In 2022, 37% of the country’s fiscal income came from this channel; tax stability is key to attract more foreign investment.
In the Dominican economy, foreign investment companies have a well-earned position and play a fundamental role that generates a profound impact on the development and growth of the country.
With their valuable investments, these companies not only contribute to economic dynamism, but also weave a web of employment, foreign exchange and tax collection that strengthens the roots of the nation.
The data contained in the “Investment Guide” published by the National Commission for the Defense of Competition (Procompetencia) in September 2022 highlights the importance and strength of foreign investors.
Their companies, either directly or indirectly, accounted for approximately 37% of all tax revenues in the country. Likewise, their influence extends to the area of national exports, contributing around 71% of these, and to the social security sector of the private sector with an impressive 22.5%. The Central Bank of the Dominican Republic (BCRD) reported that last year 2022, foreign direct investment flows amounted to the impressive figure of US$4,010.4 million.
These are numbers that, in addition to demonstrating the confidence and interest that foreign companies have in the Dominican Republic, place them among the main sources of foreign exchange, consolidating their position as an essential pillar of the national economy.
A contribution that speaks
Specifically, foreign investment companies are among the four most important foreign currency attraction areas of the country.
Law 16-95 on Foreign Investment, enacted on November 20, 1995, stands as a guiding light for development. This legislation, with its avant-garde vision, recognized from its inception that foreign investment would be a driving force behind the country’s economic growth.
By removing barriers that previously hindered the flow of capital, the law opened the door to foreign investment in multiple sectors, with the exception of those linked to national security. Because of its importance to the economy, the Dominican Republic must ensure that the rights and duties of foreign companies that decide to set up operations here are respected.
“For this, it is necessary that the authorities can guarantee that the tax burden is only that established by law and that they comply with the different agreements and contracts that are made with these types of companies, which are vital for the development of the country and improvement of the quality of life of all Dominicans,” various experts have explained when addressing the issue.
And they add that “there is an inescapable responsibility”: the guarantee that the rights and duties of foreign companies are rigorously respected. In this context, legal stability is a crucial pillar to ensure the permanence of these companies and their contribution to the sustainable development of the country.
A crucial component of the business ecosystem are the free zone parks, which are home to many of these foreign-invested companies.
These parks are not only generators of jobs, but also inexhaustible sources of foreign exchange flowing into the country. Legal certainty, adequate incentives and an equitable tax burden are essential for them to flourish on Dominican soil.
What must be preserved; the law
It is frequently stated that the State must be vigilant so that foreign capital companies are not imposed tax burdens that are outside the legal framework that regulates such companies, in order to prevent these companies from leaving the country and thus affecting the important efforts made to be among the countries with the best climate for foreign investment.
Tax stability is a transcendental factor for the success and permanence of companies and investors. A transparent and predictable regulatory environment not only attracts investors, but also fosters long-term investment and sustainable prosperity.
Incentives, legal certainty and a fair tax burden provide the basis for foreign investment to flourish. Foreign investment not only contributes to economic development, but also shapes the country’s trajectory in the global sphere.
Global competition for foreign investment is intense and cannot be underestimated. When investors evaluate the feasibility of establishing themselves in a country, one of the key factors they analyze is the tax burden they will face. If the Dominican Republic becomes a destination where taxes are perceived as prohibitive, foreign companies may begin to explore more attractive alternatives elsewhere.
This could result in a flight of capital and knowledge, which in turn could affect the flow of investment, job creation and the economic boost that these companies bring to the country.
The risk of foreign investors deciding to leave in search of more favorable fiscal conditions is a reality that should not be taken lightly, but should be in focus.
The region has examples that should not be imitated.
Ultimately, if companies feel that they are being punished by an excessive tax burden in the Dominican Republic, they may choose to relocate their operations to countries where they can obtain greater tax benefits and higher profitability.
There are enough examples to cite:
Between 2015 and 2021, several Latin American countries, such as Argentina, Brazil, Venezuela and Ecuador, experienced the withdrawal of foreign investment companies due to changes in the rules of the game that included tax increases and measures that affected legal certainty and predictability in the business environment.
In the aforementioned years, Argentina implemented policies that increased the tax burden and generated uncertainty in the business environment. Similar situations also occurred in Brazil.
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