Honduras overhauls tax code, works towards flat tax approval

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There are more than 1,968,165 taxpayers in Honduras — and they have long been burdened by a tax regime that violates due process rights, uses excessive military force to carry out tax raids, and disproportionately penalizes entrepreneurs in the middle and working classes. Fundación Eléutera, an Atlas Network partner in Honduras, launched an ambitious tax reform campaign nearly a year ago, proposing a system that would protect individual and property rights, as well as restoring accountability for public officials. Since the campaign began, 14 of Fundación Eléutera’s 20 proposals have been woven into the new tax code, which was signed into law in December and went into effect in January. The organization is now working on its proposal for a flat tax, which has received preliminary approval from the Honduran Congress.

“During the month of December, we started contacting lawmakers and sending them information on our policy recommendations that had not been incorporated into the new tax code draft they were debating,” explains Jorge Colindres, Chief Legal Officer of Fundación Eléutera. “We also wrote them a public letter describing how the barriers for accessing justice, which were contained in the tax code, went against the Honduran Constitution and international human rights treaties. Two lawmakers responded to our petition and advocated, unsuccessfully, for the removal of economic and administrative barriers faced by taxpayers for accessing the justice courts.”

The new code aims to solve the many regulatory problems caused by the previous code. One of the most important new provisions is the “principle of legality,” which binds the Honduras Tax Administration to the rule of law, and protects taxpayers against the militarized raids that had become a commonplace aspect of administrative sanctions.

“The constitutional principle of legality means that the public administration can only act in accordance to law, and has no more powers that those established in the law,” Colindres continues. “This was one of our top proposals. Now that it has been signed into law, the Tax Administration cannot sanction any one taxpayer for failing to comply with executive regulations; all punishable offenses must be established in the law, as well as the applicable sanction. The Tax Administration cannot create new punishable offenses through executive regulations, nor punish taxpayers for those already in existence.”

The tax code now also includes new due process protections, including provisions that require tax debt collections to be pursued through civil courts, as proposed by Fundación Eléutera.

“Following our recommendations, the Honduran Congress repealed three specific articles which were used to punish taxpayers by closing their businesses and blocking their tax ID; as well as a third one which forced tax payers to fully pay their alleged tax debt before they could be heard in court,” Colindres explains. “The administrative sanctions can still be imposed on taxpayers, but their execution must be suspended if the taxpayer protests it; they can then try to fight it off through administrative proceedings, and finally in court. Meanwhile, during the time the administrative proceedings are executed, no interest will accumulate on the alleged tax debt of the taxpayer, even if the administrative authority eventually rules against them. The suspension of accumulation of interest during administrative proceeding was also one of our main proposals.”

Previous barriers to trade between the formal and informal sectors of the Honduran economy may also soon be erased, Colindres points out, which would mark the end of what he calls “Economic Apartheid.” Amendments to the billing system will recognize the formal sector’s purchases from the informal as tax-deductible expenditures. Nearly three quarters of the workforce in Honduras is employed in the informal sector, so integrating them into the formal economy will likely increase economic activity.

Fundación Eléutera’s tax reform campaign is funded in part by a grant from Atlas Network, and the 14 tax proposals that have been adopted signal immense progress in Honduras. Still, the reform process continues as the organization works toward the formal passage of a flat tax. Fundación Eléutera will soon release a policy study and explanatory video promoting its flat tax proposals.

“This year it’s about implementing the tax code and having the Tax Administration respect it,” Colindres concludes. “The tax code established the legal framework for the development of a flat tax. It talks about a single tax, and consists of establishing a ‘one tax’ obligation which would replace all other taxes and contributions to the national tax regime.”

Read more in Fundación Eléutera’s article “10 benefits that the new tax code grants to Honduran taxpayers” (link in Spanish).