Economic Overview
The economy grew at an impressive rate in Q2, according to recent indicators. Elevated economic activity growth in the first two months of the quarter was driven by manufacturing in duty-free zones, construction and commerce, with the economy benefitting from robust private sector credit growth and lower average interest rates. In addition, tourist arrivals were solid in May on greater inflows from North America.
On the fiscal front, the non-financial public sector posted a small surplus in the year to May, while tax revenues exceeded expectations. This comes after growth surged in the first quarter, buoyed by monetary stimulus introduced from the middle of last year.
Growth is set to be the joint-strongest in the region this year. The economy should be buoyed by continuing robust credit provision and fiscal stimulus in the U.S., which will boost remittances, exports and tourism activity. However, elevated debt servicing costs and a narrow tax base pose downside risks, which could become more pressing with higher oil prices and as global financial conditions tighten.
Focus Economics panelists expect GDP growth of 5.1% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, panelists see the economy expanding 4.4%.
Key sectors in Dominican Republic
The Dominican Republic was for most of its history primarily an exporter of sugar, coffee, and tobacco, but in recent years the service sector has overtaken agriculture as the economy’s largest employer, due to growth in construction, tourism, and free trade zones. The mining sector has also played a greater role in the export market since late 2012 with the commencement of the extraction phase of the Pueblo Viejo Gold and Silver mine, one of the largest gold mines in the world.
The economy is highly dependent upon the US, the destination for approximately half of exports. Remittances from the US amount to about 7% of GDP, equivalent to about a third of exports and two-thirds of tourism receipts. The Central America-Dominican Republic Free Trade Agreement came into force in March 2007, boosting investment and manufacturing exports.
The Dominican Republic’s economy rebounded from the global recession in 2010-16, and the fiscal situation is improving. A tax reform package passed in November 2012, a reduction in government spending, and lower energy costs helped to narrow the central government budget deficit from 6.6% of GDP in 2012 to 2.6% in 2016.
A liability management operation in January 2015, in which the government paid down over $4 billion of the country’s Petrocaribe debt at a discount of 52% with proceeds from the sale of $2.5 billion in global bonds, reduced the country’s debt load by approximately by 4% of GDP. Since 2015 the Dominican Republic has posted the fastest economic growth in Latin America.
Taxes in Dominican Republic
Corporate Taxation
Residence – A company is resident if it is incorporated under the laws of the Dominican Republic or if its place of effective management is in the Dominican Republic.
Basis – The Dominican Republic taxes primarily on a territorial basis. Business income derived from activities performed in, property situated or economically used in or economic rights used in the country is taxed, regardless of the domicile or residence of the participants or the contracting location.
Taxable income – Corporate tax is levied on the net aggregate of various sources of business income, including capital gains derived from the transfer of capital assets (generally land and shares). Certain items of investment income derived by resident corporate taxpayers from foreign sources also are subject to Dominican tax, including dividends; interest on loans and bank savings; and income from banking or financial operations, bonds, shares in capital companies, bills of exchange and other movable capital or securities on the capital markets.
Taxation of dividends – Dividends received by a Dominican entity from which tax has been withheld at the time of the distribution are exempt from corporate income tax. No withholding tax applies if such dividends are further distributed by the recipient entity.
Capital gains – Capital gains derived from the sale of assets, immovable property or shares are included in gross income and are subject to the standard corporate income tax rate of 27%. The capital gain is calculated by deducting the acquisition cost (adjusted for inflation) from the sales price and adding the accumulated earnings/losses (other adjustments also may apply, depending on the case).
Losses – Net operating losses may be carried forward for five years, but only up to 20% of the annual total net losses carried forward may be deducted. For the fourth year, the 20% deduction may not exceed an amount equal to 80% of taxable income and for the fifth year, the 20% deduction may not exceed 70% of taxable income. For newly formed entities, losses from the first year of operations should be fully deducted in the second year. The carryback of losses is not permitted.
Rate – 27%
Alternative minimum tax – A 1% asset tax applies to the value of a corporation’s total assets
according to the company’s financial statements. The asset tax, which is paid in two instalments, is considered a minimum tax payable when it is higher than the company’s corporate income tax liability. Certain assets are excluded from the taxable base.
Foreign tax credit – Credit is available for taxes paid abroad corresponding to foreign-source income that is Dominican Republic Highlights 2018 taxable in the Dominican Republic, up to the amount of Dominican tax payable on the income.
Holding company regime – A holding company’s income tax obligation is limited to the filing of the annual tax return, provided all of its income has been subject to withholding tax by the companies in which it has investments. Dividends distributed by a holding company to its shareholders are not subject to withholding tax.
Incentives – Various tax incentives are available and include regimes (e.g. for free trade zones and tourism) that often provide a 100% exemption from national taxes and contributions.
Investing in Dominican Republic
Investment Basics
Currency – Dominican Republic Peso (DOP)
Foreign exchange control – The foreign exchange regime is based on the free exchange of national currency against foreign currency. Accounting principles/financial statements – IFRS applies. US GAAP and IFRS apply for small and medium- sized entities.
Principal business entities – These are the corporation, limited liability company and branch of a foreign company.
The Dominican Republic’s economy has kept a robust growth rate over the last 5 years, achieving a 4.6% of GDP in 2017. Although having experienced a strong annual growth rate, a slowdown has been observed in the last 2 years. The DR’s GDP reached US$75.9bn in 2017, supported mainly by sectors like manufacturing (9.9%), construction (9.8%), commerce (8.5%), transportation (8.2%) and tourism (7.9%).
Tourism, one of the pillars of the Dominican economy, also kept its ever-increasing trend in 2017 with a record arrival of 6.2M visitors (6.8% increase), keeping up with the government objective of 10M visitors by 2020 and generating estimated revenues of US$7.2b. Fresh foreign investment in tourism infrastructure keeps landing into the country and, at the moment, there are many resorts and hotels being developed or scheduled to be this year. The latest investments in tourism infrastructure have been focused both on luxury hotels and resorts, as well as high-end residential projects, which are expected to increase the average spending per tourists.
With close to 2 million Dominicans living abroad, remittances represent a key source of revenues for the country and a driver of economic growth. Rising by 13% in 2017 over 2016; it reached US$5.9bn, an equivalent to 7.8% of GDP.
The mining activity, which had grown 26.5% in 2016 propelled by the re-start of ferronickel exploitation (which had been halted since 2013), slowed down and decreased 3.4% in 2017. Gold exports from Barrick Gold’s Pueblo Viejo operations reached US$708M for the same year, making the company once again one of the key contributors to the public coffers.
The DR’s Consolidated Public Debt keeps its steady growth and at the end of 2017, reached US$37.2bn, equivalent to 48.9% of GDP. Sovereign bonds have become a regular source of financing, both internationally and domestically. In 2017 the DR issued and sold US$1.7bn worth of bonds in two blocks of US$1.2bn and US$500M, respectively. Furthermore, in February 2018, the Dominican Government issued its first international bonds in Dominican Pesos (DOP) for a total of DOP$40,000M (approx. US$822M) and also US$1.0bn in sovereign bonds of 10 years at an interest rate of 6.5%, for which demand was more than twice what the DR Government had issued.
Dominican bonds continue to have good demand in the international markets and have become the tool of preference of the DR Government for external indebtedness. At the end of 2012 the cumulative total of sovereign bonds issued by the Government was US$2.8bn; by the end of 2018 this total will be US$13.1bn.
Government revenues increased by 11% in 2017 when compared to 2016, and the fiscal deficit ended at 2.4% of GDP, lower than the 2.8% of 2016. For 2018, the Government aims to reduce the deficit to 2.2% of GDP.
The 2018 National Budget includes 10.5% higher spending than the 2017 Budget, and also US$2.9 bn in financing, which will further increase the Consolidated Public Debt. Eighty five percent (85%) of the Government expenses will be current expenses, leaving only 15% for capital expenses. The Government will be spending two and half times more money on interest payments than in capital projects this year.
In the last year, some of the multilateral economic agencies have suggested the DR needs a comprehensive fiscal reform, in order to increase revenues and reduce the fiscal deficit. Given the high informality ratio of small businesses and labour in the DR (estimated at 60%), increasing revenues through direct taxes (i.e. income tax) without heavily affecting the same segments, is a challenging task.
The energy subsidy, an enduring heavy burden carried by the Government finances year after year, have costed an average of US$843M a year to the DR for the last 5 years. For the 2018 National Budget, the Government estimated a US$645M subsidy, a figure that looks highly unrealistic considering the US$48.6 oil price used for the calculation.
Despite the Government announcement of restarting the national dialogue towards the “Energy Act” to deeply reform the electricity sector, and the scheduled addition of the Punta Catalina coal-fired plants in early 2018, subsidy levels are expected to remain unless the losses and fraud issues hindering the energy distributors are tackled.