Harmonizing tax policies in Central America

This report proposes an action plan for the rationalization of tax structures for Central America. To harmonize tax policies among Central American nations, the report recommends the following: (a) continuing trade liberalization, by reducing thelevel and dispersion of effective trade protection; (b) shifting the tax system from reliance on trade to reliance on domestic transactions and income; (c) making the value added tax the backbone of the tax system; and (d) improving tax administration. It also recommends; (e) harmonizing taxes on inputs and exempting nontraditional exporters from paying import duties; (f) moving toward coordinating factor incomes to avoid double taxation; (g) eliminating all quantitative import restrictions, prior imports deposits, non-common import tariffs and other restrictions on imports from other Central American Common Market (CACM) members; (h) applying similar principles in designing export taxes on coffee and bananas; and (i) not using differential exchange rates to discriminate against regional trade. If implemented, it is hoped that these reforms, along with other structural reforms, would help spark the latent growth potential in Central American economies.