What will you do if you incorporate a tax of 25 to 30 thousand pesos annually into the management cost of that property?
By Escarlin Pozo and Pedro Ardón
El Inmobiliario
SANTO DOMINGO – Economist Francisco Taveras says the Dominican Republic has made significant progress in the tourism sector, noting that the Confotur law has been key to positioning the country as one of the most sought-after destinations in Latin America.
The university professor expressed concern about the possible elimination of tax incentives if the government's proposed Tax Modernization Law is approved, warning that this could reduce foreign investment and affect the continued growth of tourism in the nation.
Taveras suggests that the State should not eliminate the Confotur law, but rather, following tax theory, determine which sectors of the country have developed thanks to this law and which areas need that boost.
Instead of eliminating incentives altogether, he recommends focusing them on those regions that still require support to attract investment and foster their growth.
“For example, I see that, in the Northwest region, Montecristi, and the entire North Coast, the law is still needed to attract investment in the tourism sector and to integrate the entire national territory with the momentum, or to match it with the momentum that tourism has had throughout the Caribbean,” he pointed out.
He stressed that the elimination of tax incentives should be done gradually and not abruptly.
Francisco Taveras during an interview with the El Inmobiliarioteam. (David Ventín)
He argued that dismantling the benefits of the Dominican Republic in one fell swoop could create a domino effect, causing investors to lose interest due to a lack of attractive incentives. This, according to Tavares, would lead to international capital migrating to other Caribbean countries or islands with similar natural conditions.
A threat to the slowdown in housing
Taveras revealed that the tax reform promoted by the government threatens to slow down the sale of new homes, which could have a significant impact on the profitability of the real estate sector and on the population's purchasing habits.
He indicated that the Dominican middle class will be one of the most impacted by the tax modernization project, because this group is not experiencing economic abundance, despite owning properties valued between 5 and 10 million pesos.
Speaking about the Real Estate Property Tax (IPI), which would be applied to properties with a value greater than 5,025,380.75 pesos, with a rate of 1% paid on the excess, he pointed out that this scenario could affect people's family budgets.
“So, annually, if a person has a home that is between 6 and 10 million, they will tend to pay between 15 and 25 thousand pesos annually in IPI,” he mentioned to put the issue in detail.
He stated that this would cause an increase in rents, as landlords would incorporate the new tax into the management cost, increasing rents by between 1,500 and 3,000 pesos per month.
“What are you going to do if you incorporate a tax of 25 to 30 thousand pesos annually into the management cost of that property? You're going to incorporate it into the monthly rental price of the property,” he explained.
Doubts among buyers
Taveras, who is a professor at the Faculty of Economic and Social Sciences of the Autonomous University of Santo Domingo (UASD), explained that the second aspect of the reform could generate doubts among tenants about whether it is convenient for them to acquire a home or not.
The increase in the IPI could discourage people from buying a property, as the additional cost would add to their expenses, causing many to choose to remain in renting rather than buying.
“Consequently, this won't motivate anyone to buy a home because they'll have to pay the IPI (Property Tax), either now or in the future. It would be much cheaper for someone who is renting to stay in their current rental because rents will remain a tax-exempt service,” he stated.
In that regard, he commented that this reality will alter the incentives for the acquisition of new homes in the country, affecting producers and real estate developers who sell new homes or renovate others for sale.
Other consequences of the tax reform
The economist specified that another consequence that fiscal modernization in the Dominican Republic could bring is a reduction in household consumption.
The decline in consumption would have a significant impact on the Dominican economy, the economist explained, since 60% of GDP depends on this factor.
“If we are dedicating a large part of our consumption to paying taxes, due to the purchase of a new home, then what I believe will happen is that consumption of other activities will be limited and it will take away some of the dynamism of the economic sector in general,” he stated in an interview with El Inmobiliario.
In that regard, he argued that the effect of the tax reform should be offset by better public services, including improvements in transportation, education, citizen security, and health, since it can be incorporated as "uncollected income".
To explain it clearly, he stated the following: “Reforms, and this one is no exception, generate a loss on one hand, but if the State's commitment is genuine and there is political responsibility, it can also bring us the benefit of other services that will be incorporated into our real wages.”.
In this regard, he stressed that more than tax reform, the government needs to strengthen the "State-society" trust so that citizens can see the benefits it would bring to the country.
