VZCZCXRO9168
RR RUEHLMC
DE RUEHSN #2385/01 3451924
ZNR UUUUU ZZH
R 111924Z DEC 07
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 8708
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 02 SAN SALVADOR 002385 
 
SIPDIS 
 
STATE PASS USAID/LAC 
STATE ALSO PASS USTR 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV KTEX ES
SUBJECT: NEW SERVICES LAW PROVIDES INVESTMENT INCENTIVES 
 
 
Summary 
------- 
¶1.  El Salvador's International Services Law, approved on October 
11, will regulate the establishment and operations of service parks 
and centers with incentives similar to those received by El 
Salvador's free trade zones. Developers and administrators will 
receive tax breaks, while service companies will receive permanent 
tax and tariff exemptions.  End summary. 
 
Overview 
-------- 
 
¶2. The Legislative Assembly approved on October 11, the 
International Services Law, a project presented by President Saca 
last June to mark his third anniversary in office (reftel). The aim 
of the law is to develop services centers and parks.  In these 
service zones, service firms will receive incentives similar to 
those received by firms in the free trade zones. The law regulates 
the operation of services parks and centers, as well as the benefits 
and responsibilities of service firms that benefit from the law.  In 
order to benefit from the law, a service must be exported. 
 
¶3. The idea of promoting services is not new and goes back to the 
beginning of the Saca's Presidency, when Uruguayan consultant Juan 
Opertti performed a study about El Salvador's economic future in 
services in order to offset the expected devastating loss of jobs in 
the maquila sector due to Chinese competition. At the end of 2004, 
the government announced a plan to retool and promote the country as 
the regional distribution center for Central America.  One of the 
advantages of the law is that it does not contradict the WTO in the 
General Agreement on Trade in Services (GATS), since GATS does not 
forbid subsidies for the export of services. (Note.  Earlier this 
year, the WTO extended the deadline from 2009 to 2015 for El 
Salvador to eliminate its WTO non-compliant free trade zones.  End 
note.) 
 
Definition of Services Parks and Centers 
---------------------------------------- 
 
¶4. The law defines a service park as an area without resident 
population with the capacity to establish and operate several 
services companies. A service center is an area limited to one 
company.  The Ministry of Economy will be in charge of classifying 
an area as a service park or service center. Additionally, in order 
to operate, a service park will need a Ministry of Economy certified 
administrator. 
 
Fiscal Incentives Granted by the Law 
------------------------------------ 
 
¶5. Service parks developers will be exempted from the payment of the 
income tax for 15 years, municipal taxes over the company assets for 
10 years, and real estate transfer taxes. Service parks 
administrators will be exempted from the payment of the income tax 
for 15 years and from the payment municipal taxes over the company 
assets for 10 years. The service companies or firms declared as 
service centers will have the following permanent benefits: tariffs 
exemption for the import of capital goods, machinery, equipment, 
tools, supplies, accessories, furniture and other goods needed for 
the development of the services activity (other goods and services 
such as foods and beverages, tobacco products, alcoholic beverages, 
rental fees, home equipment and furniture, cleaning articles, luxury 
goods, transportation vehicles, and hotel services are not exempted 
from taxation); exemption from the payment of income tax and 
municipal taxes over the company assets. The tax exemptions remain 
in place as long as the service operations are functioning. Service 
firms operating under the existing Free Zones law are also covered. 
However, if the services are provided to the national market, they 
cannot receive the benefits of the Services Law. 
 
Services Covered 
---------------- 
 
¶6. Services covered by the law include: 
 
-- International Distribution 
-- Logistical International Operations 
-- Call Centers 
-- Information Technology 
-- Research and Development 
-- Marine Vessels Repair and Maintenance 
-- Aircraft Repair and Maintenance 
-- Entrepreneurial Processes (i.e., business process outsourcing) 
-- Hospital-Medical Services 
-- International Financial Services 
 
 
SAN SALVAD 00002385  002 OF 002 
 
 
¶7. Several other services can be installed in the service parks 
without receiving the benefits of the law.  These services include 
hotels, airlines, electricity, communications and telecommunications 
services (except call centers and telephone firms that do not have 
their own fixed networks and are used for international 
communication), banking, financial and insurance services (with the 
exception of those specifically included in  the law), air, sea and 
land transportation, tourism and courier services, and other 
technical and professional services such as legal, tax, 
construction, publicity, and other consultants. 
 
Minimum Investment Requirements 
------------------------------- 
 
¶8. Beneficiaries must invest at least $150,000 during the first year 
of operations, including working capital and fixed assets. They must 
also hire no less than ten permanent workers and have at least a one 
year contract. For hospital/medical services, the minimum investment 
in fixed assets must be $10 million if they are to provide surgical 
services or a minimum of $3 million if they do not provide surgical 
services. Hospital or medical services must be located outside of 
major metropolitan areas. The service must also be provided only to 
patients that are insured with national or foreign insurance 
companies. 
 
¶9.  According to press accounts, the private sector, as represented 
by the private Business National Association (ANEP), the Salvadoran 
Logistics Chamber, and the Free Zones Association were very pleased 
with the approval of the new legislation.  They indicated, however, 
that other changes are needed in order to fully take advantage of 
the law, including more bilingual education, more educated 
technicians, and more infrastructure investments such as the airport 
expansion, the Port of "La Union" (scheduled for completion at the 
end of 2008), and the Millennium Challenge Corporation (MCC) 
financed highway in the northern part of the country. 
 
Comment 
------- 
 
¶10. The new law should help to attract investment in the services 
sector.  One U.S. health care provider has already inquired about 
providing medical services in the country.  The law is also part of 
the Government's efforts to make El Salvador a regional logistics 
and distribution center.  According to one government estimate, if 
the country captures 5 percent of regional transit, it could 
generate 32,000 new jobs.  Private sector job creation and economic 
diversification will not only help El Salvador in the long run, it 
will help the ruling party's (ARENA) chances for re-election in 
¶2009.  However, they also must improve the security environment and 
have a WTO acceptable plan for the elimination of the free trade 
zones sooner rather than later, if they hope to reach those goals. 
 
Glazer