Free zones: why they are key to the economy of the Dominican Republic and what effect they generate "tax holidays"

Throughout the Dominican Republic there are a number of special places with companies that produce everything from medical equipment to jewelry and are exempt from taxes.

These are free zones, industrial parks with more lenient fiscal and customs rules than in the rest of the Caribbean country and that currently channel two-thirds of Dominican exports.

These areas have also become a source of work for this nation of 11 million inhabitants, with 198,000 direct jobs generated until the end of last year, according to figures from the Association of Free Zones of the Americas (AZFA).

In fact, the Dominican Republic has become the Latin American country with the most direct jobs through free zones and parks under this regime, followed by Costa Rica and Honduras respectively, according to the same source.

“Free zones have been key in our country for decades, regardless of the party that has been in government,” he says. Claudia Pelleranoa Dominican who presides over AZFA, in dialogue with BBC Mundo.

They play an important role in the economy of the country, which holds presidential elections this Sunday.

However, these special places have received critical notes from the World Bank.

Free zones have become a kind of long-term policy that the Dominican Republic has had to attract investments since 1969, when the first of them opened in the city of La Romana.

That venture was born at the request of a transnational company with sugar investments, Gulf and Western Americas Corp., after industrial incentive regulations were approved that exempted companies located in free zones of the country from taxes.

Over time, other free zones emerged in the Dominican Republic. The companies that operated in them already exceeded one hundred in 1983. And in the following years their growth rate already stood out at the level of the Caribbean and Central America.

This special Dominican regime received an important incentive from the United States, first with preferential tariffs on products from the region and then with the free trade agreement with Central America and the Dominican Republic (DR-CAFTA, for its acronym in English) starting in the decade. of 2000.

Currently in the Dominican free zones there are about 820 local and foreign companies that moved exports of more than US$8 billion in 2023 According to official figures, a record figure for the country, with the US as a major destination (79% of the total).

These sales include everything from traditional textiles and tobacco to pharmaceutical products and medical equipment, which together are the main export, totaling US$2,474 million and exceeding 30% of exports from free zones.

They also exported plastic, metal, electrical and footwear products, among others.

This industrial range added thousands of jobs in the Dominican free zones, according to its defenders at a greater rate than in other Latin American countries, where small and medium-sized trade or service companies abound in these areas.

Based on its geographical location and port and airport infrastructure, the Dominican Republic is now betting on benefiting from the nearshoringa trend by which Western industries outsource part of their production to nearby countries to simplify their logistics instead of doing it in Asia.

Fernando Capellan He has witnessed firsthand how the Dominican free zones have changed since he started working as an industrial engineering intern in the manufacturing plant of one of them in 1979 in Santiago de los Caballeros, the second most important city in the country.

Seven years later he founded his own textile company in the same place and later installed an industrial park, Codevi, in a free zone in neighboring Haiti that provides labor to the supply chain.

“The free zones in the Dominican Republic have shown that they are a sector with a lot of potential,” Capellán tells BBC Mundo. “They have diversified and sophisticated with more added value. And more technology even in the textile area, which was where it started.”

But suggestions have also emerged to modify this policy in the Dominican Republic.

The World Bank indicated in a document in August that, although activity in the special economic zones promoted employment and attracted foreign direct investment to the country, “its indirect effects on the rest of the economy have been limited.”

He added that on average they generated 3.8% of total employment between 2010 and 2019 and that low-tech companies under these special regimes have productivity almost 30% lower than comparable companies outside them.

In another report on the country’s climate and development, the World Bank suggested in November reviewing “tax holidays for the Dominican Special Economic Zones” with the aim of “guaranteeing fiscal neutrality between companies and sectors.”

However, representatives of the free zones are reluctant to this type of change.

“When a free zone company makes an investment, it does so for the long term. And when that legal framework is constantly changed, the investment part is destabilized. So for us the stability of that framework is important,” says Pellerano.

And he points out that “in this government, in recent years there has been a clear priority and support for the free zone sector.”

The Dominican president, Luis Abinaderappears in the polls as a favorite to be re-elected, with such an advantage that he could achieve an absolute majority on Sunday and avoid a runoff with his predecessor Leonel Fernández or Abel Martíneza former mayor of Santiago de los Caballeros.

Different analysts point out that a key to Abinader’s favoritism is the strong recovery of the Dominican economy after the covid pandemic, with growth rates higher than the regional average and an expansion of 5.4% of GDP projected for this year by the IMF. .

A recent analysis by the Elcano Royal Institute in Spain indicated that this Dominican economic boom is supported by the country’s “star sectors” such as free zones and tourism, in addition to remittances.

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