Nicaragua’s new canal: the world’s biggest tax exemption?

Panama Canal with Three Ship (Photo credit: Wikipedia)

I’ve been reading about the proposed new transoceanic canal in Nicaragua, plans for which were passed by the country’s parliament last week. The Reuters story on it notes that the $40bn cost would be four times Nicaragua’s national income.

According to the Guardian, once running, the canal would double Nicaragua’s GDP and triple employment. So what would it do for the country’s tax revenues? The answer, it seems, is very little.

According to my ham-fisted translation of the draft project agreement [pdf, Spanish], the government has agreed to an exemption from all taxes, including capital gains and value added tax, for the Chinese firm building the project (which happens to be registered in the Cayman Islands). The exemption extends to withholding taxes on dividends, interest payments and royalties, all import taxes, and any taxes on expatriate employees. The only source of tax revenue left out of the exemption is “existing labour taxes”. And all of this seems to be indefinite.

The Cayman Islands company will apparently pay just US$10m a year for the privilege of owning the waterway, although it should be noted that the ownership of the canal will gradually transfer to the government.

Now I can see that this is a very high risk, high cost project, the kind where tax incentives might help tip its net present value above the threshold that makes it interesting for investors. But the sheer size of the project, combined with the sweeping nature of the exemptions, must surely merit a serious cost-benefit analysis. Yet, as often seems to be the case, there’s no suggestion that such an analysis is underway. Here are some opposition voices quoted in the Guardian:

The Sandinista Renovation Movement said it would oppose the bill and “any document that gifts a concession, privileges, exonerations and tax exemptions to an unknown company, for an unknown route, for a period of 100 years.”

“We are going to hand over the country’s sovereignty without knowing where the canal is going to go, how much it is going to cost, its ecological impact or how long its construction is going to last,” Independent Liberal party legislator Eliseo Núñez, told La Prensa.

This might be the first project of its magnitude to be under consideration since tax came to the forefront of international development debates. It should surely be a flagship case, one that will set an example of how governments, businesses and civil society should approach the question of tax incentives.