Leonel Melo Guerrero of OMG in Santo Domingo looks at the latest financial and corporate developments in the Dominican Republic
The Dominican Republic's economy continues to grow steadily in an environment of political stability. Recent legislative developments have been primarily aimed at developing regulations and institutions in order to optimise a more efficient allocation of resources throughout the economy. Another clear objective of recent legislative efforts has been fine-tuning a modern and robust regulatory framework for the key economic sectors that are most likely to attract direct investments in the following years.
The most relevant legislative and institutional changes that have taken place in the past year include: a) the bank asset tax repeal; b) widened tax incentives for tourism infrastructure development; and c) the implementation of a new regulatory and institutional framework for energy, fuels and mining.
The tax reform established under Law No. 253-12 has had a profound impact on the way that business is conducted in the country. The tax reform extended the application of a 1% tax on the net productive assets of financial institutions (banks and savings and loans associations). The tax on bank assets was mostly used for raising fiscal revenue. This is in spite of the fact that the International Monetary Fund (IMF) proposed the application of similar financial stability contributions in order to internalise some of the negative spillovers generated by financial institutions. Law No. 109-13 repealed the tax on bank assets with the aim of eliminating distortions in the efficient allocation of financial resources and therefore reducing the local cost of credit.
Moreover, the tax incentives for tourism development have also been adjusted in order to benefit a wider array of potential investors. Law No. 195-13 increases the scope of the tax incentives that had been previously granted by Law No. 158-01 to a limited number of geographical regions. The new framework establishes an open-ended approach in order to allow all regions with potential for becoming tourist attractions, to benefit from the fiscal incentives granted in the aforementioned law. These incentives include a range of exemptions aimed at tourism development in the country.
The energy and mining sector continues to rise as one of the most promising sectors for investments in the Dominican economy. Law No. 100-13 has established a new Ministry of Energy and Mining. The ministry has been staffed, leading to a new regulatory and institutional framework for energy, fuels and mining. Coupled with this novel regulatory structure, tariff cuts have been established by Law No. 103-13 for the import of vehicles that employ alternative fuels. These policies signal an environmentally conscious move towards energy sustainability and pollution reduction.
Some additional legislative efforts have been proposed in order to support the government´s plans to restructure the country´s energy matrix. Two notable examples include: a draft bill that allows the Dominican Corporation of State Electrical Companies (CDEEE) to invest directly in energy. As well as a proposal prepared by the National Energy Commission (CNE) that aims to expand the coverage of the incentives granted to biomass projects under Law No. 57-07.
In addition to the aforementioned reforms, regulatory changes in the horizon include: a) discussions on revamping and revising the Dominican Labour Code; b) the imminent tariff cuts under the DR-CAFTA trade agreement; c) reforming the country’s Securities Law; and d) an updated draft Bill on Insolvency and Mercantile Restructuring.
The executive power started consultations on revising the Dominican Labour Code (which dates from 1992) in order to adapt it and update it to recent legislative and institutional changes⎯including the 2010 Constitutional reform. The public consultations purport to foster dialogue between the relevant stakeholders and discussing potential policy improvements that could promote economic growth and help fight unemployment while adhering to the protection of fundamental rights.
Additional tariff cuts under the Central American Free Trade Agreement-DR (CAFTA-DR) enter into force in 2015. More than 96% of all products under the agreement will be tariff-free. These cuts constitute new opportunities for the import of more than 900 products under the agreement. The tariff cuts also pose challenges for national producers and exporters from the DR that face increasing competition in their markets. In order to provide greater support to local exporters, the government has announced its plans to convert the National Housing Bank (Banco Nacional de la Vivienda-BNV) into the Dominican Export Bank (Banco Dominicano de las Exportaciones-BANDEX).
On the securities front, the country has undertaken an important redefinition of its laws and regulations in a renewed effort to accelerate the development of the market. Pension funds continue to accumulate liquidity but the market has not been capable of keeping pace by increasing the offer of instruments, at the same time that banks are ever more restricted in their ability to lend money due to tightening regulations. As a result, funds remain in the hands of the government and the Central Bank, which constitute the main issuers of debt. The new rules (a combination of enabling laws, the new Securities Regulation and a proposed new Securities Law) are expected to renovate the existing market participants, promoting the entrance of new participants and most importantly creating new instruments.
Law No. 189-11 remains an important piece of the puzzle for the reinvention of the local securities market. The law seeks to promote the channelling of low-cost funds to the development of real estate projects and does so by a comprehensive set of rules and legal instruments ranging from new vehicles for structuring assets (such as the fideicomiso and the collateral agents) to new financing products (dedicated bank accounts) to procedural enhancements aimed at speeding up judicial recoveries. The fideicomiso will be especially instrumental not only through direct issuances of securities but also by enhancing other products and structures, such as investment funds and securitisation, which were instituted by the original Securities Law No. 19-00 but have not been successful for lack of proper asset segregation in the law, something that Law No. 189-11 has resolved.
Some other important pieces of legislation are still under discussion with active participation from international financial institutions, experts and the business community. These draft laws include the eagerly awaited Bill on Insolvency and Mercantile Restructuring. A new and widely supported version of this draft bill has been prepared that aims to create a modern system on pre-bankruptcy reorganisation (on both national and cross-border levels) and also to establish specialised insolvency courts. In addition, a Bill on Entrepreneurship and Business Innovation has been drafted, designed to create the necessary institutional incentives to support start-ups, angel investment and venture capital.
All of these new initiatives share the common thread that the business community has worked alongside legislators to guarantee the sustainability of the institutions, statutes and regulations, through ample discussions with all government and private sector instances likely to be impacted and also by ensuring that complementary norms, institutions, courts and regulators are established from the outset.
President and Director General
About the author
In 2001 he founded the consulting firm OMG, where he acts as President and Director General. He has 24 years of experience as an attorney, being responsible for the organization and direction of legal and interdisciplinary teams for high profile cases. He specializes in corporate and financial law, tax and business planning. A part-time academic, he has taught Business Planning, Tax and Contracts at several law schools and programs.
He holds a Bachelor of Laws from Pontificia Universidad Católica Madre y Maestra – PUCMM (1989) and a Master of Arts with concentration in Financial Law, Corporate Law, Tax and Business Planning from University of Notre Dame (1993). In addition he has attended programs at Harvard Law School and IESE Business School.
He served as Telecom Commissioner during the 2004-2012 period. He is a member of the Advisory Board of the LEGUS International Network of Law Firms. Additionally, he is President of the OMG Institute, an institution dedicated to promoting the formulation of strategy and sound public policy for the Dominican Republic through research and teaching.