Overview of the Dominican Republic’s free zone sectorBy the General Directorate of Customs, Dominican Republic
The first Free Zone Park in the Dominican Republic was established in 1969, in the city of La Romana, by the Gulf and Western Corporation, an American firm, which has grown to become the largest private operator in the country. The legal provisions regulating such “free zones” are laid out in Act No. 299 on Industrial Incentives and Protection, adopted on 23 April 1968. Companies whose production is focused on exports can set up shop in Free Zone Parks and benefit from tax exemptions and other incentives as a result.
In 1990, Act No. 299 was amended by Act No. 8-90 on the Promotion of Free Zones, which harmonizes the management, incentives, rights and duties of free zone processing and service companies. A whole chapter in the amended Act is dedicated to Customs regimes applicable to free zones, with provisions:
- establishing that all imports and exports will be subject to Customs regulations;
- authorizing the setting up of a Customs office in each Free Zone Park;
- creating a specialized Customs corps, exclusively tasked with servicing export processing zones;
- prohibiting the import of certain items such as firearms, gunpowder, ammunition and implements of war, as well as sewage or waste that could contaminate or endanger the physical integrity of Dominican territory or the health of its inhabitants.
By 2017, the free zone sector in the Dominican Republic consisted of 71 parks, bringing together 665 companies. The Free Zone Parks generate 165,724 direct jobs and account for exports amounting to just under 5,695 million US dollars. Industries established in the country’s free zones are known for their production capacity and quality.
The free zone sector is a key driver of the country’s development, creating jobs, generating foreign trade, and fostering technology transfer. In evaluating the sector, all the variables grew in 2018, with exports from free zones exceeding six billion US dollars, representing over 60% of the country’s total exports. The dynamic nature of the sector is also worth noting: there are currently Free Zone Parks in 27 of the country’s 32 provinces and, in 2018, a total of 126,095 imports, 75,091 exports and 157,284 merchandise transfers between companies were registered.
However, it has been detected that companies, which are not part of the free zone sector, have been trying to declare goods under this regime in order to benefit from import exemptions granted to free zone participants. Fortunately, these non-participating companies have not had much success, due to the vigilance of the Dominican Republic’s General Directorate of Customs.
The General Directorate of Customs has established a Free Trade Zones Deputy Directorate, whose main role is to supervise, control and authorize all imports, exports, transfers of goods, and other regimes that companies operating in a free zone may use. Each procedure is implemented with high-quality standards, which promote the efficiency, integrity and transparency of all Customs processes. Customs’ assistance contributes to time-saving with respect to imports and exports, which impacts positively on the competitiveness of participating companies.
The Free Trade Zones Deputy Directorate, along with the Customs Intelligence, Audit and Post Clearance Audit Departments, rigorously and continuously analyses, controls and supervises all operations that free zone-based companies must execute, in order to avoid potential illicit acts or the misuse of benefits and exemptions granted to free zone participants. Similarly, the Ministry of Finance monitors financial transaction movements, with the support of the General Directorate of Internal Revenue.
Specific Annex D of the RKC
Although, when ratifying the WCO’s Revised Kyoto Convention (RKC), the Dominican Republic did not accept Specific Annex D, Chapter 2 of which lists 21 Standards and Recommended Practices covering a wide range of Customs procedures related to free zone operations, the General Directorate of Customs considers Dominican legislation as complying with most of its provisions, and regards this Annex as an important tool in implementing and ensuring the development of the free zone sector.
As prescribed in Standard 3 of Chapter 2, which specifies that Customs shall lay down the arrangements for Customs control, including appropriate requirements as regards the suitability, construction and layout of free zones, it is worth noting that, in the Dominican Republic, a decentralized body called the National Council of Free Trade Zones is responsible for ensuring the construction and development of free zones, but not for Customs control arrangements, responsibility for which rests with Customs.
Other similarities between the Dominican Republic’s national legislation and the provisions prescribed in Annex D include the fact that Dominican law does not contain a period regulating the permanence of goods in a free zone, and does not require a guarantee to be lodged. It also allows goods to be transferred for inward processing between free zones and between companies.
Regarding Standard 21 of Chapter 2, the draft Customs Law approved by the Senate of the Dominican Republic establishes a term of 30 days beginning from the date on which a company located in a free zone has ceased operations without having re-shipped or definitively imported its merchandise, except in the case of fortuitous events or force majeure, both of which must be duly proven.
There are, however, some differences. For example, concerning Recommended Practice 9 of Chapter 2, which states that Customs should not require a declaration in respect of goods introduced into a free zone directly from abroad if the information is already available on the documents accompanying the goods, the Recommendation is not compatible with the Dominican Republic’s Customs legislation, in that Dominican law establishes an obligation for all merchandise entering the country, even if via a free zone, to be declared.
To ensure good communication between the General Directorate of Customs and free zone operators, as well as with companies located in these zones, an Agreement on Services was developed, and two committees that meet monthly to discuss all matters related to the services and requirements of the parties involved were constituted:
- A National Committee, composed of a National Council of Free Trade Zones representative, who presides over it, a representative of the Deputy Directorate of Customs, and a representative of the Dominican Association of Free Trade Zone Companies.
- An Internal Committee, which must be established at each Free Zone Park, composed of a representative of the Free Zone Park operator company, a representative of the Dominican Association of Free Trade Zone Companies, and the head of the Customs office located in the Park.
The Ministry of Finance is tasked with undertaking a cost-benefit analysis of free zone projects and the tax exemptions applying to them under law. Thereafter, the Ministry must engage on the efficiency or redundancy of any incentives with the agencies or councils that approve them.
It is worth mentioning here that the Standby Agreement (SBA) signed with the International Monetary Fund (IMF) at the end of 2009 established the need for the Dominican Republic to increase its revenue collections, in order to safeguard fiscal sustainability in the medium and long term.
As one of the Dominican Government’s policies was to keep the tax system unchanged, focus was put on optimizing tax collection, which led to the rationalization of the Tax Administration’s working processes. In addition, in March 2011, all procedures and procedures related to exemptions from taxes covered by laws, concessions or contracts were centralized in the Ministry of Finance.
Likewise, in compliance with the SBA, in March 2011, the Ministry of Finance established the Tax Incentive and Exemption Inspection and Evaluation Unit, whose main function is to carry out the cost-benefit analysis of exemptions provided by law or contracts ratified by the National Congress, as well as ensure that the incentives and tax exemptions are used for the purposes for which they were conceived.
Thus, when a company wishes to benefit from a regime governed by an institution or body, the Ministry of Finance must prepare a cost-benefit analysis of the project, based on methodology developed by the Ministry to guide decisions on the granting of incentives and prevent abuses in their use.
This methodology enables the impact on society to be determined when tax incentives are granted. It was developed in June 2011, as part of a technical assistance request by the Dominican Government to the representatives of the IMF. The methodology compares the cash flows of a project before and after a tax incentive in order to obtain the internal rate of return (IRR) of the tax expense, which must be greater than zero to justify the granting of the incentive.
With the above in mind, an investment project to obtain tax incentives must benefit the economy of the Dominican Republic, as this will convince the Government to become a “partner” of the project. In addition, to avoid redundant tax incentives, investment projects with positive externalities – benefits that affect a party who did not choose to incur that benefits – must have a negative return.
Based on tax best practices and technical feasibility, the Ministry of Finance issues an opinion on the incentive request, which could include an objection to the request. This opinion serves as input for decision-making in the corresponding council that approves incentives. Generally, the Ministry has one vote within the same council.