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January 04
14:01 2019

REPORTER: News Staff, – January 4th. 2019 –

“High trade taxes not only constitute a barrier to profitability and private investment, but they also impede investment in relatively desirable activities (activities of greater competitiveness and with higher social returns) more than other activities. Firms dedicate significant attention to obtaining exemptions from the tax burden and few important investments take place in the economy without tax and trade incentives that remove the barrier. The most significant exports outside of tourism—sugar, citrus, papaya, shrimp, and BPOs—rely on tax and trade exemptions. Successful exporters are underrepresented in the private sector. Along with access to finance, tax rates are rated as the biggest obstacle in the economy.”—Rekindling Economic Growth in Belize (IDB, 2015).

In the last Business Perspective (BP) column, we had concluded with the quote above. From the standpoint of the Growth Diagnostic Framework, when economic actors expend time and resources to try and lawfully circumvent something it is assumed that whatever is being avoided is likely a binding constraint to investment and, by extension, economic growth.

Consequently, with the most significant set of exporters being in sectors that rely on exemptions, then it is not difficult to see why that 2015 study concluded with recommendations to lower trade-related taxes across the board. However, the natural follow-up question is what type of tax, then, should be utilized so as to keep government services financed and expenditures covered at least their current levels.

Keeping within the motif of the ring-fenced regimes such as the Export Processing Zone (EPZ), this question is especially pertinent as EPZs have been afforded exemptions beyond trade-related taxes. The law reads: “an EPZ business shall be permitted to import such quantity of goods and supplies free of customs duty, tariffs, consumptions taxes, excise taxes, trade turnover taxes or other taxes, as are necessary for the production and operation of the business and for the sole use thereof.”

What is the government to do then, remove all taxes? It is highly doubtful that there would be any self-respecting business person who would ever advocate for such absurdity. Governments have a duty provide essential public services and goods that benefit all economic agents, including the private sector. For example, capital expenditure on needed public infrastructure has been empirically shown to boost economic activity when executed properly, and human-capital investments via governments’ spending on education and health are indisputable essentials.

The discussion, therefore, is more aptly framed in the context of finding the appropriate tax structures or mix that help to foster economic growth as opposed to hurting it. On this issue, applied economists have been known to empirically investigate the impacts that various forms of taxes can have on economic growth. Seven years ago, for instance, a study by six economists (Arnold et. al, 2011) reconfirmed the commonly found negative impact of corporate income taxes (a form of direct tax), alongside evidence of the more positive effects of indirect taxes such as excise taxes.

Inspired by Arnold (2011), a Jamaican study (Scarlett, 2011) applied a similar methodology to data from that country. Unlike the former, this latter work did not look at a group of 21 countries; it looked exclusively at Jamaica, and found somewhat mixed results. Scarlett (2011) found that “any policy action aimed at increasing the P.A.Y.E. tax would have a negative and significant impact on GDP per capita over time.” Conversely, indirect taxes (these include the likes of Value-added tax, or VAT, and excise, to name a few) were found to have a positive impact on growth in the long run, but none in the short-run. Consumption taxes, on the other hand, were found to have positive short-run effects on economic growth.

Similarly, Greenidge and Drakes (2009) had conducted an examination for Barbados and found, inter alia, evidence that the “majority of the categories of indirect taxation policies have had no long-run impact on economic growth; only import duties were found to have negatively impact growth in the long run, most likely by raising the cost of inputs and thereby discouraging production.”

To be clear, while the abovementioned studies (and more) may have some overlapping findings, it must be underscored that each economy is unique, and should be analyzed accordingly. The reference to them in this article is to emphasize the point that tax reform measures must be carefully calibrated and informed by empirical data.

For that reason, it is a useful question as to what informs such tax changes within the Belizean economy. It is also worth keeping in mind that this is an economy that is simultaneously challenged by a need for, at minimum, revenue neutrality; as well as continually beset by the need to comply with international obligations; and unendingly exposed to downside risks, many of which are beyond Belize’s control.

One is also reminded that tax increases for the last two fiscal years were heavily influenced by government’s need to satisfy external debt commitments, particularly the restructured super bond. Furthermore, it is helpful to remember that it is, yet again, international obligations that had mandated the recently tabled replacement for the EPZ Act, the Designated Processing Areas (DPA) Act, and amendments to the International Business Companies Act.

Nonetheless, keeping with the DPA case, under the new regime, the DPA business can be afforded the following ten-year benefits: “exemption from (a) customs and excise duties and taxes; (b) tariffs; (c) consumption tax on imports; (d) trade turnover tax; and (e) property and land tax”. The previous EPZ exemption for dividends and interest income are preserved under the recent amendments to the Income and Business Tax Act’s section 8. However, unlike its predecessor—at least on paper—the DPA Act indeed does appear to comply with the international organizations’ requirements to remove the ring-fencing practices that catered exclusively to exporters. Therefore, in theory, the DPA regime should be open to any business that meets the specified criteria, such as being in a “priority sector”, regardless if they are exporting or selling to the domestic market.

The reasonable person, therefore, has to ponder whether or not the government can afford a full implementation of the on-paper changes being made in this newly proposed regime. Let us recall that in a 2016 report by Cambridge Resource International, prepared on behalf of the IDB, the authors noted that “Imports to Belize totaled BZ $1,605.9 million in 2014, of which BZ $478.3 million is excluded from the potential trade tax base—$BZ 404.1 million in imports direct to EPZs/CFZs.”

Returning to the binding constraint conversation from the IDB (2015) quote that opened this article, if the assumptions and observations of the Growth Diagnostic Framework hold, it is not farfetched to expect an rise in the number of investors, both foreign and domestic, who—upon recognizing that the regime is no longer exclusive to exporters—would be clamoring to for the identified benefits. And, it is also not unreasonable to expect a governmental response that seeks to contain such increases for fear of hemorrhaging revenue. However, if such a response becomes the de facto reality, the government would still find itself in violation of the “in fact” component of the World Trade Organization’s Agreement on Subsidies and Countervailing Measures (ASCM); thereby potentially leading to a repeat of current circumstances.

Consequently, as can be gleaned from the foregoing discussion, there are at least two ways one could view tax reform: proactively or re-actively.

A proactive approach would necessitate the public and private sectors engaging meaningfully in comprehensive tax reform strategies that are informed by empirical works of the likes referenced above. On the contrary, the reactive approach would continue to have us all playing catch up to one international obligation or the next, with logic suggesting that this is not a sustainable approach to building an economy.

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