We are told ... That by the global crisis we have to think out of dollarization, how absurd!. In the editorial of Mipymes March-April 2003 I spoke about the global economic collapse where I stated that the problem now was not the shortage of supply, but rather than because of technology, offering expanded geometrically while the demand remained straight, that it was impossible to rely only on the U.S. market because a family could not buy 10 refrigerators, 10 cars, etc.., so therefore prosperity had to expand to many third World countries (at that time China recently began its economic change ) this means that in the case of Ecuador far from thinking about removing the dollarization, to put his hand in the pocket of the people or turn again in a casino that impoverished state. We should stop spending prioritizing spending quality, change confrontation by agreements and set the rules of the road to development and opening of markets, this means, walking at the same speed of technology and and stop promoting bureaucracy rather than competitiveness, open markets rather than closing them and understand that something fundamental in economics that is the timing, which apparently many here do not know, because as Manuel Hinds says, "we cannot go playing monopoly with the devil." Let's bet to become a Switzerland and not Somalia, to do so we must not walk backwards but forwards, so upon reaching 11 years of dollarization we are delivering this issue with COUNTRY COMPARATIVE COSTS ANALYSIS between Ecuador and 8 countries. What a shame that we are so behind, it is time to stop confrontation and catch up on everything that the others have done and that we raise instead of going down. TERRIBLE, we do not see the forest, we see the tree, barely half of the leaf.
ANÁLISIS COMPARATIVO DEL COSTO PAÍS 2011 ECUADOR*
EL SALVADOR*
PANAMA*
COLOMBIA
PERU
GDP (Million U.S. $) Population (Millions)
57.978 million USD 14.30 million inhabitants
21,700 million USD 5.9 million inhabitants
26.778 million USD 3.5 million inhabitants
285.511 million USD 45.5 million inhabitants
152.83 million USD 29.6 million inhabitants
WHAT IS THE MINIMUM LIVING INCOME IN U.S. DOLLARS? (INCLUDING ALL THE BENEFITS OF LAW)
308 USD
224,10 USD (max.)
416 USD (máx.)
258 USD
350 USD
WHAT IS THE NUMBER OF WORKING HOURS PER WEEK BY LAW?
40 hours Cost per hour a month taking in consideration the IMV: 1.93 USD
44 hours Cost per hour a month taking in consideration the IMV: 1.27 USD
48 hours Cost per hour a month taking in consideration the IMV: 2.16 USD
48 hours Cost per hour a month taking in consideration the IMV: 1.34 USD
48 hours Cost per hour a month taking in consideration the IMV: 1.82 USD
ANUAL INFLATION 2010 (%)
3,33%
2,1%
3,5%
3,1%
2,08%
WHAT IS THE RATE OF PERSONAL AND CORPORATE INCOME TAX?
Personal: 0% less than $ 8,910 of income and progressive up to 35%. Corporate in 2011 will be 24%. Plus 10% of dividend payment.
Maximum rate of 25% applies equally to natural and legal persons
For Individuals: Between 15% and 25% according to income brackets.
The income tax and its complementary are of national character, and are considered as a single tax: 33%
Personal Income Tax: 15% to 30% depending on income brackets.
There is a general tax rate: 16%
The general tax on sales is 18%
DOES NOT EXIST
DOES NOT EXIST
Corporate: 25%
WHAT IS THE RATE OF VALUE ADDED TAX? IF THERE ISN'T ANY, IS THERE A SALES TAX?
12%
13%
The reference rate is the Transference of Assents and Services Tax (ITBMS in spanish) of 7% La tasa de referencia es el Impuesto de Transferencia de Bienes muebles y Servicios (ITBMS) es del 7%.
IS THERE TAX FOR CAPITAL OUTFLOW? IF THERE IS, WHICH IS THE PERCENTAGE?
IT EXISTS. Is 2%.
DOES NOT EXIST
DOES NOT EXIST
3
Corporate: 30%
ECUADOR*
EL SALVADOR*
COLOMBIA
PERU
DOES NOT EXIST
DOES NOT EXIST
It exists; in averege 8% of utilitie. Maximum 18 remuneratios for the employee.
Between .6,24% and 7,77%.
The trade interest rate is 8.30%
Ordinary rate is 10,09 , and preferential 7,19.
Averge active rate 7,9%.
DOES NOT EXIST
YES, THERE IS
YES, THERE IS
YES, THERE IS
YES, THERE IS
DOES NOT EXIST There are half XX contracts Existen contratos de mitad de jornada
DOES NOT EXIST
DOES NOT EXIST There are defined and undefined time contracts.
DOES NOT EXIST There are defined and undefined time contracts.
YES, THERE ARE
DOES THE LAW MAKES MANDATORY FOR EMPLOYEES TO PARTICIPATE IN THE PROFITS OF THE COMPANY? IF THERE IS, WHAT IS THE PERCENTAGE.
15% of utilities It is NOT deductible for the employer
DOES NOT EXIST
WHAT IS THE TRADE RATE (ACTIVE) IN U.S. DOLLARS?
Referencial Active 9,54%.
IS THERE THE POSSIBILITY OF OUTSOURCING THE ACTIVITIES OF THE COMPANY?
ARE THERE HOUR CONTRACTS?
IS THE SOCIAL SECURITY SYSTEM OF INDIVIDUAL CAPITALIZATION, OF DISTRIBUTION OR MIXED?
PANAMA*
Exists a distribution system, INDIVIDUAL Individual Capitalization CAPITALIZATION DOES NOT EXISTS.
WHAT IS THE PERCENTAGE OF EMPLOYER CONTRIBUTIONS TO SOCIAL SECURITY?
12.15%
7.25%
HOW MANY DAYS OF VACATION EMPLOYEES HAVE BY RIGHT PER YEAR?
15 days per year in the private sector. (from the 5th year of work a day is added, 30 days maximum)
15 working days, with a 30% aditional payment, calculated over the salary of the employee.
The social security sistem is of individual and mixt capitalization.
4
There is individual There is individual capitalization and capitalization and distribution system, people distribution system, people can choose to enroll in can choose to enroll in either. either.
12.0%
Employer, Pensions 12%, Health 8.5%.
9%
30 days of vacations for every 11 working months.
15 working days.
General Regime: 30 days. Special Regime: 15 days.
ECUADOR* COST OF ELECTRICITY IN DOLLARS per kWh? (Including tax) residential commercial industrial
Residential: $0,09 $0,65. Comercial: $0,062-$0,09 Industrial: $0,054-$0,09.
EL SALVADOR*
PANAMÁ*
COLOMBIA
PERÚ
Industrial and Comercial: $0,14 - $0,26 Big Conssumers: $0,05 $0,10.
Residential: $0,11 Industrial: $0,79
88 octanes $4,49 ACPM Gasoline $3,89.
84 octanes $4.25 90 Octanes $4.53
National Aqueducts and Sewer.
Ativities related with defense, national security Actividades relacionadas con la defensa y seguridad nacional y el Manejo, procesamiento disposición de desechos tóxicos, peligrosos o radioactivos no producidos en el país.
There is no restriction.
YES. The strategy is to sign FTAs
YES. The strategy is to sign FTAs
YES. The strategy is to sign FTAs
Currently in process of ratificating the FTA with USA. Central America and Panama signed a Comercial Agreement with the EU.
It exists with the EU and the FTA with USA. Is in process of the Goverment approval.
YES, THERE IS
Residential: $0,14 – $0,17 Residenctal: $0,13 – $0,17 Industrial: $0,103 Industrial: $0,07 – 0,10
COST OF GASOLINE IN DOLLARS PER GALLON INCLUDING TAXES? 86 OCTANE 89 to 92 octane diesel
AREAS WHERE THE LAW IMPEDES THE PRIVATE INVESTMENT
IS THERE OPEN TRADE
DO YOU HAVE FREE TRADE AGREEMENTS WITH: - USA - EU
Extra 86 Super 89 – 92 Diesel
$1.48 $2,19 $1,03
Regular Special Diesel
$4,64 $4,80 $4,68
Petroleum, Gas and electricity. And any other sector determined by the goverment
For underground resources – water and minerls- have to ask for permission.
Limited trade openess. High level of Protectionism
YES. Free Economy according to the Economical Freedom rate.
THERE IS NOT ANY FTA WITH ANY COUNTRY AND THE GOVERMENT HAS INFORM THERE IS NO INTENTION IN HAVING THEM.
Gasoline 91 Gasoline 95 Light Diesel
Yes, with USA, and in negociations with the EU.
5
$3.98 $4.19 $3.79
ECUADOR*
EL SALVADOR*
PANAMA*
COLOMBIA
PERU
DOES FOREIGN INVESTMENT HAS THE SAME TREATMENT AS NATIONAL INVESTMENT?
YES
YES
YES
YES
YES
ARE THERE INCENTIVES TO FOREIGN INVESTMENT? IF SO, WHAT ARE THEY?
CURRENT GOVERNMENT ELIMINATE THE TREATY OF LEGAL STABILITY AND CONFLICT RESOLUTION. ON THE ROLE OF FOREIGN INVESTMENT HAS OFFERED SOME BENEFITS BUT IN PRACTICE DUE TO INSTITUTIONAL CHAOS AND VIOLATION OF CONTRACTS THAT FOREIGN COMPANIES HAVE SUFFERED, ECUADOR IS ONE OF THE LAST COUNTRIES IN ATTRACTING FOREIGN INVESTMENT.
There are incentives for foreign investment, which Colombia ranks second in are listed below: Latin America with better • Law on Export business environment, Processing Zones (Law 25 according to the Doing of November 30, 1992) Business Report 2010. • Law of Incentives for Tourism Development in The most important the Republic of Panama incentives to attract (Law 8 of 1994) investors. • Stability Judicial 1. Legal Stability Investment Law (Law 54 of Agreements. July 22, 1998) 2. The Colombian • Law of Multinational government has created a Enterprises Regional series of exemptions from Headquarters (Act 41 of income tax in priority 2007) sectors. • Law of Incentives for the 3. Special Import - Export Film Industry (Act No. 36 of "Plan Vallejo" Services. 2007)
THERE ARE NOT
6
National treatment to is granted foreign investors
ECUADOR*
EL SALVADOR*
PANAMĂ *
COLOMBIA
PERU
ARE THERE FREE TRADE ZONES?
EXIST BUT THEY ARE BLOCKED
YES, THERE ARE
YES, THERE ARE
YES, THERE ARE
YES, THERE ARE
IS THERE AGREEMENTS (CONTRACTS WITH THE STATE) OF LEGAL STABILITY
THERE ARE NOT, THE CURRENT GOVERMENT ELMINATED THEM. EXISTED FORMERLY BUR WERE NOT APPLIED
DOES NOT APPLIES
YES, THERE ARE
YES, THERE ARE
DOES NOT EXIST. RECENTLY ELIMINATED.
NA
Supreme Decree # 0022002PE, entitled "Act to promote the globalization of the tuna fishery and the development of canning and freezing industry of this kind." definitive Returning of general sales tax, excise tax and municipal tax. In addition, a group of tax benefits based on fulfillment of specific conditions.
Law # 8 (June 1994) provides a set of incentives to promote investment in the tourism sector: Total exemption from income tax for a period of 15 years, total exemption from property taxes for a period of 20 years, total exemption from import duties for materials and furnishings needed for the construction and equipment. Companies that provide ecotourism services certified by the Ministry of Environment, have the advantage of the exemption from Income Tax.
Companies that provide ecotourism services certified by the Ministry of Environment, have the advantage of the exemption from Income Tax.
NA.
INCENTIVES FOR FISHERIES AND PRESERVES INDUSTRY
TOURISM INCENTIVES
THERE IS NO BENEFIT to incentive investment in the sector.
THERE ARE BUT THE CONDITIONS OF THE COUNTRY AND BY THE ELIMINATION OF THE WORK FLEXIBILITY PREVENTS IT.
YES, THERE ARE
DOES NOT EXIST.
The Tourism Law provides legal guarantees and incentives to investors with assets of more than $ 50 thousand, including total exemption from duties and import taxes, including VAT of inputs for project equipment.
7
ECUADOR*
EL SALVADOR*
PANAMÁ*
Reduction of up to 30% of the prevailing rate in the installation and electricity consumption, tax exemption up to 30% of sums invested in the agricultural, livestock, aquaculture and agribusiness.
NA
YES, THERE ARE
YES, THERE ARE
(Example.: www.ciudaddelsaber.org )
(Example: www.parquepta.org )
INCENTIVES IN AGRICULTURE
THERE ARE NO INCENTIVES
DOES NOT EXIST
ARE THERE TECHNOLOGY PARKS AS SPECIAL AREAS OF PRODUCTION?
YES, THERE IS, THE ESPOL TECHNOLOGICAL PARK, THAT THE ESPOL HAS DEVELOP
YES, THERE ARE
DO NOT EXIST. LAW IS CHANGED TO A NEW CODE OF ORGANIC PRODUCTION, BUT ARE THERE INCENTIVES TO EXPORT? IF SO, HAS NOT BEEN WHICH ARE THEY? SUCCESSFUL IN PROMOTING EXPORTS, AND DOMESTIC PRODUCTION. ARE THERE SECTORS WHIT SPECIAL BENEFITS OF PRODUCTION?
DOES NOT EXIST
COLOMBIA
There are incentives for exports, which are: Yes there are incentives Certificates for the to exports. Among these Promotion of agricultural are, Special systems of exports (CEFA) and import and export (Plan Industrial Development Vallejo). Certificate (IFC).
DOES NOT EXIST
NA
YES, THERE ARE
8
YES, THERE ARE
PERÚ
During pre-production stage and for a maximum period of 5 years, the natural or legal person, may recover in advance the general sales tax.
YES, THERE ARE
There is a system of tariff refunds (Draw Back) that is 5%
YES, THERE ARE
ECUADOR*
TOTAL ASSETS TAX
CAPITAL MONEY TAX
URBAN PROPERTY TAX
ALCABALA MUNICIPAL TAX:
VEHICLE TAX
1.5 per thousand over book value of total assets of the calendar year preceding the date of payment.
DOES NOT EXIST
YES, THERE ARE
EL SALVADOR*
PANAMA*
COLOMBIA
PERU
The renewal of the registration of Trade is conducted annually and the payment is 5% of total assets. The payout percentages are based on the amount of assets.
DOES NOT EXIST
NA
NA.
DOES NOT EXIST
NA
NA
DOES NOT EXIST
from 1,40% to 2,10% over the cadastral value
NA
0.2% up to 15 ITUimpeditive tax unit, 0.6% from 15 to 60 ITU, 1% over 60 ITU.
ITAN Tax: 0% from 0 to $ 1Mill, 0.4% for the excess of one million.
For each purchase made of real estate and ships. Real estate: Less than 10 UIT does The rate varies from a NA DOES NOT EXIST NA NOT pay. 3% of transfer minimum of 4% on value. contracts of more than $ 200. YES THERE IS, 35%. The right of fee changes. For the pick ups, for And in charged another example, is 5%, but for a luxury property tax is The value varies There is no import tax Minimum 1.5% of the sedan, depending on their (ICE) up to 30% between 1.5% and 3.5% ITU, 1% of the original size varies and can range on vehicles, but there is CURRENTLY THERE depending on the value from 20% to 25% of the an excise tax ranging value or CIF IS A NEW REFORM of the vehicle. vehicle value. from 5% to 23%. transaction. THAT WILL For vehicles from United AGGRAVATE MORE States, due to the THE VEHICLES. NAFTA, do not pay tariffs.
9
ECUADOR*
IS THERE DRAWBACK?
CUSTOMS DUTIES: WHAT IS THE MIN AND MAX RATE TARIFF.
ESTIMATED TIME OF MERCHANDISE customs clearance (Shipping)
ESTIMATED TIME OF MERCHANDISE customs clearance (AIR TRANSPORT)
HOW MANY DAYS TAKES TO CONSTITUTE A COMPANY?
EL SALVADOR*
PANAMÁ*
COLOMBIA
PERÚ
YES, THERE ARE
EXISTS BUT IT IS ALMOST IMPOSIBLE TO CONSOLIDATE IT.
YES, THERE ARE
YES, THERE ARE
Up to 35% in some products
Minimum: 0 % Maximum: 17 % Average Tariff 2,5%
Average Tariff 7,1% (Economical Freedom Inform 2011)
Average Tariff 8,4% (Economical Freedom Inform 2011)
Min: 0% Max: 11% Average Tariff 2%.
6 days
3 days
2 days
4 days
3 days
4 days
3 days
2 days
4 days
3 days
56 days
17 days
9 days
14 days
14 days
The equal process in Colombia is the “Vallejo Plan”
YES, THERE ARE
* Dollarized countries colored in green. ** The figures for other analyzed countries that have national currency have been converted into dollars to the current exchange rate. In non-dollarized countries tax rates are in local currency. Blue = Forward. Red = Reverse. For any details on the information presented, you can consult the American Federation Business. NA: Not available.
10
ANÁLISIS COMPARATIVO DEL COSTO PAÍS 2011 ECUADOR*
CHILE
ARGENTINA
URUGUAY
COSTA RICA
US$57.978 million 14,30 Million inhabitants
US$203.323 million 17,2 Million inhabitants
US$370.269 million 40,5 Million inhabitants
US$40.272 million 3,36 Million inhabitants
US$35.780 million 4,6 Million inhabitants
WHAT IS THE MINIMUM LIVING INCOME IN U.S. $? (INCLUDING ALL THE BENEFITS OF LAW)
US$308
US$388
U$S 441,24
US$355
US$325
WHAT IS THE NUMBER OF HOURS YOU WORK PER WEEK BY LAW
40 hours Cost of hour per month, taking notice of the MLI (Minimum Living Income) US$1,93
45 hours Cost of hour per month, taking notice of the MLI (Minimum Living Income) US$2,15
48 hours Cost of hour per month, taking notice of the MLI (Minimum Living Income) US$2,29
44 hours Cost of hour per month, taking notice of the MLI (Minimum Living Income) US$2,02
48 hours (max.) Cost of hour per month, taking notice of the MLI (Minimum Living Income) US$1,69
3,33%
2,9%
10,9% (According to private estimations between 20 and 25%)
6,9%
5,8%
GDP (MILLION U.S. $) POPULATION (MILLIONS)
ANNUAL INFLATION 2010 (%)
WHAT IS THE RATE OF PERSONAL AND CORPORATE INCOME TAX?
WHAT IS THE RATE OF VAT? IF THERE ISN'T ANY, IS THERE A SALES TAX? IS THERE CAPITAL OUTFLOW TAX? IF THERE IS WHAT IS THE PERCENTAGE?
Personal: 0% less than $ 8,910 of income and progressive up to 35%. Corporate in 2011 will be 24%. Plus 10% dividend payment.
12%
YES, IT IS 2%.
Personal progressive up to 40%. Corporate flat rate 17.5% but exceptionally today is 20% in the first category to contribute to post-earthquake reconstruction
Personal: 9% to 35% (depends on level of taxable income) Corporate: 35%
19% No sales tax, except tabacco and fuel tax.
21%
NO
There are no restrictions to the outflow of profits abroad.
11
Personal: is by fringes and includes a tax allowance. Varies between 10% and 25%. Corporate: 25% Maximum rate: 22% Minimum rate: 10%
Individuals: 10% to 25%, depending on income level. Corporate: 30%
Sales tax: 13%
YES There is a regulation to the output of capital, but only taxes the income of that exit through the income tax.
NO
DOES THE LAW MADE MANDATORY FOR EMPLOYEES TO PARTICIPATE IN THE PROFITS OF THE COMPANY? IF THERE IS, WHAT IS THE PERCENTAGE WHAT IS THE COMMERCIAL INTEREST RATE (ACTIVE) IN U.S. DOLLARS? IS THERE THE POSSIBILITY OF OUTSOURCING THE ACTIVITIES OF THE COMPANY?
ECUADOR*
CHILE
ARGENTINA
URUGUAY
COSTA RICA
15% of the profits NOT deductible for the employer
The law requires that gratuities are agreed. You can agree month to month or yearly, as long as there profits. The top is U.S. $ 1,404 per worker.
NO
NO
NO
8% (average of the system).
19% (min)
Between9 % and 12%
9,57%
YES
NA
YES
YES
YES
It is possible to conclude contracts for part-time work.
Depends on the activity and the Conventions set out in the Wages Councils.
NO
INDIVIDUAL CAPITALIZATION
Distribution System
It is mixed. Part will to distribution system and some individual capitalization regime.
Coexist Individual capitalization and distribution system
NA
16%
18,12%
8%
Less than 5 years old: 14 days. 5 to 10 years: 21 days. 10 to 20 years: 28 days. 20 to 30 years: 35 days.
20 days during the first five years, adding one more day after this period for each 3 years old, always in the same company.
Referencial Active 9,54%.
NO
ARE THERE CONTRACTS OF HOURS?
NO Only contracts for half a working day
IS THE SOCIAL SECURITY SYSTEM OF CAPITALIZATION, INDIVIDUAL OF DISTRIBUTION OR MIXED?
There are distribution systems, THERE IS NO INDIVIDUAL CAPITALIZATION
WHAT IS THE PERCENTAGE OF THE PATRONAL CONTRIBUTION TO SOCIAL SECURITY? HOW MANY DAYS OF VACATION ARE ENTITLED TO WORKERS PER YEAR?
12,15%
15 days per year in the 15 working days per year private sector (increases 1 and rising after 10 years day after the 5th year of by adding an extra day per work, limit 30 days) year.
12
1 day per month worked
ECUADOR*
CHILE
ARGENTINA
URUGUAY
COSTA RICA
COST OF ELECTRICITY IN DOLLARS PER KILOWATT HOUR (INCLUDING TAXES)
residential commercial industrial
Residential: $0,09 - $0,65. Commercial: $0,062-$0,09 Residential: $0,21 Industrial: $0,054-$0,09.. Industrial: $0,196 – 0,257
Residential: $0,19 - $0,39. Residential: $0,01 – 0,055 Industrial y Commercial: Industrial: $0,038 $0,24 - $0,28.
Extra 86 $1.48 Super 89 – 92 $2,19 Diesel $1,03
96 octanes $4,4 97,5 octanes $5,3 Gasoil $3,96
Residential: $0,14 Industrial: $014 General: $0,17
COST OF THE GASOLINE IN DOLLARS PER GALLON INCLUDING TAXES 86 OCTANE 89 to 92 OCTANES Diesel
AREAS WHERE THE LAW PREVENTS PRIVATE INVESTMENT
IS THERE TRADE OPENNESS?
IS THERE A FREE TRADE AGREEMENT WITH: - USA - EU
Oil, gas and electricity. And any other area determined by the government.
95 octanes 97 octanes Diesel
$6,05 $6,46 $5,17
The State of Chile has a very limited role in productive activities. Activities such as lithium exploration and exploitation, deposits of located liquid and gaseous hydrocarbons
Limited trade openness High level of protectionism
YES The strategy is to sign Free Trade Agreements.
THERE ARE NO FTAs WITH ANY COUNTRY AND THE GOVERNMENT HAS INDICATED THEY HAVE NO INTEREST IN DOING SO.
Chile has FTAs with 58 countries including the EU and the U.S. and 24 countries with double taxation treaties.
13
86 octanes $6,59 89 octanes $8,32 Diesel $4,84 Fuel Oil $2,75
Super $5,36 Plus 91 $5,18 Diesel 50 $4,82
Areas such as banking and insurance, there are special statutes that require all operators, domestic or foreign, to request permission
Import, export and refining of crude oil and petroleum derivatives export, in the distribution of electric power, in fixed telephony and data transmission, in sanitation and water supply and insurance for work accidents.
Hydropower, coal, gas and oil, production of alcohol, telecommunications services, water, railways, ports, airports and insurance.
Limited
YES Free economy according to the Index of Economic Freedom
YES Free economy according to the Index of Economic Freedom
NO
NO Only with MERCOSUR, the rest are bilateral agreements and for specific areas of activity.
Yes, with both
¿LA INVERSIÓN EXTRANJERA TIENE EL MISMO TRATO QUE LA NACIONAL?
ECUADOR*
CHILE
ARGENTINA
URUGUAY
COSTA RICA
Yes
Yes
Yes
Yes
Yes
THE CURRENT GOVERNMEN T ELIMINATED THE TRE ATIES OF LEGALSTABIL ITY AND OF CONFLICT RESOLUTI ON. ON THE ROLE OF FOREIGN INVESTMENT HAS ARE THERE BEEN GIVEN SOME INCENTIVES TO FOREIG BENEFITS BUT IN THE N INVESTMENT? IF SO, PRACTICEDUE WHAT ARE THEY? TO INSTITUTIONAL CHA OS AND VIOLATION OF CONTRACTSFOREIG N COMPANIES HAVE SUFFERED, ECUADOR IS ONE OF THE LASTCOUNTRIES IN ATT RACTING FOREIGN INVESTMENT.
In Chile Exist two fundamental mechanisms that regulate foreign investment, 'The Foreign Investment Statute or Decree Law 600. -Section 47 of the Constitutional Act of the Central Bank, also known as ChapterXIV of Foreign Exchange Regulations (CNCI). There is also a third way, through Law No. 18,657, which regulates the legal figure of Foreing Capital Investment Fund (FICE), although in this case, the invested capital must be justified under Chapter XIV or Decree Law 600. In November 2002 a new standard was approved, known as the law of"investment platform" designed to encourage foreign investment, maritime areasunder national jurisdiction or in areas classified by law as important for national security, as border areas.
14
THERE ARE NO INCENTIVES
In Costa Rica there is not a specific law to regulate direct foreign investment. Both, local Law 16906 of 20/01/98 and foreign investors enjoy Law on promotion and the same treatment protection of investments: and the same levels of - Foreign investors have investment protection. the same incentives In addition as local investors - There is no restriction on to external incentives that represent being the transfer of profits a beneficiary of the abroad Carebbean - Automatic Incentives Basin Initiative (CBI) and and objective criteria the Generalized System of - Silence of the Preferences (GSP) in administration works in industrialized countries, favor of the taxpayer. agreements that There is also a law-free guarantee access to a zones and does not discriminate between foreig wide range of duty free goods to those markets, n and domestic the Government of Costa investment (Law 15 921, Rica offers the following of 17/12, 1987). system of investment incentives: the Free Trade Zone and Inward Processing Regime
ARE THERE FREE TRADE ZONES?
ARE THERE (GOVERNMENT CONTRACTS) LEGAL S TABILITY AGREEMENT S?
INCENTIVES IN FISHERIES AND CANNING INDUSTRIES.
INCENTIVES IN TOURISM
ECUADOR*
CHILE
ARGENTINA
URUGUAY
COSTA RICA
YES, BUT THEY ARE BLOCKED
YES
YES, AND THEY ARE VERY DEVELOPED
YES, AND THEY ARE VERY DEVELOPED
YES
YES THERE ARE. For example, the mining promotional regime ensures fiscal stability for 30 years.
DOES EXIST, but are rare
There are no real incentives nationwide.
Law 14,178 - Industrial Promotion Act Incentives: Direct Credit Assistance and tax exemptions. Credit - for purchase of machinery, raw materials, initial turn, preinvestment, among others.
THERE ARE NOT, THE CURRENT GOVERNMEN T REMOVED THESE. THERE USED TO BUT NOT IMPLEMENTED.
THERE IS NOT ANY TYPE OF BENEFIT to incentivate the investment in the area
THERE ARE BUT THE TERMS OF THE COUNTRY AND THE ELIMINATION OF WORK FLEXIBILITY P REVENTS IT.
YES THERE ARE
The Foreign Investment Statute (DL 600) does not discriminate between sectors (fishing has the same treatment)
The Foreign Investment Statute (DL 600) does not discriminate between economic sectors (tourism has the same treatment)
Law 14,335 - Promotion of Tourism - Among others, plan and promote the There are no real improvement of tourism incentives, access to infrastructure, approving training or just a projects and tourism conversion program, % development programs, subsidized in general by a install tourist information ny province. centers abroad, grant concessions on property owned by the state for use in tourism.
15
Free Trade Zones only
NO
Incentives in tourism (Law 6990)
ECUADOR*
CHILE
INCENTIVES IN AGRICULTURE
ARE THERE TECHNOLOGICAL PARKS AS SPECIAL PRODUCTION AREAS?
NO INCENTIVES
NA.
YES
YES
NO. LAW WAS CHANGED TO A NEW ORGANIC CODE F ARE THERE OR PRODUCTION BUTH INCENTIVES TO AS NOT BEEN EXPORTS? IF THERE IS, SUCCESSFUL WHICH ARE THEM? IN PROMOTING EXPORTS, NOR DOMESTIC PRODUCTION.
ARE THERE SECTORS WITH SPECIAL BENEFITS OF PRODUCTION?
NO
VAT refund. Furthermore, the main incentive is that the country is open to the world through free trade agreements, which opens the door to major world markets.
YES
ARGENTINA There are no real incentives, in agriculture the state retains 30% on the sale of grain, besides the other current taxes.
YES
URUGUAY
COSTA RICA
Law 14,178 - Industrial Promotion Act idem Fisheries and preserves industries. Law 15,939 - Forestry Act.
Incentives to reforestation
YES
YES
Training in Foreign Trade: YES THERE ARE. Ability Uruguay has a program to to obtain the restitution promote the export of import duties, statistical culture of small tax and Value Added and medium enterprises Tax that have been in our country. paid on imported Proexport Program: provide inputs and then used in s a subsidy of up to $ 5 the 000 for a maximum grant production of exportable p assistance of 70% of the roducts; internal tax cost of the activity. refund, among others
Automotive and Auto Parts, Software, Biotechnology, Biofuels, Motorcycles and motorcycle parts, Mining, Tourism, Forestry industry, public infrastructure, exploration and exploitation of hydrocarbons.
16
Export Agreement grants the following incentives: 1. Exemption from import duties on raw materials, containers and semi-finished products used in the manufacture of export products. The exemption will be proportional to the third party sales of nontraditional markets. Exemptio n from import duties on machinery, equipment and spare parts directly involved in the production process.
Yes, for example, the law 14,448 provides special Special areas of benefits for production development in less ofsacarigens. Today also pr developed regions omotes the production of biofuels.
TOTAL TAX ASSETS:
CAPITAL TAX MONEY:
URBAN PROPERTY TAX
ECUADOR*
CHILE
ARGENTINA
1.5 per thousand over book value of total assets of the calendar year preceding the date of payment.
In Chile the companies do not pay specific taxes such as described in additional taxes.
The company assets are encumbered by a 1% tax, called tax on minimum presumed income.
NO
NO
NO
YES
For each sale that is made of real property and ships. Real MUNICIPAL TAX EXCISE estate: The rate varies from a minimum of 4% on contracts over $ 200. YES THERE IS, 35%. And in the luxury is charged another tax (ICE) up to 30% VEHICLE TAX CURRENTLY THERE IS A NEW REFORM THAT WILL TAX VEHICLES EVEN MORE.
YES
NA
NO
URUGUAY IRAE (Income Tax on Economic Activities in spanish) 25% over Net Income Tax (Articles 19 to 25 Law 18 083).
Covered in Tax Law 18,083 of total assets.
There is a provincial property tax and municipal rates vary by value.
It includes two taxes: property tax Which is fixed by sections. Primary tax, ranging from 0% to 30%. No gravel rural goods.
Varies between 0.5 to 3% depending on the municipality and the activity of the taxpayer.
Covered in Law 18,083 Tax on total assets.
Yes there is, 34.8% of the net price
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Rolled Pat - you pay annually. All departments of the country have their own rate set by each Municipality. The average is 4.5% of the selling price of the vehicle without VAT.
COSTA RICA
NO
NO
YES
NO
Yes there is and depends on the price
IS THERE DRAWBACK?
CUSTOMS DUTIES: WHAT IS THE MIN AND MAX FEE RATE
ECUADOR*
CHILE
ARGENTINA
URUGUAY
COSTA RICA
THERE IS BUT IT IS ALMOST IMPOSSIBLE TO CONCRETE
YES
YES
YES Decret 380/004
YES
Up to 35% in some products
Average rate: 1%
Min: 0% Max: 20% Average rate: 5,3%
Min: 0 % Max: 20 % Average rate: 3,5%
Average rate: 2,4%
6 days
3 days
5 - 7 days
4 days
3 days
4 days
3 days
2 - 4 days
4 days
3 days
56 days
22 days
27 days
65 days
60 days
ESTIMATED TIME OF CUSTOMS CLEARANCE OF GOODS (SHIPPING)
ESTIMATED TIME OF M ERCHANDISE CUSTOM S CLEARANCE (AIR TRANSPORT)
HOW MANY DAYS IT TAKES TO CONSTITUTE A COMPANY?
* Dollarized countries in green
** The figures for other analyzed countries that have national currency have been converted into dollars at current exchange rate. In non-dollarized countries tax rates are in local currency. Blue = Forward. Red = Reverse. For any details on the information presented, you can consult the Federaci贸n Interamericana Empresarial. NA: NOT AVAILABLE
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THE ANTICS OF THE DEVIL: DOLLARIZATION AND LOCAL CURRENCY IN DEVELOPING COUNTRIES Dr. Manuel Hinds
Former Minister of Finance of El Salvador
The crucial question: WHY HAVING A CURRENCY OF OUR OWN? The prejudice: • There is the idea that by allowing the exercise of "monetary policies" and "exchange rate policies", local currencies give crucial benefits to developing countries. • Since these policies allow them to become independent from what happens in the world, mainly to: - Print money to keep low interest rates even if they are high in the rest of the world - Devalue the currency to promote exports - To protect banks against financial crisis - Printing money to save the banks if there is a crisis • All these ideas are false • These are based on ideas that may be true for currencies that have an standard international value, like the dollar, but not for currencies that are used only in developing countries
The confusion of the dollar with the Peso... which are not the same • Most economists take as true the results of theoretical analysis made on the currencies of the world's strongest economies. • Believing that people react equally to the pesos as to dollars. • This is not true, because people react against the currencies depending on the value that people believe they have and their ability to keep it in time and space. • In the U.S., it is true that so far the Fed can do all that is listed previously... • But it is not true that the central banks of developing countries can do the same. Printing is not the same the standard of value than printing an imperfect substitute for such standard • When a country has a vulnerable currency, say pesos, people take as a other currency standard of value, less vulnerable, as the dollar. • and start measuring the value of the pesos in relation to the dollar. • That is, thinking in dollars and translates them into pesos. • So, central banks print a substitute of the standard of value, not the standard of value itself, as the U.S. Fed does . • This causes, for example, that by printing money the interest rates to rise it because people think that the pesos will be devalued and the interests want request to compensate the loss • In the U.S., people does not mind is if the dollar depreciates against the euro or any other currency standard ... its of value is the dollar itself, its own currency, not the euro.
An appropriate simile 19
• The central bank in a developing country would be as a player who is managing the bank in a game of Monopoly with real money betting. • When entering the game, the bank will that the real change their real dollars money, promising that at the end of the game will sell the dollars back that match what you have in money. • The bank dollars deposits in a real bank that the real and earn interests while you use the fake money. • The important thing for you is that when you want to change your Monopoly money back for dollars these will be enough. • If they are not enough, the bank will devalue the money and you will lose real dollars.
In this Monopoly board • How much interest would you request to be paid would ask for to change their dollars for this little money? • Higher rates than those in dollars, obviously: - Why, otherwise, would you agree to exchange a currency that circulates worldwide, that allowes you to buy houses in the U.S., Brazilian aircraft, boats in England, dinners in China, and so on. ., for a coin you can only use in El Salvador, and may lose value? • And, the more Monopoly money without the support of printed new dollars, you would ask for higher interest rates because the risk are not enough that the real dollars becomes higher. • This is an example of a crucial dimension in which people react in opposite ways to the dollars that to pesos.
In fact, the reality is the opposite of what they expect, those who believe that monetary policies help in all dimensions. Expectations of local currencies Realities of local currencies Inflation
Low
Higher than in dolarized countries
Financial
Lower interest rates
Interest rates higher than the dollar in all countries with local currency.
Abundant credit
Low and with tight deadlines
Avoid financial crisis Resolved printed Comerce
bank
runs
Generate financial through exchange crisis U.S. dollars are needed to solve the when runs because people wants dollars
Devaluations lead to success Those who devaluate the most the in exports ones that least exporters
The chart above shows • That a dollarized economy can do everything the economy says it can be done but that does not do • And can be done better and more transparently • The following slides demonstrate this point
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The IMF report on Dollarization in El Salvador The critics The IMF - Inability to make monetary policy reduces the - The dollarization really dropped the interest government's ability to reactivate the economy rates by at least 5 percentage points. This has by lowering the interest rates. led borrowers to save 1.200 million in the first 9 years of dollarization. - The dollarization has been more successful in - Monetary policy the Central Bank would give the stabilization of the economy than the high efficiency in the stabilization of the policies of the Central Bank in the years prior to economy. dollarization were. - Lack of devaluations has not affected - Devaluations turn companies more negatively the cost of exporting companies. competitive and improve their exports. - The dollarization has provided a strong anchor to the country to ensure stability through - Monetary policy helps to absorb shocks more much stronger shocks that the country suffered efficiently than the dollarization. before dollarization. It's a trust factor.
SOURCE: Andrew Swinston, Official Dollarization as a Monetary Regime: its Effects on El Salvador, IMF Working Paper,WP/11/129 June 2011.
The failed promises of the legacy currencies: THE PROMISE OF LOW INFLATION It is assumed that one of the objectives of monetary policy is to keep inflation low
The evidence shows that dollarized countries have inflation rates substantially lower than those of nondollarized This is not by chance ... The countries with own currencies devaluate often ... And that causes inflation in developing countries Source of basic data: International Financial Statistics of the IMF. Depreciation and inflation in the dollar area (USA) In the United States to devalue the dollar against the euro does not increase inflation The slight trend observed is not statistically significant In El Salvador many people believe that dollarization has caused inflation ... As shown in the accompanying graphic, inflation in El Salvador has been the lowest in Central America and has been well below the average since the dollarization of Latin 21
America
The lowest inflation It has a big effect on the price level as the time passes. Since the inflation of a year adds up over the previous year. In El Salvador, prices increased 34 percent from January 2001 to February 2010 On average in Latin America increased 87 percent. In Costa Rica, 148 percent.
In the United States: the interest rate does not increase when the dollar is devalued.
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Datos enero 2000 – junio 2004.
But it does in developing countries: Interest rate and currency devaluations in 114 developing countries.
Data January 1997 - March 2005. In Latin America, central banks talk a lot about executing monetary policies to maintain low the interest rates But the interest rates in dollarized countries have been much lower than those of non-dollarized The same goes for real interest rates That is, with the rates calculated after deducting the inflation rate
The failed promises of local currencies: DEVALUATIONS DO NOT PROMOTE THE EXPORTS 23
The myth in this dimension is that devaluations promote exports This myth has two problems: - First, if it were true would make it at the expense of workers' income, since the reasoning is that devaluations increase all costs but not the wages, thereby reducing production costs by lowering the real wages of workers and this is not conducive to development. - Second, the evidence sample that is not true that promote exports. - If this were true, Latin America would be the great champion of exports because no region has been devalued devaluated as Latin American countries. - Now, with the boom in primary products exports have risen sharply - But at the same time, the currencies have been appreciated, not devalued. - It's the opposite of what they say. Competitiveness at the expense of lower the actual salary • Supporters of dollarization believe that devaluations are good because they "improve competitiveness by reducing costs." Typically they do not say what costs or how. • Do you think what are the reduced costs and how to reduce them? • With a devaluation of all the costs go up ... except wages. • That is, lower costs at the expense of workers. • Of course, this is not true increase competitiveness, which depends on the education, efficiency in managing public services, and many other variables. • None of the Global Competitiveness Index includes devaluations as a factor that promotes it, because there is no gain for the country to increase sales running down the population income Before showing the data is necessary to make an observation • What is important to vary the cost is the real exchange rate • To relate the movements in the exchange rate to differences in the rate of inflation ... • If, for example, the colon is devalued by 10 percent but the inflation rate rises to 10 percent also while the U.S. is zero, no change in costs - Lower cost 10 percent by devaluation. - But increased 10 percent for inflation. • This is why it is so important that the issue of devaluation increases inflation in developing countries. So, it is possible to devalue nominally and have the currency appreciating in real terms: This has happened in Latin America, as seen in the accompanying graph, the actual production costs in dollar terms have risen in non-dollarized countries since the current boom began ... While these costs fell in Ecuador dollarized. This is because as Ecuador does devalues its currency, inflation rates are lower than in non-dollarized countries. (The real effective exchange rate measures changes in costs measured in dollars through two variables: 24
nominal devaluations and inflation. A devaluation lowers the costs but inflation rises them). That real devaluations do not increase exports is clear in cross sections of the world economy at any given time In Latin America, the ones that have devalued the ones that least exported. Real exchange rates based on nominal exchange rates and differences in inflation. Real devaluations to the right. Data from 1995 to 2002.
Why export success is linked to the appreciation of the currency and not to devaluations? • Because by success in exports of, say, toys (like Japan at the end of the war) the large influx of dollars appreciates the local currency. • This means that wages are too high for producers of toys. • Japan could devalue the currency and maintain profitable production of toys. • If this would have been done they would still be exporting toys. • By not devaluing, forced the conversion to higher value added activities. • It's the same story in all successful countries. There is a misuse of language when we say that that by devaluing countries become more competitive: • Competitiveness is not to earn less, pay less to workers ... • But to earn more, pay more to workers. • This ability depends on real activities - investment, education, improvements in efficiency and no money tricks. • Instead of toys, cars. • Instead of cheap cars, cars of high value added. • And so on
Why real devaluations do not promote exports although real wages fall? Two reasons: - Because interest rates rise, which turn more difficult to make the necessary investments to increase production and exports. - Because in long term petrify exports in low
25
value added activities, which are those that devaluations maintain profitable. - If it is not devalued, the private sector has to move towards higher added value. - So it was in El Salvador since the currency was not devalued since 1992 forward.
The failed promises of local currencies: local currencies are not safer IN CRISIS, IN FACT ARE PRONE TO THE CRISIS. A bank may survive as insolvent for a long time if kept liquid ... until a trigger shoots the crisis. The trigger has always been a currency crisis.
In all crises in developing countries, the trigger has been a currency crisis • The history of the crisis has always been the same: - The central bank issues large amounts of money but avoids the devaluation of the currency to reduce inflation - This creates an initial a bubble of real estate and other assets ... everyone happy. - But then comes the fear that the currency has to depreciate - This creates a crisis of trust in the currency, which makes people withdraw their money from banks to convert it in dollars - This leads to the banking crisis. - The greatest fear is always that the government will not be able to stop the devaluation of the currency. - If people trust the currency, the crisis stops with a government guarantee. Examples: The Case of Thailand, where, as in all other cases, the financial crisis began with a currency crisis. 26
Another clear case: In Argentina in 2001, dollar deposits rose and stood while the peso deposits fell.
In Ecuador, the bank run stopped when the economy is dollarized.
The failed promises of local currencies: THE MYTH OF THE LENDER OF THE LAST 27
INSTANCE The myth is that the central banks of developing countries can stop crises printing local currency • If that were true, the presidents of central banks and finance ministers of the countries with banking crises would go to the beach to enjoy, leaving the central bank machines printing money. • Instead, you find them in Washington or New York getting dollars in the International Monetary Fund and global banks. • Why go to ask for dollars? • Because for issuing pesos the central banks need dollars because: - People take pesos of banks to exchange them for dollars ... - And this depletes the central bank, causing a real crisis. In fact: • The countries that have local currency have the same problem as dollarized countries to solve a bank run, central banks can not print dollars, which is what people want in a crisis. • However, the risks of falling into a crisis in a dollarized economy are lower because such economies do not have the enormous risk of devaluations. • And because, for the same reason, by solving a problem of excessive debt, we not run the risk that the debt burden is increased exponentially by local currency devaluations.
The failed promises of local currencies: the politicization of MONEY AND CONTRADICTION BETWEEN GLOBALIZATION IN ALL DIMENSIONS AND MONETARY FRAGMENTATION. Local currencies have serious problems that dollarized countries do not have: • One problem is the politicization of monetary creation. - If politicians can create money, they will continually fight to do so. • Another, fundamental, is the contradiction that set the risks of local currency to the globalization process that is making our time, just as the Industrial Revolution marked the transition between the local and national economies. • Local currencies are obstacles to the integration of production and financial processes , which are the only way we have to become part of the global economy. The failed promises of local currencies: WHAT IF DE-DOLLARIZATION? Those who want to de- dollarize are politicians: • But do not dare to do so. • They say that although dollarization is bad undo it would be worse. • Why? • Because the only reason they want a local currency is to issue it as they please to support increased state spending. • causing inflation and devaluations (which they claim to be good), taking away value to the savings of citizens and lowering real wages for workers. • People willingly gave worthless pesos for dollars, that are worth in the world • They will not deliver this for pesos politicians want to devalue. • Dollarization resolved a crisis ... de-dollarization would cause another. For individuals, • Surprisingly, there are people who believe that the only consequence of dollarization would be that instead of using dollar bills would use colons bills • There are even many people who believe that the change of bills will result in immediate 28
regression to the prices that existed in December 2000, a month before dollarization. Even worse, some people think that thereafter prices would rise no longer. • Prices of course would not drop. At first, prices would be equal to what they are in dollars multiplied by the exchange rate. • What does happen is that your bank account in dollars would become necessarily to colons to the exchange rate set by the government. Soon the dollar value would drop even more because the government would use the power to create money to create it, which would increase inflation and the currency devalued rapidly. • The interest rate on their loans would go up immediately. That is, if now you pay 10 percent, say, you would have to pay 22 or 25 percent, as it was at the time of the colon. This will duplicate the fees for all loans. There would be many who could not afford them. The de-dollarization and companies, • In 2001, the dollarization generated to companies savings in interest payments that they could invest in more equipment, hire more staff, increase salaries or reducing its debts. • interest rates paid on their loans fell between 18 and 22 percent to 7 percent, periods increased from five years maximum fifteen and twenty years. • If the government de-dollarization, the effect is the opposite: by increasing the interest rates, businesses would have to readjust to a dramatic increase in financial costs, which at best would be doubled. • The realignment would occur through fire people and reduce investment, both measures would reduce both, the current and future production. • At the same, companies would be faced with a drastic reduction in demand due to the readjustment of the consumers from rising interest expenses and by the reduction of real purchasing power resulting from inflation. • Thus, the adjustment in all businesses and consumers would result in a deep and prolonged recession. The de-dollarization and exchange and financial markets, • With rising interest credits at least to the level they were before dollarization, the bad loans would rise violently. • If banks offer lower deposit interest savers will take them . To leave here, they would demand fees plus dollar devaluation risk. • In these circumstances, the country would be in a shortage of what the government now wants to get rid of-dollars. The de-dollarization and debt of the country: • The equals to borrow without devaluations enjoying the debt funds as they increase the debt burden (the ratio of debt to GDP). • Because the debt is denominated in dollars and the GDP is denominated in pesos. • By devaluing the pesos against the dollar, the debt burden increases. SUMMARY: The conclusions are simple • The blind application of concepts generated in the U.S. and Europe, where currencies create a standard of value for the population, to the context of developing countries, where those same currencies and not their own are the standard of value, has resulted in predictions that are the opposite of what is observed in reality. • Dollarized economies have lower inflation, lower inflation rates higher degrees of export diversification, they can absorb external shocks more promptly without internal crises and financial crises can be resolved more easily than non-dollarized. • In addition, local currencies are obstacles to globalization. • So why having their own currency?
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