, Raúl Melara. The government increased again, the AP reported. of Justice, or CCJ, on July 8. Both the elections struck the deal with the Mara Salvatrucha and commission and the CCJ declared a win for the Barrio 18 gangs in an effort to lower El Sal- Norway Envoys opposition. Former President Expected to Arrive Mauricio Funes denied in Venezuela Hundreds of Nicaraguans involvement in the pact. Stuck at Costa Rican Venezuela’s political opposition said Friday Border Over Virus Fears that it was expecting the arrival of government Hundreds of Nicaraguans are stuck at the vador’s murder rate. In exchange, authorities representatives from Norway in the Andean border of Costa Rica and Nicaragua after moved some imprisoned gang leaders from nation, Reuters reported. In a statement, the their homeland refused to allow them back in high-security to medium-security prisons, from opposition said Norway had informed it that without proof that they are not infected with which they were able to continue managing its representatives would observe the South the novel coronavirus, Costa Rica’s immigration the gangs’ activities, the AP reported. Melara American country’s “political and humanitarian department said on Friday, Reuters reported. said investigators determined that Funes and About 300 Nicaraguans are stranded, having Munguía devised the pact, adding that El Salva- been barred from entering. During the pandem- dor’s attorney general’s office is also pursuing ic, about 18,000 Nicaraguans have been turned Funes, who fled to Nicaragua and was granted away from Costa Rica, which on Saturday asylum in 2016. In a posting on Twitter, Funes registered its highest daily Covid-19 toll, with denied involvement in the pact. “I never met 931 new cases and 11 deaths. with gangsters, nor did I order any official to do so,” he said in the posting. “I never ordered nor authorized prison privileges for any gang mem- ber.” Munguía’s attorney, Manuel Chacón, said Workers at Antofagasta’s Maduro // File Photo: Venezuelan Government. last Thursday that he had not been informed of Zaldivar Mine in Chile the charges against the former defense minis- situation.” The visit comes almost a year after Accept Wage Offer ter, adding that the he and Munguía had long the end of talks in Oslo between Venezuela’s known about the investigation into the gang divided government and opposition, which Workers at the Zaldivar copper mine in Chile, pact because prosecutors had Munguía testify Norway’s foreign ministry mediated. The which is owned by Antofagasta, have accept- several times about it. In another case related opposition declared those efforts dead last ed a revised wage offer, averting a strike, to the gang pact, Munguía said the agreement September, saying that President Nicolás Bloomberg News reported Saturday. Members was a public policy that originated from Funes’ Maduro was not willing to seriously negotiate of the union representing workers at the mine cabinet. “My role was to facilitate the work of for a new election. In the Friday statement, voted 387-236 for the offer, the news service the mediators and receive reports from the the opposition highlighted that there is no reported. Talks had previously broken down during collective bargaining.

COPYRIGHT © 2020, INTER-AMERICAN DIALOGUE PAGE 2 LATIN AMERICA ADVISOR Monday, July 27, 2020 negotiation process going on right now. “There FEATURED Q&A / Continued from page 1 is not any dialogue process underway at this moment, and we reiterated to the Norwegian taxes and leave the burden of collection see much happening on the international delegation that only free and fair elections can on taxes imposed on consumption, even front, and plain national measures will fall solve this crisis,” the statement said, Reuters imposing higher taxes on luxury goods. The short. Ideal tax reforms must go beyond reported. Neither Norway’s foreign ministry nor more money we leave in citizens’ pockets, compliance measures and focus, first, on Venezuela’s information ministry immediately the more the economy grows, and so also increasing tax revenues. The danger is that responded to Reuters’ requests for comment. grow tax revenues. Such a measure must go businesses have started to push for tax The announcement came as lawyers for Vene- hand in hand with the promotion of the do- breaks and other expensive incentives in zuela’s central bank, or BCV, said they had won mestic market in each country. It will be key the right to appeal a ruling by the English High to implement fiscal stimuli with rules that Court that recognized Venezuelan opposition guarantee economic improvement in each lo- The inevitable reality leader Juan Guaidó as the country’s president. cality, with a strict vigilance of tax payments, is that restoring The decision had effectively denied the Maduro a situation that can be resolved through economic growth in government access to nearly $1 billion worth electronic control of trade. We need to bet Latin America will of gold stored in the Bank of England. on business investment, coupled with a com- have a significant mitment to job creation and improvement, financial cost...” in order to get back tax contributions that — María Fernanda Valdés ECONOMIC NEWS improve everyone’s economy as a whole.”

María Fernanda Valdés, author Latin America, a region already rife with tax Chile’s Piñera and coordinator of tax issues benefits and with dubious results at best Approves Pension for the Friedrich Ebert Stiftung in terms of economic stimuli. Countries A in Colombia and Latin Ameri- should instead focus on equity. In one of Withdrawal Measure ca: “The inevitable reality is that restoring the most unequal regions of this planet, the economic growth in Latin America will have poor, those who are excluded and women Chilean President Sebastián Piñera on Friday a significant financial cost, and time will are already paying the biggest price in this signed into law a measure to allow citizens soon come for tax reforms, as has happened crisis, and they must not be left to carry the to withdraw as much as 10 percent of their during all economic crises in the region, economic burden of recovery as well. New pensions savings, as people lined up at the and probably elsewhere. In fact, preliminary revenue should not come from workers or administrator’s office in Santiago to take discussions about tax reforms are already poor customers in the form of a value-added advantage of the economic relief, Reuters on the agenda in many Latin American tax or other regressive taxes. Instead, they reported. The president’s office said Piñera countries. Now, how should a new wave of should come from those economic sectors tax reforms in the aftermath of this crisis that are thriving during the pandemic and look? A good start is to work on compliance from the richest segments of the society, Piñera’s government had measures. Evasion and avoidance are in fact which are paying very low taxes in Latin staunchly opposed important fiscal challenges, with evasion America (the top decile in Latin America the measure. alone costing around 6.3 percent of regional pays an exceptionally low effective tax rate GDP. Yet, the root of evasion and avoidance of less than 5 percent; in comparison, in has a predominant international component, the United States, this rate is 14.2 percent). had signed the bill late on Friday but made no and with base erosion and profit shifting This is also the least distortionary and a comment on its content. The government had (BEPS) negotiations falling apart after the growth-friendly way to collect—thus a win- staunchly opposed the legislation while it was United States decided to step back, I do not win policy response to the crisis.” being discussed in both houses of Congress, Continued on page 4 even announcing it would help support citizens “difficult economic and social situation,” CNN a total estimated $16.65 billion potentially to with public money instead. It also warned of en Español reported. Lines formed on Friday be used for consumption, according to think long-term consequences on the profitability outside offices of pension fund administrators, tank Ciedess, Reuters reported. However, they and already low average payouts of pensions. with polls showing that nearly nine out of every also warned of the negative impact on pension In a statement last week, Piñera’s office said 10 Chileans planned to dip into their pension funds, which hold more than $200 billion in it would sign the plan into law in response to funds. Economists say that Chile’s struggling assets and which may liquidate local stocks the widespread support given the country’s economy could get a short-term boost, with and bond holdings to pay out savers.

FEATURED Q&A / Continued from page 3 LATIN AMERICA ADVISOR is published every business day by the Inter-American Dialogue, Copyright © 2020 Gabriela Rosa Lopes, tax and the systems in force are not efficient, as they legal consultant at BMJ Con- are not as modern as the changes that the Erik Brand sultores Associados in Brazil: economy demands.” Publisher [email protected] “Several Latin American coun- A Gene Kuleta tries have already understood that economic Carlos Wong Z., president of Editor recovery must come with tax measures with the Free Zones Association [email protected] two guidelines: tax simplification and trans- of Costa Rica: “Covid-19 has Anastasia Chacón González parency. Tax payments have to be a simple affected Costa Rica, leading to A Reporter & Associate Editor task not only to facilitate tax collection and a significant impact on its macroeconomic [email protected] reduce the incidence of mistakes in tax variables in 2020: a contraction in GDP of compliance, but also to facilitate inspec- between 4 and 4.9 percent and unemploy-

tion. In Brazil, the tax reforms in discussion ment of between 16 and 17 percent. To Michael Shifter, President intend to unify consumption taxes so that, in these indexes, add a fiscal deficit of approxi- Rebecca Bill Chavez, Nonresident Senior Fellow the future, it is possible to reduce the burden mately 9 percent, driven by a drop in income Sergio Bitar, Nonresident Senior Fellow of approximately 12 percent in the first half Joan Caivano, Director, Special Projects of the year. Faced with these challenges, the Michael Camilleri, Director, Rule of Law Program The problem of country has taken positive steps that could Kevin Casas-Zamora, Nonresident Senior Fellow tax evasion will be lead to a revival of its economic activity in Héctor Castro Vizcarra, Nonresident Senior Fellow urgent following the coming years. Some of these are part of Julia Dias Leite, Nonresident Senior Fellow the pandemic.” joining the OECD, as well as its labor reforms Ariel Fiszbein, Director, Education Program and recent fiscal reform, including the Peter Hakim, President Emeritus — Gabriela Rosa Lopes framework of fiscal rules to promote balance Nora Lustig, Nonresident Senior Fellow in public balances. As for new measures, a Margaret Myers, Director, Asia and on this economic base and raise the taxation recent evaluation by the OECD gives a clear Latin America Program Manuel Orozco, Director, Migration, on income and profits. The mere simplifica- outline for several of them. Among the most Remittances & Development tion will already reduce company expenses prominent is the simplification of regula- Xiaoyu Pu, Nonresident Senior Fellow with numerous tax teams, advisory services tions, the digitization of the state and the Jeffrey Puryear, Senior Fellow and legal liabilities. In this sense, the ideal reduction of bureaucracy. In fiscal matters, Mateo Samper, Nonresident Senior Fellow reform is one that decreases the time spent the OECD recommends increasing the Tamar Solnik, Director, Finance & Administration paying taxes and does not require further value-added tax rate, as well as a more open Lisa Viscidi, Director, Energy Program adjustments in a few years, so that the next monetary policy that provides liquidity to the Denisse Yanovich, Director of Development and step is to reduce the tax burden. Globally, banking system. Regarding government, it External Relations the economy gains and reduces market recommends reviewing salary policies and Latin America Advisor is published every costs. The problem of tax evasion will be the efficiency of public spending. Regarding business day, except for major U.S. holidays, urgent following the pandemic. Countries employment, stimulating the development by the Inter-American Dialogue at 1155 15th Street NW, Suite 800 such as Peru and Colombia are talking about of public infrastructure is an urgent task for Washington, DC 20005 changing their legislation on the sale of Costa Rica, as well as maintaining its suc- www.thedialogue.org goods between related companies abroad cessful FDI attraction program, particularly ISSN 2163-7962 (transfer pricing). The Special Department of in the life sciences and value-added services Subscription inquiries are welcomed at Federal Revenue of Brazil has been develop- sectors, which have proven to be highly resil- [email protected]

ing changes in the way it accesses taxpayers ient and dynamic amid the pandemic.” The opinions expressed by the members of the Board of in debt, through negotiations to recover large Advisors and by guest commentators do not necessarily debts. The focus of these countries should The Advisor welcomes comments on its Q&A represent those of the publisher. The analysis is the sole view of each commentator and does not necessarily not be on raising the tax burden. The collec- section. Readers can write editor Gene Kuleta represent the views of their respective employers or firms. tion problem that they face today is not due at [email protected]. The information in this report has been obtained from reliable sources, but neither its accuracy and completeness, to a low burden, but rather to the fact that nor the opinions based thereon, are guaranteed. If you have any questions relating to the contents of this publication, contact the editorial offices of the Inter-American Dialogue. Contents of this report may not be reproduced, stored in a retrieval system, or transmitted without prior written permission from the publisher.