Tweet
IMF warns against banking on tax incentives as pull for investment - Jamaica's foregone revenues estimated at a fifth of collections
published: Friday | October 19, 2007
Keith Collister, Business Writer
Joseph M. Matalon, chaired a 2004 task force on tax reform. The Matalon Tax Report estimated that more than 200,000 incentives were granted to businesses. - File
In a public information notice on the Caribbean released October 5, the International Monetary Fund (IMF) warned against relying on tax incentives to attract investors, saying they are costly in terms of foregone revenues.
"Other efforts to attract investments may be more effective for the region as a whole," the IMF executive board argued, pointing to other factors such as institutional quality, infrastructure and governance as important determinants of Foreign Direct Investment (FDI).
Toward cost effectiveness
The multilateral, while also recognising "the intense competition for gobal investment funds which the region faces", said it would encourage policymakers "to weigh carefully the costs and benefits of tax exemptions and consider reducing them if possible, to step up efforts to improve other determinants of investment, and to make remaining tax incentives more cost effective."
Finally, the IMF notes tha regional cooperation could facilitate progress 'along these lines', their discussions had indicated 'challenges' in ensuring cooperation.
In that last paragraph, the IMF appears to be referring to the fact that Caribbean countries are competing with each other for investment through the use of tax incentives, most of which are granted for the Caribbean's leading industry - tourism.
It is, therefore, interesting that the IMF's release coincided almost exactly with the release of a Caribbean Hotel Association (CHA) study entitled 'Taxation and Tourism Costs for the Caribbean Hotel Sector', prepared by the PA Consulting Group with European Union funding.
Unfair additional taxes
The study looked at the competitiveness of hotels in the Caribbean in relation to their operating costs, taxation levels, and other non-cost barriers that negatively impact the tourism sector - focusing on four sample destinations: Barbados, Dominican Republic, Jamaica and St. Lucia.
The main conclusion of the study is that the activities in the Caribbean tourism industry are unduly subjected to additional taxes not found in other sectors, such as room tax, import tax and departure tax.
The study notes that while most Cariforum countries have fiscal incentives for the establishment of hotels, which include exemption of corporate taxes, reduction or exemption from import duties on equipment, and reduction or exemption of duties on construction materials, the reduction in duties applies specifically to the construction phase and incentives often run between five to 15 years depending on the number of rooms the hotel is constructing.
"On one hand, governments traditionally address the burden of high expenditures by applying taxation to leading sectors in the economy - more often than not, the tourism sector," said CHA president Peter Odle commenting on the study.
The CHA report also argues Caribbean tourism profitability is being challenged by high construction costs, rising utility costs and high labour costs.
"By the same token, such an unfriendly fiscal climate makes our destinations less attractive as an investment opportunity and less attractive to visitors, which produces the exact opposite of the intended result of taxation in the first place," said Odle.
"It begs the question: Do these incentives, as they are, achieve their goals?"
The issue of the role of incentives in the Caribbean is a particularly germane to Jamaica at this time, as the Jamaica Labour Party's (JLP) manifesto, under the heading tax reform, states their intention to "embark on a comprehensive tax reform programme designed to simplify the tax system, make it more equitable, remove disincentives to investment and job creation and ensure greater compliance."
Prime Minister Bruce Golding has stated his intention to move ahead with tax reform in time for the next budget.
However, there is a tension in the JLP manifesto between the numerous areas listed as requiring incentives, and the stated goal of simplifying the tax system.
Businessman Joseph M. Matalon, chair of the 2004 tax reform taskforce, said of corporate tax that the "harmonisation of the corporate and individual taxation regimes ought to be a priority along with removal of the incidences of double taxation."
Matalon notes, however, that the Tax Policy Review Committee had also recommended further research and policy study as a prelude to reform of the existing corporate incentives regime.
But: "As far as I am aware this further work has not yet commenced," he said.
In a section suggestively entitled 'The Special Problem of Tax Incentives', the Matalon report advises that "The government does not know the full extent of the incentives it has given, nor are these tracked on a regular basis."
The report goes on to estimate that separate incentives and remissions "number nearly 200,000" and that the amount of tax forgiven was the equivalent of about one-fifth of total government tax revenues in 2003.
The treasury took in tax revenues of $102 billion in 2002/03, and $131 billion a year later.
According to the report, this compares with the share of corporate income tax in total tax revenue in 2002 of approximately 6.9 per cent, which itself has fallen sharply from 12.7 per cent in 1993.
The report goes on to advise that: "The policy question is whether the time has come to scale back and rationalise this programme, or whether it should be continued in its present form as a key element of national industrial policy."
Commenting on the need for urgent action on Jamaica's incentives, Price Waterhouse partner, Brian Denning, notes that the goal is to forgo only so much taxes as are considered necessary to achieve the desired results.
"For overseas investors this also requires an appreciation of relevant tax rules they face in their home jurisdiction as well as the impact of Jamaica's tax treaty network," said Denning.
"Many of Jamaica's incentives have been 'all or nothing' and export-driven. With our commitments, under both the Revised Treaty of Chaguaramas and to WTO, there is an urgent need to reform Jamaica's suite of incentives to meet the needs and challenges of today's marketplace."
Matalon himself notes none of those issues should be dealt with in isolation, saying that for tax reform to be successful it had to be comprehensive across all tax types and allow for a level of public engagement and education.
keithcollister@cwjamaica.com
published: Friday | October 19, 2007
Keith Collister, Business Writer
Joseph M. Matalon, chaired a 2004 task force on tax reform. The Matalon Tax Report estimated that more than 200,000 incentives were granted to businesses. - File
In a public information notice on the Caribbean released October 5, the International Monetary Fund (IMF) warned against relying on tax incentives to attract investors, saying they are costly in terms of foregone revenues.
"Other efforts to attract investments may be more effective for the region as a whole," the IMF executive board argued, pointing to other factors such as institutional quality, infrastructure and governance as important determinants of Foreign Direct Investment (FDI).
Toward cost effectiveness
The multilateral, while also recognising "the intense competition for gobal investment funds which the region faces", said it would encourage policymakers "to weigh carefully the costs and benefits of tax exemptions and consider reducing them if possible, to step up efforts to improve other determinants of investment, and to make remaining tax incentives more cost effective."
Finally, the IMF notes tha regional cooperation could facilitate progress 'along these lines', their discussions had indicated 'challenges' in ensuring cooperation.
In that last paragraph, the IMF appears to be referring to the fact that Caribbean countries are competing with each other for investment through the use of tax incentives, most of which are granted for the Caribbean's leading industry - tourism.
It is, therefore, interesting that the IMF's release coincided almost exactly with the release of a Caribbean Hotel Association (CHA) study entitled 'Taxation and Tourism Costs for the Caribbean Hotel Sector', prepared by the PA Consulting Group with European Union funding.
Unfair additional taxes
The study looked at the competitiveness of hotels in the Caribbean in relation to their operating costs, taxation levels, and other non-cost barriers that negatively impact the tourism sector - focusing on four sample destinations: Barbados, Dominican Republic, Jamaica and St. Lucia.
The main conclusion of the study is that the activities in the Caribbean tourism industry are unduly subjected to additional taxes not found in other sectors, such as room tax, import tax and departure tax.
The study notes that while most Cariforum countries have fiscal incentives for the establishment of hotels, which include exemption of corporate taxes, reduction or exemption from import duties on equipment, and reduction or exemption of duties on construction materials, the reduction in duties applies specifically to the construction phase and incentives often run between five to 15 years depending on the number of rooms the hotel is constructing.
"On one hand, governments traditionally address the burden of high expenditures by applying taxation to leading sectors in the economy - more often than not, the tourism sector," said CHA president Peter Odle commenting on the study.
The CHA report also argues Caribbean tourism profitability is being challenged by high construction costs, rising utility costs and high labour costs.
"By the same token, such an unfriendly fiscal climate makes our destinations less attractive as an investment opportunity and less attractive to visitors, which produces the exact opposite of the intended result of taxation in the first place," said Odle.
"It begs the question: Do these incentives, as they are, achieve their goals?"
The issue of the role of incentives in the Caribbean is a particularly germane to Jamaica at this time, as the Jamaica Labour Party's (JLP) manifesto, under the heading tax reform, states their intention to "embark on a comprehensive tax reform programme designed to simplify the tax system, make it more equitable, remove disincentives to investment and job creation and ensure greater compliance."
Prime Minister Bruce Golding has stated his intention to move ahead with tax reform in time for the next budget.
However, there is a tension in the JLP manifesto between the numerous areas listed as requiring incentives, and the stated goal of simplifying the tax system.
Businessman Joseph M. Matalon, chair of the 2004 tax reform taskforce, said of corporate tax that the "harmonisation of the corporate and individual taxation regimes ought to be a priority along with removal of the incidences of double taxation."
Matalon notes, however, that the Tax Policy Review Committee had also recommended further research and policy study as a prelude to reform of the existing corporate incentives regime.
But: "As far as I am aware this further work has not yet commenced," he said.
In a section suggestively entitled 'The Special Problem of Tax Incentives', the Matalon report advises that "The government does not know the full extent of the incentives it has given, nor are these tracked on a regular basis."
The report goes on to estimate that separate incentives and remissions "number nearly 200,000" and that the amount of tax forgiven was the equivalent of about one-fifth of total government tax revenues in 2003.
The treasury took in tax revenues of $102 billion in 2002/03, and $131 billion a year later.
According to the report, this compares with the share of corporate income tax in total tax revenue in 2002 of approximately 6.9 per cent, which itself has fallen sharply from 12.7 per cent in 1993.
The report goes on to advise that: "The policy question is whether the time has come to scale back and rationalise this programme, or whether it should be continued in its present form as a key element of national industrial policy."
Commenting on the need for urgent action on Jamaica's incentives, Price Waterhouse partner, Brian Denning, notes that the goal is to forgo only so much taxes as are considered necessary to achieve the desired results.
"For overseas investors this also requires an appreciation of relevant tax rules they face in their home jurisdiction as well as the impact of Jamaica's tax treaty network," said Denning.
"Many of Jamaica's incentives have been 'all or nothing' and export-driven. With our commitments, under both the Revised Treaty of Chaguaramas and to WTO, there is an urgent need to reform Jamaica's suite of incentives to meet the needs and challenges of today's marketplace."
Matalon himself notes none of those issues should be dealt with in isolation, saying that for tax reform to be successful it had to be comprehensive across all tax types and allow for a level of public engagement and education.
keithcollister@cwjamaica.com