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Taxing the life out of tourism
An analysis by Keith Collister
Sunday, May 27, 2012
Sunday, May 27, 2012
FROM the time of Independence in 1962, tourism and bauxite have been the engines of growth for the Jamaican economy. However, the role of tourism as a future engine of growth is now in doubt.
The European crisis is intensifying again, with no easy resolution. The crisis in the European banking system, which, by far, finances the largest portion of the world's trade, means that we are likely to see a contraction in trade financing worldwide, and the further transmission of financial stresses to the US. Indeed, Europe as a whole (including the UK) is already in a recession, the US economy is weak, and the one bright spot, Canada, now appears to be weakening.
Atlantis resort on Paradise Island, The Bahamas was this year taken over by its lenders. (Photo: AP)
Atlantis resort on Paradise Island, The Bahamas was this year taken over by its lenders. (Photo: AP)
Atlantis resort on Paradise Island, The Bahamas was this year taken over by its lenders. (Photo: AP)
Atlantis resort on Paradise Island, The Bahamas was this year taken over by its lenders. (Photo: AP)
A holiday is a discretionary expenditure, and people concerned about their jobs will consume less and cut down on what they are willing to pay, as occurred after the fall of Lehman in 2008. Indeed, we should now be on watch for a Lehman 2, but in Europe instead of the US, at least initially.
Across the Caribbean, there are more hotel properties in distress, either in receivership, or for sale due to poor financial returns (at prices well below book value), than has been the case for the past three decades. Regional player Almond Resorts, once aggressively expanding across the region, has seen three of their resorts put on fire sale, one of which has since been sold.
In premium-priced St Lucia, Morgan Bay and a number of other properties are for sale. Fabled Atlantis, which is almost single-handedly responsible for the revival of the Bahamian tourism industry, was this year taken over by its lenders. The only reason the Cable Beach-based Baha Mar mega project may finally get off the ground is due to Chinese Government money being part of a political rather than economic decision.
The most obvious sign of distress is that the company central to the initial creation of our all-inclusive industry, SuperClubs, has either sold or given up the management of half-a-dozen of its properties in the region, the vast majority of them being in Jamaica. Sagicor has made no money since taking over Sandals Dunn's River, Palmyra is in receivership, and a number of our other larger domestically owned European Plan hotels are under severe financial pressure. Even one of the world's strongest brands, the Ritz Carlton, appears unable to make money in Jamaica.
The situation facing Jamaica's smaller indigenous hotels is much worse, as most are facing a higher level of financial stress than ever before. All of this is before the hammer blow of the tax package proposed in the Budget last Thursday.
Early this year, the Jamaica Hotel and Tourist Association hired the world's leading economic consultancy for the travel industry, Oxford Economics, to look at Jamaica's tourism industry. Its conclusions were very clear, revealing that many hotels were operating at a much lower profit margin than 10 per cent, with many in the mid single digits or lower.
At the time, the consultancy advised that the Private Sector Working Group's (PSWG's) proposed increase in GCT from the 10 per cent paid by the tourism sector to 12.5 per cent could bring these companies down to break even or loss. In short, they noted that in the current world environment, any increase in taxation cannot be passed on.
The increase in taxation on the industry proposed in the Budget is several times higher than that originally proposed by the PSWG. It has the potential, particularly if coupled with a worsening global environment, to break all but the strongest players. The maths of this statement are simple.
The proposed tax package is likely to see a near doubling of the direct taxation on the industry (see article in today's Sunday Finance for details), estimated at about $6.9 billion in 2010 by Oxford Economics, based on Ministry of Finance figures. It needs to be fully understood however, that this is not the end of the taxation borne by the industry.
The latter figure includes the net GCT paid by the industry of just over $3 billion (which many analysts mistakenly believe is the total GCT paid by tourism interests). But the total amount of GCT paid for goods and services by the industry in 2010 was just under $9 billion, and would be higher now.
It is this $9 billion that represents the total inland GCT (not including GCT paid to Customs for imports) paid by the industry, as it is the industry that generates the economic activity. What happens next is that through the GCT system, the industry subcontracts the payment of the rest of the $9 billion to its suppliers, who now have the task of handing it on to the Government, where it is recorded as coming from distributors, life insurance companies and the like.
In addition, there are other taxes such as travel, tourist shop licences, etc of close to another $3 billion. Tourism, unfortunately, gets little or no credit for this $6 billion of GCT which is recorded as coming from manufacturers, insurance companies, traders, etc.
If the overall tax increase is, say, $6.4 billion on an industry with $90 billion in revenue in 2010, this means anybody making under a seven per cent profit margin would now lose money if the taxation is distributed equally, which would include the vast majority of the small hotel sector. However, the most damaging of the announced measures — a room tax of between US$2 and $12 per room per night rate — would impact the hotels most severely, leaving a tiny sliver of profitability for those operating at a 10 per cent net profit margin.
Such a scenario will result in hotels cutting staff and services to recover profitability. This is a slippery slope for our economy that depends on the jobs our hotels provide and the reputation of quality for which Jamaica is known.
Across the Caribbean, there are more hotel properties in distress, either in receivership, or for sale due to poor financial returns (at prices well below book value), than has been the case for the past three decades. Regional player Almond Resorts, once aggressively expanding across the region, has seen three of their resorts put on fire sale, one of which has since been sold.
In premium-priced St Lucia, Morgan Bay and a number of other properties are for sale. Fabled Atlantis, which is almost single-handedly responsible for the revival of the Bahamian tourism industry, was this year taken over by its lenders. The only reason the Cable Beach-based Baha Mar mega project may finally get off the ground is due to Chinese Government money being part of a political rather than economic decision.
The most obvious sign of distress is that the company central to the initial creation of our all-inclusive industry, SuperClubs, has either sold or given up the management of half-a-dozen of its properties in the region, the vast majority of them being in Jamaica. Sagicor has made no money since taking over Sandals Dunn's River, Palmyra is in receivership, and a number of our other larger domestically owned European Plan hotels are under severe financial pressure. Even one of the world's strongest brands, the Ritz Carlton, appears unable to make money in Jamaica.
The situation facing Jamaica's smaller indigenous hotels is much worse, as most are facing a higher level of financial stress than ever before. All of this is before the hammer blow of the tax package proposed in the Budget last Thursday.
Early this year, the Jamaica Hotel and Tourist Association hired the world's leading economic consultancy for the travel industry, Oxford Economics, to look at Jamaica's tourism industry. Its conclusions were very clear, revealing that many hotels were operating at a much lower profit margin than 10 per cent, with many in the mid single digits or lower.
At the time, the consultancy advised that the Private Sector Working Group's (PSWG's) proposed increase in GCT from the 10 per cent paid by the tourism sector to 12.5 per cent could bring these companies down to break even or loss. In short, they noted that in the current world environment, any increase in taxation cannot be passed on.
The increase in taxation on the industry proposed in the Budget is several times higher than that originally proposed by the PSWG. It has the potential, particularly if coupled with a worsening global environment, to break all but the strongest players. The maths of this statement are simple.
The proposed tax package is likely to see a near doubling of the direct taxation on the industry (see article in today's Sunday Finance for details), estimated at about $6.9 billion in 2010 by Oxford Economics, based on Ministry of Finance figures. It needs to be fully understood however, that this is not the end of the taxation borne by the industry.
The latter figure includes the net GCT paid by the industry of just over $3 billion (which many analysts mistakenly believe is the total GCT paid by tourism interests). But the total amount of GCT paid for goods and services by the industry in 2010 was just under $9 billion, and would be higher now.
It is this $9 billion that represents the total inland GCT (not including GCT paid to Customs for imports) paid by the industry, as it is the industry that generates the economic activity. What happens next is that through the GCT system, the industry subcontracts the payment of the rest of the $9 billion to its suppliers, who now have the task of handing it on to the Government, where it is recorded as coming from distributors, life insurance companies and the like.
In addition, there are other taxes such as travel, tourist shop licences, etc of close to another $3 billion. Tourism, unfortunately, gets little or no credit for this $6 billion of GCT which is recorded as coming from manufacturers, insurance companies, traders, etc.
If the overall tax increase is, say, $6.4 billion on an industry with $90 billion in revenue in 2010, this means anybody making under a seven per cent profit margin would now lose money if the taxation is distributed equally, which would include the vast majority of the small hotel sector. However, the most damaging of the announced measures — a room tax of between US$2 and $12 per room per night rate — would impact the hotels most severely, leaving a tiny sliver of profitability for those operating at a 10 per cent net profit margin.
Such a scenario will result in hotels cutting staff and services to recover profitability. This is a slippery slope for our economy that depends on the jobs our hotels provide and the reputation of quality for which Jamaica is known.
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