Is the Tourism Investment Law Good for You?

My socio and I have recently gained some experience related to Ley 306, the tourism incentive law. I have been encouraged to post what we learned.

At this point I was going to add a pointer to the actual law. But, the legislature web site is currently down and the other place I found the law actually sells copies for $50. Maybe that is how to make money off of the law.

My from memory executive summary of the law goes like this. If you invest over $150,000 outside of the Managua area or over $500,000 in the Managua area in a tourism project you could qualify as a major tourism facility. There are other hoops--for example, if it is a hotel you need to have at least 15 rooms--but that's the basic idea. There are lesser categories but I don't think they are even worth considering. You will see why I feel that way.

What you get is not having to pay the 15% "sales tax" on purchases to create the facility and no property taxes for 10 years. If you are "The Hilton" or some such chain, all this sounds very good. But, what are the real benefits so some "mortal" that understands how business is done in Nicaragua?

While the law has existed for seven years and Estelí has many tourist facilities, you will find only one that was build under Ley 306. That one was built by a "non-local". I think this fact is fairly important.

The first step in Ley 306 compliance is to write a "business plan" and submit it to INTUR. INTUR has specific requirements for the plan which includes a lot of statistics about tourism that you are to supply. The idea of a business plan is good--all too many people think they don't need one--but a lot of what INTUR is asking for is really what INTUR should know and be telling you in order to get you to invest.

My interpretation here is that while INTUR seems to not have that information available (information, by the way, which you can quickly find on-line about Costa Rica) that if you hire a "consultant" that "works with Ley 306 plans" they will magically have the information.

If you are playing by the (306) rules you have a long list of requirements to meet. (To put this in perspective, it is still much easier and cheaper than trying to do the same thing in the US.) You then are subject to audits to make sure you complied and continue to comply with the requirements.

Let's use a $150,000 project as an example and further say $50,000 is the real property and $100,000 is "the business". Your sales tax savings would be $15,000. Property tax is up to debate but maybe $5000 (that's $500/year). Sounds like you should save $20,000. But, is that the case?

First, you have the compliance expenses. You either invest a lot of time or some money for a consultant to write the Ley 306-complaint plan. I will somewhat randomly pick $5000 for that part. You will then have more bookkeeping expenses to make sure you are ready for an audit. As you get 10 years of tax relief, even looking at $100/mo, you have another $12,000.

Already, things don't look that good. Now, let's apply some "how things get done locally" rules. "Everyone" knows that declared value of real estate for tax purposes is but a fraction of actual value or even cost. What fraction: typically 10% or less. If your books have to reflect actual costs for the Ley 306 possible audits, you may feel you are saving a lot on property tax relief but, in reality, the savings are really less than 10% of what they appear.

What about sales tax? While we would like to think everyone pays their taxes, the reality is that they don't. Ever been asked in a restaurant or hardware store, "do you need a receipt"? That roughly translates to "do you want me to charge you sales tax". If you are building concrete and brick buildings with local labor, you will probably pay sales tax on less than half the expenses.

There is actually more to say here but maybe I should put that in my next book that I should title "You Can Trade Time for Money". Ok, the book idea is a joke but before you start hoop jumping and money spending, you might want to engage a "consultant" such as my socio to listen to your idea and insert a bit of "local wisdom". (I'm serious--PM me if you are interested.)

My conclusion is that if you are going to import a lot to start your business, Ley 306 may be a good thing. On the other had, if you are "thinking local", you are likely better off "doing it the local way".