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Outsourcing services to Mexico with Arturo Rodriguez

Outsourcing services to Mexico with Arturo Rodriguez

by | Oct 22, 2023 | FDI Latin America, Podcast

Arturo Rodriguez
Co-Founder and Vice President of Business Development
Intugo
arturo.rodriguez@intugo.co

LATAM FDI: Today. We’re pleased to have Arturo Rodriguez with us. Arturo is the founder or one of the founders of a company that is based in Hermosillo, Mexico, called Intugo. And today, we will have a conversation on outsourcing services to Mexico. Arturo. How are you today?

Arturo Rodriguez: I’m very good. I’m very happy to be here with you. Steve.

LATAM FDI: Can you tell us a little bit about yourself and your organization?

Arturo Rodriguez: Sure. As you said, I’m Arturo Rodriguez, Vice President of Business Development for Intugo and a co-founder. Intugo is a company that, for more than 15 years, has been helping international companies set up, run, and grow operations in Mexico. We specialize in particular in helping operations related to service-oriented activities. And as I said, we’ve been helping companies that are outsourcing services to Mexico for more than 15 years.

LATAM FDI: Many people are familiar with the power and breadth of Mexico’s manufacturing sector. But you deal with other kinds of businesses. What kind of operations can a company have in Mexico from the perspective of your clientele?

Arturo Rodriguez: Yeah, it’s a good question. Manufacturing is huge in Mexico, and the type of services we offer at Intugo are a spin-off. They are an expansion of services that have already been offered to manufacturing companies for more than 30 or 40 years. We expanded the concept and tweaked it a bit for people looking at the possibility of outsourcing services to Mexico.  This relates to BPO operations, call center operations, software development, accounting, and anything you can do from a computer or maybe on a remote basis, if you will. That’s the kind of operation that we host. At Intugo, we have more than 90 different positions in different operations for our clients who are outsourcing services to Mexico. This means one position would be maybe software development. Another position would be a call center agent, for instance. Furthermore, another position would be accounts receivable agent or accountant. You can see that there’s a broad number of types of operations and positions that you can do when outsourcing services to Mexico. This aligns with what every company has as a goal to do here.

LATAM FDI: I’m familiar with your company and know you have a unique business model. But before we specify what the characteristics of your particular business model are at Intugo, what types of models, other than what you’ll explain to us about your company, are available for businesses that want to set up the kind of operations that you mentioned in Mexico?

Arturo Rodriguez: Yes, there are many models or value propositions in the marketplace, but I’ll summarize it in two big solutions, if you will. First, you want a company to help you with a particular need. Let’s say that you needed someone to help you with your accounting and do your general ledger and do your returns and do your, I don’t know, tax strategies, et cetera, et cetera. You want to outsource that to someone, maybe in Mexico, a Mexican firm, for whatever reasons. Then, you find what we call a regular outsourcing firm. A regular accounting outsourcing firm. Same thing. You can tell. Let’s say you want to do a sales campaign to sell something through a call center. You may go and find a call center outsourcing company in Mexico that does sales. You don’t want to get very much involved in the operation. You want someone to do it for you completely in your desire to outsource services to Mexico. That’s one type of company or a big number of value propositions around that concept. Our concept is totally the opposite. Our concept is all about helping you be able to control the operation for yourself using the same examples.

You don’t want someone doing the accounting for you; you want to do it yourself. You want to control it. You want to know who’s doing the work. You want to help with the productivity of the people doing the tax returns or the general ledger activities. In another example, in call center operations, you want to be involved in and control sales. Maybe that’s your core business. Maybe that’s what you do as a business, and you want to expand your operation and control the people. You want to be able to say who gets to be part of your team. Our model for outsourcing services to Mexico is all around helping, making sure that you can control productivity while we take care of the rest.

LATAM FDI: So, when you talk about “the rest,” obviously, I’m familiar with your business. I know that part of that, quote-unquote, “the rest” has to do with physical infrastructure. But in addition to physical infrastructure, what other things do you do to take off the plate for your clients so that they can on their core competencies and concentrate on what they do?

Arturo Rodriguez: Yes, we call it. We offer a bundle for outsourcing services to Mexico. Let me start by giving a view of this concept. When you have an operation or a company, you have to take care of everything that the company needs. Not only the productivity aspect, but you have to take care of the people, pay payroll, and take care of the facilities, insurance, and everything else that is needed. Our services for outsourcing services to Mexico enable you to concentrate on what you’re there to do. Our job is to try to make sure that you don’t have to deal with the complexities, particularly the complexities of doing business in Mexico, and that you don’t necessarily have to get too deep into that because we help you with that. As you said, we go from everything regarding the infrastructure and the facilities to the recruiting of the people who will be part of your team. All the human resources activities that are needed for the people not only to be recruited and hired but also for them to stay there. We provide services for outsourcing to Mexico regarding legal contracts, payroll, benefits administration, and maybe some additional benefits that you want to provide or that you’re already providing to your people back home.

We also help you with any procurement needs that you may have for your operations, including the basic things that someone in your team may need or something more related to your operation. Computers, bandwidth, more office space, et cetera, et cetera. So, in a nutshell, all the labor or law or country-related activities to be able to operate, we help you with those once again, for you to be able to concentrate on what you’re here to do, your core business in Mexico.

LATAM FDI: Just so I am clear on this, my understanding is that under your business model, the people who work for your clients are not legally, at least on the side of Mexican labor law, employees of your client. Would it be correct to assume that with regard to human resources, your company acts somewhat akin to a PEO in the United States?

Arturo Rodriguez: We could say that we call that we are the employer of record for outsourcing in Mexico. So yes, legally speaking, people are under our umbrella, and technically speaking, our clients don’t have any labor law-related liability in Mexico. Our clients don’t need to have any entity or bank account in Mexico to operate through our model. We take care of that, including what you say regarding the employer of record situation. Nevertheless, operationally speaking, the people assigned to your operation, our client’s operation, report to our client and our client’s managers and work alongside our clients’ strategies.

LATAM FDI: In other words, they have control over what they do. This means they have a complete focus on their activities, which they’re in business to do. At the same time, you take care of things in a way that enables them to plug into Mexico and be up and running, outsourcing services to Mexico in a reasonable period of time. Is that correct?

Arturo Rodriguez: That’s correct. Very correct.

LATAM FDI: So, given this model, how big of an operation can you contemplate setting up under that model in order to be able to gain some of the benefits that you’re able to gain by outsourcing services to Mexico?

Arturo Rodriguez: Yeah, we have operations that have started with one person, and we have operations that have started bigger. But most importantly, we have operations with more than 200 or 300 people. So, we host small operations or small clients and bigger ones. Maybe a common thing, a common trend amongst all our clients, is that usually, they start small by their standards. Small for someone, maybe 20 people, small for someone else can be one.  Usually, they start with that and eventually grow. That has been the trend for most of our clients.

LATAM FDI: What kind of savings would a company expect to see by setting up operations in Mexico?

Arturo Rodriguez: It depends on what kind of talent pool you’re looking for. The more experience, and particularly worldly experience, the less savings you may have. Maybe. But in general, on average, you will be able to have between 25% and 50% lower costs compared to your operation in the US. In general, that’s what you find when outsourcing services to Mexico under the Intugo business model.

LATAM FDI: With respect to your company, I understand that you have several locations. Can you tell us a little bit about each location and maybe a little bit about the labor force that people can expect to find in those locations?

Arturo Rodriguez: It’s an interesting question, not only from the perspective of facilities that we have but also from the market conditions as they are right now. Because as we know, before COVID, 98% of the people working for our clients worked in one of our facilities. Just a few of them were working remotely or maybe on a work-from-home basis. Once COVID hit and everyone, including us, had to go home and work there for a while, the work-from-home, or the remote option, if you will, became a reality. Today, we have maybe 40% of the people working from home, and the rest are working on a hybrid model or an on-site model in one of our facilities. We have facilities in Hermosillo, Sonora, which is where we started. We also have facilities in Obregon, Sonora, and have facilities in Guadalajara and in Mexico City. We also have a very small operation in Monterrey. Having said that, we have recruited people for outsourcing services to Mexico from practically all over the country. A lot of the people that are working today for us and for our clients are working from different states in Mexico.

The important part regarding these concepts is that we help you decide what’s the best strategy for you. This strategy is particularly based on what kind of talent you’re looking for in order to engage in outsourcing services in Mexico. If you have an operation that needs a lot of security and maybe it’s an IT-related operation, we might suggest Guadalajara, for example. There’s a big talent pool for IT people there. But if your operation does not necessarily have that need and needs different kinds of people, different kinds of experiences, and positions, we may suggest a hybrid mode. This could maybe be with a foot in one of our facilities in one of the cities, but also with people working remotely because of the experience you’re looking for. Every operation is different, and we usually work with our clients involved in outsourcing services to Mexico to decide what strategy will be best for them to have the best talent available.

LATAM FDI: It seems this is an all-inclusive model for outsourcing services to Mexico that makes it easy to set up operations.

Arturo Rodriguez: I would like to say that with us, it’s very easy to start and very easy to start up operations through outsourcing services to Mexico.

LATAM FDI: Typically, when people listen to the podcasts we do, they have questions arising from the information they’ve listened to. That being the case, if somebody with further questions would like to contact you, how would they do that?

Arturo Rodriguez: I invite them to send me an email. I’ll give you my email: arturo.rodriguez@intugo.co. That’s my email. They can contact me through that or go to our website, www.intugo.co, and look at our business proposition there. There, they will find different ways of contacting us, including my email, but also through a form, and we’ll answer them really quickly.

LATAM FDI: Okay. What we’ll do is, in the transcript section on the page that hosts this podcast, we’ll have that information. We’ll have your URL and your email address. Another thing that we would like to include if it’s available, is a link to people’s LinkedIn pages. Do you have a LinkedIn page that we can include in our information about outsourcing services to Mexico?

Arturo Rodriguez: That will be okay, definitely.

LATAM FDI: All right, we’ll do it. Thank you very much for speaking with us today. It’s been very interesting and informative, and we hope you have good luck going forward.

Arturo Rodriguez: Thank you for inviting me, Steve.

Bitcoin mining in Paraguay: Is it a good use of the country’s energy resources?

Bitcoin mining in Paraguay: Is it a good use of the country’s energy resources?

by | Oct 21, 2023 | FDI Latin America

Paraguay is currently debating what to do with the proliferation of bitcoin production farms. A single 50,000-square-foot facility for bitcoin mining in Paraguay consumes the same electricity as 20,000 middle-class homes.

When the Spanish founded the city of Villarrica in the 16th century in Paraguay, they expected to find abundant quantities of gold. But the gold never appeared. Now, 450 years later, what Villarrica produces are bitcoins.

Emmanuel Friedman is a local businessman from Villarrica who, together with his international partners, operates nearly 10,000 computing machines to do crypto mining, that is, generate electronic currencies by bitcoin mining in Paraguay.

How does it work? The machines are dedicated 24 hours daily to solving complex computer processes to validate transactions on the Bitcoin network. For this activity, crypto miners like Friedman are rewarded with fractions of bitcoin. The more machines with high computing power are used, the higher your income will be, but the cost of electricity, the primary input of crypto mining, rises. ”It is a new way to have extra income for all Paraguayans by transforming energy into an asset,” explains Friedmann.

The energy expenditure of Friedman’s crypto-mining complex bitcoin mining in Paraguay is equivalent to the consumption of 20,000 middle-class homes. It is estimated that between industrial miners and people who do crypto mining at home, there are 30,000 machines in Villarrica. “Today, we already have Swiss, Canadian, and Brazilian companies in the city doing mining,” says Friedman.

Low-cost bitcoin mining in Paraguay

CLYFSA, the private company that distributes electricity in Villarrica, has been purchasing energy for five years at a price below the cost of production, according to the National Energy Administration, ANDE.

In 2021, CLYFSA paid ANDE an old rate of USD 23.84 megawatt/hour, while the rest of the Paraguayans paid USD 41.98 per megawatt/hour. Judicial protection prevents ANDE from updating the rate to CLYFSA.

According to ANDE, the energy rate that Villarrica mining accesses is below the cost of production, which becomes “a subsidy granted by all the Paraguayan people,” the company said in a document published on its web portal.

”This means that the rest of the users have to pay that difference, either in their electricity bill or in a worse quality of service, because the necessary investments cannot be made,” says the former vice minister of Mines and Energy of Paraguay, Mercedes Canese, who observes with the growing fever for bitcoin mining in Paraguay with growing concern.

Paraguay is a country that generates 100% of its electricity from its binational hydroelectric plants: the Itaipú dam, in partnership with Brazil, and Yacyretá, in alliance with Argentina. Nearly 60% of Paraguay’s energy is not consumed in the country. The surplus is exported to Brazil and Argentina.

Crypto miners: “We must take advantage of the surplus energy.”

Juan José Benítez was one of the first crypto miners in Paraguay and has his own mining plant in the capital, Asunción. Benítez is one of the most audible voices that promote regulating this industry activity and encourages foreign capital’s arrival. “Take advantage of the surplus energy we have. Paraguay has a lot. We have renewable hydroelectric energy that is green, which is everything that, let’s say, any Bitcoin investor would be looking for at this moment,” Benítez assured.

The miners argue that the country would receive more significant income through bitcoin mining in Paraguay than by exporting surplus energy. “What Paraguay has the most of is energy. On top of that, it has energy that is not used. So, instead of Paraguay selling Brazil energy at ridiculously low prices, this is an excellent opportunity for everyone to sell energy to the large mining companies that come to invest in Paraguay to create a new way of making assets,” says Emmanuel Friedmann.

The cryptominers ‘ argument is not shared by the former Vice Minister of Energy, Mercedes Canese. We do not want “companies to come that consume a lot of energy, also at a subsidized price. This is because these types of investments do not generate employment. It is perhaps different from subsidizing a sector that does generate general well-being, such as public transportation, or an industry that is not electro-intensive, but employment-intensive .”

The environmental footprint of Bitcoin mining

Using electricity from fossil fuels to “mine” bitcoins is one of the significant criticisms of cryptocurrency mining globally. China banned crypto mining in 2021. Activity was temporarily reduced, but it is growing again. Although bitcoin mining in Paraguay is becoming increasingly popular, its global participation is barely 0.15%.

Bitcoin in the world

Although the electrical energy that Paraguay produces is completely clean. That is the argument of local crypto miners to defend their activity and attract foreign investors. Former Vice Minister Canese considers that if Paraguay’s surplus electrical energy stops being sent to Brazil and Argentina to prioritize crypto miners, those countries would likely have to look for alternative sources, such as oil derivatives. “So the greenhouse gas is not generated in Paraguay, but it will be generated in Brazil or Argentina, and the effect of climate change is global,” says Canese.

Paraguay’s hydraulic energy availability will be taken over starting in 2030, as estimated by the binational company ITAIPU, which generates energy from the Paraná River. The severe drought affecting the Paraná basin has reduced the levels of hydraulic energy production. It has fallen 36% since 2016, when ITAIPU had its best generation year.

Although Paraguay has surplus electricity, at least 23% of Paraguayan households still depend on the consumption of firewood for cooking, according to the latest Permanent Household Survey of 2018. In rural areas, firewood consumption for domestic use reaches 52%.

“We are talking about providing concentrated energy to crypto miners when we have places 50 kilometers from Asunción without power lines. The neighbors have to organize to set up an energy column. It is the neighbors themselves who have to assume the cost at an energy rate 4 or 5 times higher than what a crypto miner would pay in Villarrica,” says Leonardo Gómez from the Association of Technology, Education, Development, Research and Communication TEDIC, an organization that has monitored the development of crypto mining in Paraguay.

Government veto on crypto mining

In July, the Senate of Paraguay approved a law regulating bitcoin mining in Paraguay. However, the government of President Mario Abdo Benítez vetoed the law and returned it to Congress. The veto decree argues that crypto mining “does not generate added value.” It is characterized by “its high electrical energy consumption and low use of labor.” The government considers that the country’s industrial exports are growing and estimates that, in five years, the country’s manufacturing industry will require the available energy. “If Paraguay wants to intensify crypto mining today, in the next four years, it will be forced to import electricity,” the decree states.

The Paraguayan government’s veto of crypto mining relieves those who have doubts about the implications of equating crypto mining with a regular industry. However, Villarrica’s crypto miners will continue to benefit from low-cost energy that all Paraguayans somehow end up paying for.

The United States sees investment and business opportunities in Uruguay

The United States sees investment and business opportunities in Uruguay

by | Oct 21, 2023 | FDI Latin America

“There is a large block of American companies that believe in business opportunities in Uruguay and want success,” said Eric Geelan, commercial and political advisor at the United States Embassy in Uruguay.

The United States seeks to promote trade and investments in Uruguay and motivate Uruguayans to invest or establish companies in their own country. There are incentives for pursuing such business opportunities in Uruguay.

This was stated by the ambassador of the United States in Uruguay, Heide Fulton, who recently spoke of the “thriving economic sectors that can generate greater mutual collaboration.” Significant business opportunities in Uruguay are mainly in agriculture and technological services, which present the most important potential for success.

There are programs such as “ Select USA,” which informs foreign entrepreneurs of the requirements and incentives made available by the U.S. government and helps generate networks of contacts, in addition to providing other tools, such as databases, investor guides, legal advice, information on taxes, migration, in which States to invest, etc.

The idea is that Uruguayan companies make a soft landing (soft landing, without losing time or errors) in the northern country.

Exports to the United States are varied

Julio César Lestido, president of the Uruguayan Chamber of Commerce, emphasized that the United States occupies fifth place as a destination for Uruguayan products. But if exports of products and services are added, the United States comes to first place.

“There are business opportunities in Uruguay to take advantage of,” he said, addressing a gathering of that country’s businessmen concerning export issues and investments.

Eric Geelan, commercial political advisor at the U.S. Embassy in Uruguay, highlighted that exports of goods from Uruguay to that country grew by US$200 million in 2022. “It is a robust increase that has been talked about very little,” he stated. Specifically, Uruguayan exports to the United States increased from US$ 572 million in 2021 to US$ 786 in 2022 (37% increase). This was mainly due to the sale of Uruguayan meat. “The United States pays for the quality cut,” said the diplomat.

The primary goods Uruguay exported to the United States are beef, meat by-products, wood and wood products, cellulose, citrus fruits, and honey, in that order. “Exports of all those Uruguayan products to the United States have increased,” Geelan said. Business opportunities in Uruguay also focused on honey and citrus fruits, with the United States being the “market par excellence” for citrus fruits. “We began a process of purchasing more pulp,” he added.

Likewise, diplomatic authorities focused on Uruguay’s service exports. According to the Uruguayan Chamber of Information Technologies (CUTI), the United States represents 60% of Uruguay’s technology services exports. “It had reached 70%, but an American company was bought by an English firm, which reduced the percentage,” he explained.

Still, the percentage remains high and is the equivalent of about US$600 million in technological services exports. That is, Uruguay’s export of Information Technology (I.T.) services to the United States is almost equal to its export of goods.

The problem is the limitations of Uruguayan capacity in terms of qualified personnel in new technologies, which Uruguay knows perfectly well, and the U.S. diplomatic representatives have noted this point.

Likewise, Uruguay’s imports from the United States increased from US$540 million in 2021 to US$655 million in 2022 (21% increase). The products most imported from the U.S. are oil, agricultural machinery, machinery for the renewable technology industry, and transportation.

Companies in the U.S. see business opportunities in Uruguay

The United States is one of Uruguay’s most prominent investors. “It is true that we do not have a flagship investment yet. But a large block of American companies believe in Uruguay and want to promote its success,” said Geelan.

180 American companies with a presence in Uruguay employ approximately 30,000 workers.

U.S. support for ventures and projects in Uruguay falls within the framework of the Law Enforcement Commission of Investments ( Comap ).

Promoting economic exchange with Uruguay in the U.S. national interest

For many reasons, promoting business opportunities in Uruguay is undeniably in the United States’ national interest. First and foremost, Uruguay’s stable and open economy is an attractive gateway for American businesses seeking access to the broader Latin American market. By fostering stronger economic ties with Uruguay, the United States can secure a strategic foothold in the region, thereby advancing its economic interests.

Additionally, the diversification of trade partners and investment opportunities in Uruguay can enhance the resilience of the U.S. economy, particularly in times of global economic uncertainty. Furthermore, a thriving business relationship with Uruguay bolsters diplomatic and political ties, ultimately contributing to regional stability and cooperation, which aligns with U.S. foreign policy objectives.

In conclusion, promoting business opportunities in Uruguay not only bolsters American economic growth but also fortifies diplomatic relations, thereby safeguarding and advancing the national interest of the United States in an interconnected world.

Light manufacturing in Guatemala has excellent potential

Light manufacturing in Guatemala has excellent potential

by | Oct 21, 2023 | FDI Latin America

Guatemala is among the big winners in its efforts to continue attracting investment in light manufacturing. According to the Trading Economics report with data from the Bank of Guatemala, the gross domestic product contributed by light manufacturing in Guatemala increased to Q21,258.07 million in the first quarter of 2023 from Q20,227.83 million in the fourth quarter of 2022. This is not only because nearshoring is a reality in the Central American country but also proves that Guatemala can take advantage of manufacturing opportunities for job creation.

Textiles dominate light manufacturing in Guatemala at present

Within the light manufacturing sectors in Guatemala, the clothing and textile industry has significant strategic importance at this time. According to estimates from an initial Guatemala No Se Detiene study, the Central American nation has the opportunity to generate an additional US$3.5 billion in exports if there is a focus on products such as men’s shirts, blouses, women’s dresses (knitted), T-shirts, women’s suits and for men, with specific markets to grow in the United States, the United Kingdom, Spain, Germany, and the Netherlands. This effort could generate a 5.2% increase in GDP and generate between 117,217 and 472,617 additional jobs engaged in light manufacturing in Guatemala.

Guatemala’s clothing and textiles cluster comprises companies that generate threads, fabrics, clothing, finishes, and accessories. According to information provided by the same Clothing and Textile Commission ( Vestex ), the importance of the industry in the economy has an impact of 2.5% of the national GDP (this is 2.7 times what tourism contributes for comparison) and generates 14.40% of exports with a total of 51,379 direct and indirect jobs, being the main export product. Coffee, fats, oils, bananas, and sugar follow these export products.

Seventy-two percent of clothing and textile industry exports have the United States as their leading destination. This circumstance reflects the importance of the strategic relationship with that country to continue supporting a joint work agenda to develop more and better economic opportunities. The rest is exported, 22% to Central America and 6% to other countries, including Mexico and the European Union.

Many products carry the “Made in Guatemala” label

Light manufacturing in Guatemala is very well evaluated in the world ranking of the North American market. The country is the fifth supplier of cotton t-shirts, the sixth in synthetic t-shirts, the seventh in cotton bags, the seventh in synthetic t-shirts, and holds eighth place in synthetic shorts and pants. Major brands such as VF, Nike, Target, Gap, Fanatics, Lucky, Hanes, Kohl’s, Carhartt, J. Crew, Old Navy, Land’s Sea, and Polo Ralph Lauren, among others, carry the Made in Guatemala label.

Twenty-five percent of the maquilas involved in light manufacturing in Guatemala are located in the municipality of Guatemala, and others have been established in Mixco 24%, Villa Nueva 14%, Palín 13%, San Pedro Sacatepéquez 6% and Amatitlán 6%. Given the growth of light manufacturing in Guatemala, improving infrastructure is vital for maintaining the competitiveness of this sector in the country. That is why it is so important to continue to advance the 64 projects that have been identified in Guatemala No Se Detiene that prioritize logistics corridors. Additionally, facilitating the studies and resources necessary to develop other strategic routes that connect the ports of the Pacific with the Atlantic and the route of the southern corridor from Guatemala City to Puerto Quetzal is fundamentally vital to efforts to promote light manufacturing in Guatemala. Finally, approving initiative 5431 General Road Infrastructure Law in the Congress of the Republic will facilitate Guatemala’s further development in the light manufacturing sector.

It is of great importance to continue developing light manufacturing in Guatemala

The promotion of light manufacturing in Guatemala holds paramount importance in advancing the country’s economic growth for several compelling reasons:

Firstly, light manufacturing industries, characterized by the production of textile and consumer goods and electronics, have the potential to diversify the economy and reduce its heavy reliance on traditional sectors like agriculture. This diversification can enhance resilience to external economic shocks.

Secondly, establishing light manufacturing facilities can create employment opportunities, especially for the rapidly growing young population, thus reducing unemployment rates and improving living standards. Moreover, these industries often require skilled labor and technology adoption, contributing to human capital development and technological progress.

The production of light manufactured goods can also serve as a platform for exports, bolstering foreign exchange earnings and expanding international trade. Finally, this sector’s growth can foster the development of a robust supply chain and infrastructure, attracting foreign investments and stimulating domestic entrepreneurial activities.

In summary, promoting light manufacturing in Guatemala is pivotal to fostering economic growth by diversifying the economy, creating jobs, developing human capital, increasing exports, and catalyzing broader economic development.

Tax incentives contained in the new law to promote innovation and technology manufacturing in El Salvador

Tax incentives contained in the new law to promote innovation and technology manufacturing in El Salvador

by | Oct 21, 2023 | FDI Latin America

On April 18, 2023, the Legislative Assembly approved the new Law for the Promotion of Technological Innovation and Manufacturing in El Salvador, intending to incentivize natural or legal persons that make, within the national territory, new investments and foreign direct investment in innovation projects or technological manufactures; thus, contributing to the economic growth and sustainable development of the country.

This new law grants multiple tax incentives and is specifically designed to encourage investment and development of the technology industry in El Salvador’s national territory. Regarding its application, it will correspond to the Ministry of Economy. In contrast, the effective surveillance and control of the customs and tax regime will correspond to the Ministry of Finance, which may conduct inspections to verify compliance with legal obligations.

Below, we have included a summary of the significant points touched upon by the new law for the Promotion of Technological Innovation and Manufacturing in El Salvador.

What are the incentivized activities?

Natural or legal persons who carry out commercial activities in productive sectors related to at least one of the following items will enjoy tax benefits:

  • Programming, management, maintenance, consulting, and analysis of computer systems or software.
  • Development and commercialization of cloud computing and data flow services; artificial intelligence, massive data analysis; distributed ledger technology; cybersecurity solutions.
  • Technologies based on the manufacturing in El Salvador of parts, materials and equipment or installations, assembly, including manufacturing plants for technological equipment or hardware, semiconductors, communications technology, robotics, nanotechnology, aircraft, and unmanned vehicles.
  • Systems engineering and technologies necessary to integrate basic industrial technologies into global production chains.
  • New energy generation and storage sources, which do not currently exist within the national energy matrix, will be subject to the corresponding authorizations and concessions, as the case may be.
  • Research and development of new technologies.

Who can benefit from the new law?

The beneficiaries of this law will be natural or legal persons, national or foreign, who develop, within the national territory, a new investment in innovation projects or technological manufacturing in El Salvador included in the previous section, which meets the following requirements:

  • Be natural or legal persons, national or foreign.
  • Be registered with the Salvadoran Tax Administration.
  • Prove that the activities developed correspond to the incentivized activities.
  • Obtain a current qualification agreement issued by the Ministry of Economy.

However, investments made before the entry into force of this law, as well as investments related to operations already established in the territory or those under a special regime derived from the increase in assets as a result of merger, absorption, or any other processes, operational and administrative restructuring of assets, are excluded from the benefits of the new law.

Nor will natural or legal persons who enjoy the benefits included in other special tax regimes, such as those contemplated in the regulations that regulate industrial and marketing free zones and those that control parks and service centers, be eligible for this law.

What tax incentives does it provide?

The beneficiaries of this law, subject to a current Qualification Agreement issued by the Ministry of Economy, will be eligible for the following tax incentives:

  • Total exemption from Income Tax regarding incentivized activities.
  • Exemption from all types of Income Tax withholdings regarding incentivized activities.
  • Full exemption from municipal taxes on the net assets declared by the beneficiaries.
  • Exemption from the payment of Capital Gains, stipulated in articles 14 and 42 of the Income Tax Law;
  • Total exemption from the payment of Import Tariff Duties and taxes levied on the importation of goods, inputs, machinery, equipment, and tools necessary to develop the incentivized activities.

The above tax incentives will be recognized for fifteen years from the day following notification of the issuance of the Qualification Agreement by the Ministry of Economy.

The total exemption from Import Tariff Duties and Taxes levied on the importation of goods indicated applies only to goods that are essential for the benefited activity, and they must be duly identified by the beneficiaries as being exclusively used for the activity in question.

Likewise, the quantity of goods to be imported must be proportional to the installed capacity of the beneficiary through which the incentivized activity will be developed. No exemption regulated in that law will be extended to the import of firearms, ammunition, goods for consumption by directors, partners, or staff of the company, their family members or related companies, and current assets.

What violations and sanctions does it establish?

Among the main infractions that this new law establishes are:

  • Applying tax incentives and benefits to activities not encouraged by this law will be considered a severe infraction, which will be punished with a fine of 15 to 20 minimum monthly salaries in the commerce and services sector.
  • Failure to comply with the operating permits and authorizations corresponding to the type of productive activity, commerce, or services to be carried out will be considered a serious infraction, which will be punished with a fine of 6 to 15 minimum monthly salaries in the commerce and services sector.
  • Refusing to appear without justified cause to the legal calls made to them by the institutions mentioned in this law will be considered a less severe infraction, which will be punished with a fine of 2 to 5 minimum monthly salaries in the commerce and trade sector.

When did the new Law for the Promotion of Technological Innovation and Manufacturing in El Salvador enter into force?

The law, as mentioned above, was published in Official Gazette No. 81, Volume No. 439, dated May 4, 2023, and according to its final article, it entered into effect thirty days after its publication in the Official Gazette, that is, from August 4, 2023.