Tax Reform in the Dominican Republic in 2024

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The Dominican Republic is on the cusp of introducing significant tax reform, as per President Luis Abinader’s government policy.

Despite the ruling Modern Revolutionary Party (PRM) holding a majority in both legislative chambers, Abinader insists that the reform must be a national pact, aiming to shield the most vulnerable and continue reducing poverty.

The proposed tax reform bill is ready and expected to be sent to Congress soon.

This legislation aims to enhance revenue efficiency, reduce fiscal deficits, and ensure the wealthy contribute their fair share, while also safeguarding the interests of the most vulnerable citizens, said Alexis Cruz, the Vice Minister of Economic and Social Analysis at the Ministry of Economy, Planning, and Development.

Abinader’s administration is confident about the country’s economic prospects, forecasting 5% real GDP growth and maintaining inflation within a 3.75% target range for the year. However, Cruz has warned that neither short-term nor long-term growth is guaranteed.

Income, expenditure, macroeconomic stability

The tax reform revolves around three core principles: income, expenditure, and macroeconomic stability.

Cruz has outlined that the reform is future-focused, designed to minimize the fiscal deficit and reduce the state’s financing needs.

This reduction in debt could enhance the country’s credit rating, facilitating access to resources for development plans and capitalizing the Central Bank to lower the cost of money.

The necessity of this reform has been underscored by several factors, including the economic downturn from the COVID-19 pandemic, the Ukraine-Russia conflict, and international recommendations.

Notably, the International Monetary Fund has suggested broadening the tax base and cutting exemptions. This fiscal reform in the Dominican Republic is necessary, according to Sergio Díaz-Granados, the executive president of the Development Bank of Latin America and the Caribbean (CAF).

It will help the country improve its income and expenditure management. However, historical resistance to past reforms, notably in 2012, highlights the need for careful implementation to avoid backlash.

Raising the tax burden

The upcoming tax reform in the Dominican Republic is expected to elevate the tax burden from 14.5% to 17.5% by 2025, according to economist Bernardo Hirán Sánchez Melo, director of Public Investment at the Ministry of Economy.

This adjustment aims to address the country’s fiscal challenges.

Sánchez’s proposal to increase the tax burden by three percentage points of GDP in a single year aligns with the average fiscal deficit targets set in recent years.

The reform seeks to overhaul the tax system, shifting the focus from regressive indirect taxes to progressive direct taxes.

The proposed changes are crucial for ensuring a more equitable tax system and improving public revenue.

By increasing the contribution of direct taxes, the government aims to reduce inequality and better fund public services.

GDP per capita up, poverty rates down

As of the most recent World Bank data, the Dominican Republic’s GDP per capita stood at USD10,111.2 in 2022, reflecting a significant increase from previous years, an increase of approximately 18.8% from 2021.

The poverty rate has improved slightly, with the upper-middle-income poverty rate (living on USD 6.85 per day) estimated at 19%, down from 20% in 2019 before the pandemic. Despite this growth, high inflation rates in 2022 (8.8%) and 2023 (4.8%) have affected the most vulnerable populations.

As of 2023, the Dominican Republic’s unemployment rate is approximately 5.6%, reflecting a slight decrease from 2022.

Protecting the tourism sector

Tourism contributes 19% to the Dominican Republic’s GDP. In this context, the government is navigating the tax reform to increase revenue while avoiding negative impacts on tourism, its key industry.

An incentive scheme currently promotes tourism investment, but its future is uncertain. A study by Friedrich Ebert Stiftung found DOP 41.2 billion (USD695 million) was lost from 2009 to 2018 due to these incentives.

David Llibre, president of Asonahores, urges maintaining these incentives. The country anticipates 11 million visitors by the end of 2024. Balancing reform to boost income while reducing deductions without harming tourism remains crucial.

One of many reforms

The Abinader administration in the Dominican Republic is planning multiple reforms to modernize the economy, with a key focus on fiscal reform. Other initiatives include overhauling social security to expand services, reduce out-of-pocket expenses, and increase financial benefits.

These reforms aim to address critical areas to support sustainable growth. The electrical sector reform targets improved energy efficiency, reduced losses, and boosted investments in distribution.

The goal is to achieve more efficient management and significant investment increases in the sector

These changes are intended to enhance the overall productivity of the economy.

President Abinader emphasized that the fiscal reform is crucial, as the revenue collected will enhance the functionality of various national institutions.

The administration aims to use these funds to improve public services and infrastructure, supporting a more productive and modern economy.

Overall, the Abinader administration’s ambitious reform agenda seeks to lay a solid foundation for long-term economic stability and growth.

By addressing key sectors like taxation, social security, and energy, the government aims to foster a more equitable and efficient economic environment, ultimately benefiting the entire population.

Balancing these reforms with the needs of vital industries like tourism will be critical to their success.