By Tim Rogers
Tico Times Nicaragua Correspondent
MANAGUA –In an effort to improve upon success, Nicaragua is about to implement
what it is calling the “most innovative”and “aggressive”tourism-incentive
law in all of Central America, and possibly Latin America.
The reform measures to the Tourism Incentive Law of 1999
(known as Law 306) are designed to expand benefits and tax-exemption incentives
for small businesses, which are estimated to represent 45-50% of tourism operations
in Nicaragua. The reform will also create a new “super fund”to support
private investment in small business development.
The reform bill was drafted in late 2004 by the congressional tourism commission,
the Nicaraguan Tourism Institute (INTUR) and the various tourism-business chambers.
It is currently being studied by Congress, and is expected to be passed later
this month and go into effect by March.
“This law will make Nicaragua even more attractive to foreign investment,”said
INTUR lawyer Michael Navas, one of the chief architects of the reforms. “I
don't think a better investment law exists.”
THE reformed Law 306 will allow qualifying small businesses to finance up to
70% of new tourism projects –or a maximum of $100,000 –through the
private sale of certificates.
The certificates, set at a market-based interest rate of around 10-12%, will
be sold to private investors or banks at an agreed-upon term of up to 10 years.
The capital generated from the sale of the certificates will provide small-business
owners with the funding needed to construct their hotel, restaurant or tour operation.
Once the business is generating income, investors will be repaid the certificate
value plus interest with money provided by the 15% value-added tax (known as
I.V.A. in Spanish). In other words, the government will give qualifying small
tourism businesses a 10-year grace period on their I.V.A., with the stipulation
that the tax money generated goes toward repaying investors.
The development model is adapted from the City of Chicago's time-proven urban-renewal
plan known as “Tax Increment Financing,”or TIF.
THE best part of the new development plan, Navas explained, is that private financers
will have their tourism-certificate investments backed 100% by a special government
fund of no less than $1 million.
In the event the new tourism business fails, investors will recover 100% of their
investment plus interest from the safety fund. The bank would then confiscate
the failed tourism project and sell the property to recoup most of the money
spent from the safety fund.
INTUR is currently in communication with the Inter-American Development Bank
(BID) to provide the initial $1-million to start up the fund, which will be managed
by the Nicaraguan bank that wins the concession to control it, Navas said.
Because the fund will have to cover all investors under the new incentive law,
INTUR will only approve certificate sales for 10 new tourism companies per year,
or a maximum total investment of $1 million. If more money is added to the fund
later, the incentive program would grow accordingly.
THE new reform measures will also make it possible for previously existing small
businesses to grow and become included under Law 306 by investing 35% of their
net value in development.
Small businesses eligible for the new 306 Law will be minor lodging facilities,
restaurants, and artisan workshops that fit into the following parameters: 1)
employ between five and 30 workers; 2) generate between $75,000 and $250,000
in annual sales.
The expanded law will cover many small tourism operations that “felt excluded”from
the original incentive law, Navas explained.
BASIC incentives under the current 306 Law include: 80-100% exemption on income
tax; total exemption on property taxes for a period of 10 years; exoneration
from import duties on vehicles (in some cases); and exemption from sales tax
on the purchase of equipment and construction materials.
In its current form, Law 306 is extended to the following categories: a) hotels
with a minimum investment of $150,000 (or $500,000 in Managua); b) tour operators
investing $100,000 in Historical Preservation Sites, or $40,000 in other protected
areas; c) domestic air-transportation companies; d) yachts visiting Nicaraguan
ports for less than 90 days; e) tour operators and travel agencies; f) new companies
that provide food, beverage or recreational services and have a minimum investment
of $30,000 ($100,0000 in Managua); g) nightclubs, restaurants, discos and casinos
with a minimum investment of 35% their total value; h) companies in national
territory engaged in producing feature-length films of an international character;
i) new or existing companies dedicated to renting land or water vehicles to tourists;
j) companies that invest in other tourism projects a minimum of $100,000 ($250,000
in Managua); k) individuals or corporations dedicated to activities to develop
national handicrafts, artistry or dance, with a minimum investment of $50,000.
Since Law 306 was first implemented in June 1999, INTUR has approved 443 tourism
projects to receive benefits, for a total investment of $2.9 billion.
THE idea to expand Law 306 to include small businesses was born out off recent
meetings among leaders of the tourism sector, who were looking for new mechanisms
to encourage investment after an 84% drop in foreign investment during the first
half of 2004.
The drop in tourism investment is due, primarily, to the 2003 implementation
of the Law of Fiscal Equality, which repealed two investment mechanisms that
together provided financing for up to 70% of tourism projects.
The solution that the government and private sector agreed to was to pass new
legislation to allow larger projects to emit tourism bonds (TT, Nov. 12), and
to expand Law 306 to include smaller tourism projects.
The end result, INTUR hopes, will be the most comprehensive and inclusive incentive
law in existence.