El Salvador passes tax bill aimed at closing loopholes

SAN SALVADOR, July 31 Thu Jul 31, 2014 5:38pm EDT

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SAN SALVADOR, July 31 (Reuters) - Lawmakers in El Salvador approved a tax reform bill on Thursday that introduces a minimum income tax targeting loopholes used by the rich, as well as a imposing levy on financial transactions.

The measures were approved with a slim majority of 44 votes of the 84 cast with the backing of lawmakers from the ruling leftist Farabundo Marti National Liberation Front (FMLN) with help from the moderate right wing GANA party.

A total of 38 lawmakers from the ultra-right wing Arena party and other smaller parties walked out in protest before the vote, claiming the measures had not been sufficiently discussed. Two lawmakers abstained.

El Salvador has been struggling to increase tax revenue amid a sluggish economy to contain rising debt and pay for more social welfare programs, such as free school supplies and health care.

The popularity of those programs helped the FMLN, founded by former guerrillas from the country's 1980-92 civil war, win a second term in office with the election of President Salvador Sanchez Ceren in March.

"The humble people know that this tax (bill) will not affect those with more limited means. It is going to affect those with greater means," Sanchez Ceren said.

The centerpiece of the bill introduces an alternative minimum income tax of 1 percent on a taxpayers' net assets.

Lawmakers complain that big companies and the rich evade taxes and are not paying their fair share under the current income tax structure that has a maximum rate of 30 percent. Taxpayers will have to calculate their tax burden under both rules and pay whichever is higher.

The bill also introduces a 0.25 percent tax on certain financial transactions greater than $1,000, with some exemptions such as ATM withdrawals and money transfers used by the roughly 2 million El Salvadorans living in the United States.

The bill also establishes a tax on luxury homes and targeted the nation's ultra-right wing newspapers. The bill eliminates exemptions newspaper owners had enjoyed since 1950.

Previous reforms helped boost the government's tax revenue to 15.4 percent of gross domestic product last year compared with 12.6 percent in 2012, Fitch Ratings said earlier this month. Fitch projects total debt could reach 62 percent of GDP this year.

The government did not provide an estimate of how much the new measures could increase collection. (Writing by Michael O'Boyle. Editing by Andre Grenon)

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