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Tourism Incentives Sweetened
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.

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