US Advises “Extreme” Caution When Investing in Nicaragua

State Department: Regime has created “an unpredictable investment climate, rife with reputational risks and arbitrary regulation.”

By Confidencial

HAVANA TIMES – The US State Department advised international investors that they “should be extremely cautious” when investing in Nicaragua, “under the authoritarian government of President Daniel Ortega and Rosario Murillo.” 

In a report on the investment climate in Nicaragua, the State Department details that since 2018, the Ortega regime has in violation of the Constitution suspended “civil rights, detained political prisoners, and shown a disregard for the rule of law”. 

Under these circumstances, the regime has created “an unpredictable investment climate, rife with reputational risks and arbitrary regulation,” warns the report, published on July 21st. 

“Almost three years have passed since the 2018 political-economic crisis left more than 300 peaceful protesters dead, 2,000 protesters injured and more than 100,000 Nicaraguans displaced and seeking asylum outside Nicaragua,” it notes. 

“Presidential elections are scheduled for November 2021. Failure to restore civil liberties and guarantee free and fair elections could spark renewed unrest and lead to the further isolation of the Ortega regime,” says the report. 

Four years of falling foreign investment in Nicaragua

Last week, Confidencial reported that the Foreign Direct Investment (FDI) has plummeted in the last four years. In 2017, 970.9 million dollars were attracted, whereas about 159.4 million dollars are expected for 2021, according to economist Alejandro Arauz, who published an analysis on his blog.

“In the period from 2008 to 2017, the average annual growth was 12.4%. In contrast, the deceleration of FDI from 2018 to 2021, is estimated at an average annual decrease rate of 64.1%, implying a sharp reduction of fixed investment and the net position of Nicaragua’s international balance of payments,” he explained. 

In its report, the State Department emphasizes that the Ortega government “seeks foreign direct investment to project normalcy and international support, at a time when foreign investment has all but ground to a halt”.

“As traditional sources of foreign direct investment fled the ongoing political crisis, the Government has increasingly sought foreign investment from other countries, such as Iran and China. Investment incentives are targeted at export-focused companies that require large amounts of unskilled or low-skilled labor,” the report states. 

Tax reform “has hurt” importers and businesses 

The US warns that a tax reform that was passed on February 27, 2019, “has hurt US importers and businesses” by tripling the alternative minimum tax rate from 1 to 3%, for businesses earning more than $5 million in annual gross receipts, and doubling (to 2%) the tax for businesses with receipts between $1.9 million and $5 million in gross receipts.”

The State Department explains that, with the reform, the Selective Consumption Tax (ISC) was increased for many items, which “harms importers because customs authorities collect the tax on goods imported at the border, based on erroneous valuations, which can triple the declared value of the goods.”

The report also notes that the Nicaraguan government promised a review of the reform, after a 90-day observation period; however, more than two years into implementation, “it has yet to propose revisions”.

“The reforms, combined with increased employer social security contributions, have reduced profit margins and increased consumer prices,” the report asserts. 

The US entity reports that “several large companies, including some US companies and franchises, are involved in tax disputes with the government. The government is assessing income taxes on the basis of gross income, rather than net profits as required by law. This new tax calculation imposed by the Government could force the closure of these companies”.

Audits and confiscations

The document further states that Nicaragua does not have a bilateral Income Tax treaty with the United States or any other country; furthermore “tax authorities increased audits of foreign investors in 2017”. 

“During the political crisis, these audits became more aggressive and threatening, including reports of seven different government entities conducting audits on the same day, an increased scope of audits (e.g., requesting seven years of documents instead of the usual two-year practice), and fines. Companies that participated in work stoppages organized by opposition leaders reported audits immediately after the work stoppages,” noted the State Department.

It further warns that these audits “almost always” result in additional taxes being owed. “New tax bills are often accompanied by penalties equal to the amount of taxes allegedly owed. These fines appear to have no legal basis”.

“The government has seized private property and imprisoned individuals for failure to pay these tax bills and fines, often while legal proceedings are still ongoing. These tax problems have affected US companies or companies owned by US citizens,” it maintains. 

The report notes that President Ortega “controls the judicial system and fair and objective rulings are not expected. Investors regularly complain that regulatory authorities are arbitrary, negligent or slow to enforce existing laws, sometimes in an apparent effort to favor one competitor over another.”

Ortega’s laws

The report notes that “there are local laws and practices that affect foreign investors” although few are “particularly” aimed at investors. 

“In 2020, the National Assembly – controlled by Ortega – passed six repressive laws that should alarm investors” according to the document which lists the “most worrisome laws”: “Gag Law,” which criminalizes political speech; “Foreign Agents Law,” which forces organizations and individuals to report foreign assistance and prevents anyone receiving foreign funding from running for office.

It adds the “Consumer Protection Act”, which “could prevent financial institutions from making independent decisions about whether to provide services to financial clients, including entities sanctioned” by the United States, the European Union, Canada, Switzerland and the United Kingdom.

ProNicaragua “has nearly halted” investment promotion activities

“Investors should know that local connections with the government are vital to success. Investors have expressed concern that regulatory authorities act arbitrarily and often favor one competitor over another,” the publication highlights. 

“Foreign investors report significant delays in obtaining residency permits, which requires frequent trips outside of the country to renew visas”, it notes. 

The United States informs that ProNicaragua, the agency that promotes investments and exports in the country “has nearly halted it’s investment promotion activities. It has virtually no clients due to the current political crisis”. 

“ProNicaragua, already heavily politicized, became even more so after President Ortega installed his son, Laureano Ortega Murillo – sanctioned by the US – as the organization’s main public face,” it adds.

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This article was originally published in Spanish in Confidencial.

Read more from Nicaragua here on Havana Times.