Tourism Incentives Sweetened

MANAGUA – In an effort to improve upon success,Nicaragua is about to implement what it is calling the“most innovative” and “aggressive” tourism-incentivelaw in all of Central America, and possibly LatinAmerica.The reform measures to the Tourism Incentive Lawof 1999 (known as Law 306) are designed to expandbenefits and tax-exemption incentives for small businesses,which are estimated to represent 45-50% oftourism operations in Nicaragua. The reform will alsocreate a new “super fund” to support private investmentin small business development.THE reform bill was drafted in late 2004 by the congressionaltourism commission, the Nicaraguan TourismInstitute (INTUR) and the various tourism-business chambers.It is currently being studied by Congress, and isexpected to be passed later this month and go into effect byMarch.“This law will make Nicaragua even more attractive toforeign investment,” said INTUR lawyer Michael Navas,one of the chief architects of the reforms. “I don’t think abetter investment law exists.”THE reformed Law 306 will allow qualifying smallbusinesses to finance up to 70% of new tourism projects – ora maximum of $100,000 – through the private sale of certificates.The certificates, set at a market-based interest rate ofaround 10-12%, will be sold to private investors or banks atan agreed-upon term of up to 10 years.The capital generated from the sale of the certificateswill provide small-business owners with the funding neededto construct their hotel, restaurant or tour operation.Once the business is generating income, investors willbe repaid the certificate value plus interest with money providedby the 15% value-added tax (known as I.V.A. inSpanish). In other words, the government will give qualifyingsmall tourism businesses a 10-year grace period on theirI.V.A., with the stipulation that the tax money generated goes toward repaying investors.The development model is adaptedfrom the City of Chicago’s time-provenurban-renewal plan known as “TaxIncrement Financing,” or TIF.THE best part of the new developmentplan, Navas explained, is that privatefinancers will have their tourism-certificateinvestments backed 100% by a special governmentfund of no less than $1 million.In the event the new tourism businessfails, investors will recover 100% of theirinvestment plus interest from the safetyfund. The bank would then confiscate thefailed tourism project and sell the propertyto recoup most of the money spent fromthe safety fund.INTUR is currently in communicationwith the Inter-American DevelopmentBank (BID) to provide the initial $1-millionto start up the fund, which will bemanaged by the Nicaraguan bank that winsthe concession to control it, Navas said.Because the fund will have to cover allinvestors under the new incentive law,INTUR will only approve certificate salesfor 10 new tourism companies per year, ora 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 alsomake it possible for previously existingsmall businesses to grow and becomeincluded under Law 306 by investing 35%of their net value in development.Small businesses eligible for the new306 Law will be minor lodging facilities,restaurants, and artisan workshops that fitinto the following parameters: 1) employbetween five and 30 workers; 2) generatebetween $75,000 and $250,000 in annualsales.The expanded law will cover manysmall tourism operations that “felt excluded”from the original incentive law, Navasexplained.BASIC incentives under the current306 Law include: 80-100% exemption onincome tax; total exemption on propertytaxes for a period of 10 years; exonerationfrom import duties on vehicles (in somecases); and exemption from sales tax onthe purchase of equipment and constructionmaterials.In its current form, Law 306 is extendedto the following categories: a) hotelswith a minimum investment of $150,000(or $500,000 in Managua); b) tour operatorsinvesting $100,000 in HistoricalPreservation Sites, or $40,000 in other protectedareas; c) domestic air-transportationcompanies; d) yachts visiting Nicaraguanports for less than 90 days; e) tour operatorsand travel agencies; f) new companiesthat provide food, beverage or recreationalservices and have a minimum investmentof $30,000 ($100,0000 in Managua); g)nightclubs, restaurants, discos and casinoswith a minimum investment of 35% theirtotal value; h) companies in national territoryengaged in producing feature-lengthfilms of an international character; i) newor existing companies dedicated to rentingland or water vehicles to tourists; j) companiesthat invest in other tourism projectsa minimum of $100,000 ($250,000 inManagua); k) individuals or corporationsdedicated to activities to develop nationalhandicrafts, artistry or dance, with a minimuminvestment of $50,000.Since Law 306 was first implementedin June 1999, INTUR has approved 443tourism projects to receive benefits, for atotal investment of $2.9 billion.THE idea to expand Law 306 toinclude small businesses was born out offrecent meetings among leaders of thetourism sector, who were looking for newmechanisms to encourage investment afteran 84% drop in foreign investment duringthe first half of 2004.The drop in tourism investment is due,primarily, to the 2003 implementation ofthe Law of Fiscal Equality, which repealedtwo investment mechanisms that togetherprovided financing for up to 70% oftourism projects.The solution that the government andprivate sector agreed to was to pass newlegislation to allow larger projects to emittourism bonds (TT, Nov. 12), and toexpand Law 306 to include smallertourism projects.The end result, INTUR hopes, will bethe most comprehensive and inclusiveincentive law in existence.