The DR’s tax take of 15% of GDP is well below the regional average; is it time for a fiscal reform?
Minister Guerrero: We have focused on improving the capacity of the country’s two tax collecting agencies – internal revenue and customs – to collect tax in accordance with the laws we already have. The two agencies did not coordinate between themselves very well in the past, which resulted in failure to collect tax. We estimate that we are losing 42% of the sales tax to evasion, while with personal income and corporation tax evasion is probably nearer to 50%. So, there is a lot of lost revenue there that we can recoup. And I believe it doesn’t make sense to work on a new tax reform if we are not able to collect the taxes under the laws we already have.
The last fiscal reform was passed in 2012 but it didn’t have the anticipated impact in terms of government revenue because of the inability of the agencies to collect the taxes. So, we have been investing in the technology and processes of internal revenue and customs. We’ve enlisted expert help from the US Treasury and the Inter-American Development Bank and are confident that agencies’ performance will improve. We are also introducing electronic receipts later on this year, which will make it harder for businesses to avoid paying their fair share of tax. All of these technical improvements lay the groundwork for a future fiscal reform. We are determined to reduce tax evasion and fraud because we can’t allow a large portion of the society to benefit from the state without contributing. It’s unfair on the other companies and people that pay taxes and it puts fiscal pressure on the government.
In a recent report Moody’s highlighted a “lack of institutionality” in the DR’s fiscal decision making; is that fair?
MG: During my period as finance minister we have worked hard to improve the processes and regulations that govern how the state manages its finances. For example, we are working on a new budget law, that will place more control on state spending. This government has implemented the purchase law, which has completely changed the state’s procurement of goods and services. There is an entity which regulates, but doesn’t carry out, state procurement. Everything is published online in a transparent process that has been hailed by international agencies. It has taken away the large discretionary power that people sometimes had within ministries and improved the institution of government.
We’ve also passed an anti-money laundering law that ingrained the best-practises recommended by the World Economic Forum throughout our financial system. We have also banned bearer shares, so the ultimate beneficiary of a stock must be known, which improves transparency. Of course, there is always more that could be done but our track record in improving the institutionality of the state’s finances speaks for itself.
The DR has elections in 2020; could a different party undermine all of your hard work?
MG: No, it won’t make a difference. All the parties with a realistic chance of winning understand that we have to preserve what we have built so far. That is one of the strong points of the DR, that all the main political parties have an investor-friendly, pro-growth outlook. Economic growth, international trade agreements and attracting foreign investment are all part of the recipe that has proved so successful and that won’t be changed.
“All the parties with a realistic chance of winning understand that we have to preserve what we have built so far…”
Sometimes investors worry that elections will destabilise the economy because governments boost spending and the deficit increases. But we had an election in 2016 and that didn’t happen. So, your readers don’t need to worry too much about the coming elections as fiscal stability will be preserve.
A World Bank report criticised the DR government’s debt level; is that fair?
MG: We think that the country’s stock of debt is in line with its capacity to support it. Our debt is 38.9% of GDP, which is lower than the Latin American average of 42%. Indeed, our real debt is even lower. Because some of the debt is intergovernmental financing, so if you look at the government as a single entity our debt is less than 37% of GDP. It’s true that interest repayments are 18% of government revenue, which is high, but the problem there is not the debt but the amount of tax the state is collecting. We should have a tax take of 20% of GDP, which would make our interest repayments easier to bear. But the fact is, our fast economic growth means that we can comfortably service our debt. That World Bank report didn’t seem to take our economic growth into account.
We have also made important changes to the profile of our debt. Back in 2014, 20% of our stock of debt was at variable rates. Now it’s just 12%, which reduces our exposure to changing US interest rates. We’ve also issued more debt in local currency – for example last year in New York we issued the first global peso-denominated debt, which was worth $800million. That helps us reduce the forex risk from our stock of debt. Finally, we have lengthened the tenure of our debt, with average maturity now at ten years.
We feel confident that once we finish the Punta Catalina coal plant, which has taken up a lot of our financing capacity, then our needs will decrease which will help us improve our debt curve. Indeed, the sale of some of the strategic stakes we have in key assets could provide another boost to our finances. We are selling at least 49% of Punta Catalina, while we are in the process of approval of a new Private Public Partnership law that will make it easier for us to attract private sector investment to state-owned companies and/or infrastructure projects.