Country Report El Salvador

GENERAL OVERVIEW

Situated on the Pacific coast of Central America, El Salvador has Guatemala to the west and Honduras to the north and east. It is the smallest of the Central American countries, with an area equal to that of Massachusetts, and it is the only one without an Atlantic coastline. Most of the country is on a fertile volcanic plateau about 2,000 ft (607 m) high.

El Salvador is the smallest and most densely populated of the seven Central American countries. Despite having little level land, it traditionally was an agricultural country, heavily dependent upon coffee exports. By the end of the 20th century, however, the service sector had come to dominate the economy. The capital is San Salvador.

From the late 1970s to the early 1990s, El Salvador was the focus of international attention, owing to its civil war and to external involvement in its internal conflicts. The war, which pitted a militarily and politically capable left-wing insurgency against the U.S.-backed Salvadoran Armed Forces, was caused by decades of repressive, military-dominated rule and profound social inequality. Following the United Nations-mediated 1992 peace accords, which contained fundamental provisions for El Salvador’s democratization (including the removal of the military from political affairs), the country began to recover from years of political and economic turmoil, only to be devastated by Hurricane Mitch in 1998 and by a major earthquake in 2001.

Crime and violence threaten social development and economic growth in El Salvador, and negatively affect the quality of life of its citizens. While a truce established between street gangs in 2012 contributed to reducing violence levels to fewer than 39 homicides per every 100,000 inhabitants, violence has been on the rise since 2014. Crime and violence make doing business more expensive, negatively affect investment decisions and hinder job creation.

Government of El Salvador

El Salvador is a country in Central America which attained independence in 1841 after the collapse of the Federal Republic of Central America. The Constitution of El Salvador is the supreme law in the country and dictates the government system in El Salvador as that of a representative presidential democracy where the president is both the head of state as well as head of government. The president is commander-in-chief of the armed forces, enforces the laws, formulates an annual budget, draws up international treaties and conventions (which must be ratified by the National Assembly), appoints diplomatic and consular officials, and supervises the police. Every two years, the National Assembly elects three substitutes (designados), who can, in order of designation, assume the presidency when the president and vice president are not available.

ECONOMIC OVERVIEW

El Salvador’s economy was predominantly agricultural until industry rapidly expanded in the 1960s and ’70s. Despite its traditional concentration on agriculture, the country is not self-sufficient and must import food. At the root of this problem is the disproportionate distribution of land, which favours commercial crops and leaves many peasants landless and unable to grow subsistence crops.

The Civil war destroyed the country’s economy and infrastructure. Only after the signing of the peace accords in 1992 that El Salvador’s economy began to recover from the effects of war. By the mid-1990s El Salvador had expanded its service industry, and in the early 2000s it increased its amount of agricultural exports and number of reconstruction projects. In 2004 El Salvador signed a free-trade agreement with the United States that further boosted its export income. However, in the late 1990s, these accomplishments had been offset by high oil prices, natural disasters, and a decline in the number of maquiladoras (manufacturing plants that import and assemble duty-free components for export). These factors prevented El Salvador from paying off its external debt, and the country continues to rely partly on foreign aid.

Agriculture, forestry, and fishing

The most important agricultural products in El Salvador are coffee, cotton, corn (maize), and sugarcane. Several species of palm and coconut trees grow in the coastal zone, and there are many varieties of tropical fruit, such as coconut, tamarind, melon, watermelon, and mango. Nontraditional agricultural products (e.g., jalapeño peppers, marigolds, okra, and pineapple) have increased in importance since the early 2000s. Nevertheless, coffee alone still accounts for a substantial part of the value of total agricultural production. Cattle raising is also an important activity.

Valuable wood is obtained from the cedar, mahogany, laurel, nispero, and madrecacao trees and is used for the manufacture of furniture. The trunk of the balsa tree yields excellent lumber as well as resin that is used in the manufacture of antiseptics and medicinal gums. It is also used for fuel.

Commercial fishing, regulated by the government, has added to the country’s export earnings. Most of the fish caught commercially or for sport come from offshore waters and coastal lagoons; they consist chiefly of crustaceans (including lobster and shrimp), mullet, snappers, jacks, groupers, sharks, and anchovies.

Resources and power

There is no mineral exploitation of significance in El Salvador. The main power sources, meeting most of the country’s needs, are the hydroelectric projects on the Lempa River 35 miles (56 km) northeast of San Salvador, which are administered by a government agency.

ECONOMIC GROWTH

Economic growth in El Salvador reached 2.4 percent in 2016. This growth was mainly driven by external factors, including a significant decline in oil imports, which fell by US$262 million, and remittances, which increased by US$306 million from 2015 to reach US$4,576 million (or 17.1 percent of GDP). The country’s economic performance also benefited from an improvement in the trade balance, as both imports and exports fell, but the decline in imports was more marked.

The country’s low growth has translated into persistently high poverty levels, and increased urban poverty in recent years. According to WB data based on national poverty lines, 41 percent of households lived below the poverty line in 2015 including 10 percent which lived below the extreme poverty line.

TAXATION

Key Tax points

• An income tax rate of 25% is applied to the net profit for companies that sell up to USD 150,000. For all others it is 30%.
• A corporation is required to prepay its estimated tax liability on a monthly basis of 1.75% of gross revenue.
• Capital gains are taxed at a rate of 10% applied to the net profit of a transaction, calculated as the sales price less the cost of the property plus any related sales expenses.
• Services and goods are subject to a 13% Value Added Tax (VAT).
• Interest, commissions, royalties and technical assistance fees paid to foreign recipients are subject to a 20% withholding tax.

Social Taxes

These are payments that are made monthly by employers and employees on the payroll of companies for the purpose of guaranteeing the functioning of the worker social security system benefits at the national level:

Company = 7.50% of salary

Employee = 3.00% of salary

Maximum salary of USD 1000 per employee.

Social Security has a special education tax called INSAFORP which is 1% of the total amount that the company pays (this applies to companies with more than 10 employees).

FOREIGN INCOME

Foreign sourced income is not subject to income tax. Only income earned in the territory of El Salvador is subject to El Salvador income tax. Interest income and gains on market values are the exception. Foreign sourced income is not subject to VAT tax. Income received by persons or companies domiciled outside El Salvador will be considered as being from an El Salvadoran source if it arises from services or actions that benefit persons or companies located in El Salvador, including fees, interests and royalties.

INVEST IN EL SALVADOR

• Since 2001 El Salvador adopted the U.S. dollar as legal tender- one of the most important policies implemented to open the country’s economy to world trade and investment.
• El Salvador has a privileged geographical location. Located at the heart of the Americas, it is a true commercial bridge between North and South America. El Salvador is also part of the bi-oceanic corridor linking Europe to Asia.
• El Salvador has trade agreements with 43 countries in the Americas, Europe and Asia. Together they represent a potential market of 1.2 billion consumers. These agreements provide flexible rules of origin and major reductions in import tariffs.

Provides tax incentives to companies dedicated to providing services to foreign customers. To enjoy these benefits companies may establish in:

Service Parks: Limited areas considered to be outside of the national customs territory, where exporters of services are installed and operate under the benefits of this law.

Service Centers: When a company – in an eligible activity specified in this law – for physical or technical reasons is unable to operate inside a service park, it can be authorized to operate outside as a Service Center and enjoy all the benefits of this law.

Benefits:

1. Full exemption from customs duties and other taxes on the import of machinery, equipment, tools, replacement parts, accessories, furniture and office equipment, and other goods required for the execution of the incentivized activity.
2. Total exemption from income tax, exclusively for income deriving from the incentivized activity during the period of operation in the country
3. Total exemption from municipal taxes on company assets during the period of operation in the country

• The country enjoys a modern and efficient road network that connects its main cities and offers a rapid and easy access to the rest of the region. Due to this, the WEF has ranked El Salvador as the country with the best road infrastructure in Central America.
• El Salvador’s labor force is composed of 2.9 million people, 57% of whom are 39 years or younger. Thus, it offers a highly productive labor force capable of developing new skills in short time. The country’s labor force is ideally qualified for manufacturing, agro-industrial and service activities.

Currently, the World Bank portfolio in El Salvador totals US$140 million and includes two projects focused on serving vulnerable groups, particularly by increased access to health and education.

SECTOR OPPORTUNITIES

Specialized Textiles and Apparel

The textile and apparel sector is one of the main engines for the development of El Salvador, with a value chain that has been consolidating and integrating towards more value added products.

The dynamic process of vertical integration of the industry has incorporated all production activities of the textile and apparel chain, from the production of fibers, manufacture of yarns and fabrics, product design, garment manufacturing and the associated logistics, besides offering countless opportunities to enter new businesses in the upper and lower end of the value chain and related activities.

Outsourcing services

These Offshore Business Services are provided from El Salvador with neutral English and Spanish capabilities in sub-sectors such as Contact Centers, Call Centers, Captive Service Centers, Excellence Services Centers, Shared Services Centers – under both the Hub and Spoke Business Model and the Hybrid Business Model (KPO’s)-, and Business Process Centers for Common Corporate Functions (BPOs), both vertical and horizontal, as well as Data Processing Centers, among others.

Tourism

The natural wealth of the country, attractive fiscal incentives provided by the Tourism Law, as well as the determined support from the government of El Salvador, have made Tourism one of the most booming sectors of the country.

Aeronautics

El Salvador has more than 28 years of experience in the aircraft maintenance and repair (MRO) industry, which has placed the country on the global aviation map. The sector has shown annual growth rates of 20%, creating more than 2,400 jobs.

Agroindustry

Located at the geographical center of the Americas, is easily accessible by land, sea or air. The country has one of the newest ports, and the best airport location in the region.

Light Manufacturing

El Salvador offers a successful export platform with strategic location, high productivity and competitive costs for companies in the fields of medical devices, footwear, auto parts and electronic components, who want to establish manufacturing plants and export their products to big markets.

Logistics & Infrastructural networks

El Salvador seeks to become a strategic partner —in the global commerce—for shipping lines, terminal operators, logistic enterprises and manufacturers, by offering the advantages of a convenient business platform to key markets.

El Salvador is also developing a marine industry, focused so far on one of the marine market sectors: the leisure sector.

Healthcare Services

El Salvador offers geographical proximity for quality health services at competitive costs, making it an ideal destination for the establishment of hospitals, clinics, medical centers and resort hospitals, to serve medical tourism.