El Salvador technology concept

El Salvador slashes taxes for companies developing AI products

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El Salvador has passed a bill that makes companies developing AI products exempt from income tax, capital gains and local government taxes.

The Central American country has voted in favour of the tax exemptions, in a bid to make the country a more attractive destination for technological companies, entrepreneurs and investors.

The tax exemptions - which are anticipated to be kept in place for the next 15 years - will be available for eligible companies developing artificial intelligence (AI) tools, as well as other computer programming work. Lawmakers approved the motion with 69 voting in favour among the 84-member unicameral legislature.

"With these exemptions, we are facilitating the development of the technological sector in our country, and manufacturing as well, which will help a new industry emerge," said lawmaker Rodrigo Ayala during the debate.

The move was championed by President Nayib Bukele, who first touted the legislation late last month. Since it came into power, Bukele's 'New Ideas Party' has made broad efforts to modernise the economy of El Salvador and reduce its reliance on more traditional industries such as agriculture and manufacturing.

Towards this aim, the government has been investing in infrastructure, education and entrepreneurship programs to promote innovation and digitalisation across various sectors.

Bukele also gained international attention in 2022 when he promised that his country would issue Bitcoin-denominated bonds to pay off national debt, after making the crypto currency a legal tender in the country. However, those bonds have yet to materialise. 

The new AI-related tax exemptions includes income, property, capital gains and import tariffs on technology innovations, such as coding, software programming, AI development, as well as computing and communications hardware manufacturing.

AI tools have been gaining increasing attraction in recent months, as a result of the rise in popularity of intelligent chatbots such as OpenAI’s ChatGPT have seen a dramatic rise in popularity. These free tools can generate text in response to a prompt, including articles, essays, jokes and even poetry. However, governments and experts have raised concerns about the risks these tools could pose to people’s privacy, human rights or safety. 

While Italian regulators have decide to issue a temporary ban on the technology and China has unveiled draft measures to make companies responsible for the data used to train generative AI models, El Salvador has instead taken action to promote the development of these technologies.

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