General Overview & Institutional Strengthening for Belize Tax Administration
As was pointed out in last week's EDC "Strictly Business", the need for the tax system to be modified so as to reduce the cost of doing business in Belize and simplify the business process has been raised by the private sector on numerous occasions and confirmed by independent studies, including the World Bank's Enterprise Survey.
In the World Bank study, for example, approximately 25 percent of firms in Belize found the tax administration system to be a "major" constraint to business activity.
To address this concern, the Economic Development Council (EDC)-an advisory council to government as it pertains to policy reforms relevant to improving the business climate-had established in June this year the Trade and Tax Policy Committee (The Committee) that is tasked with conducting a comprehensive review of Belize's trade and tax regime.
More to the point, while Belize's net tax revenue of 22 percent of Gross Domestic Product outstrips the average for the Latin American and Caribbean Region-thereby making our tax system one of the most effective at generating revenue-the tax administration process has been described as being "inequitable" and too complex for both tax payers and those tasked with tax administration.
Consequently, five key areas had been identified as being especially problematic: "(i) there are too many different taxes; (ii) there exists too many exemptions, (iii) the continued reliance on "sub-optimal" forms of taxation; (iv)the employment of special tax regimes, and (v) the fragmentation of the tax administration."
To address these problem areas, the Committee's review is designed to provide and/or assist GOB with the following:
(i) proposals on the best reforms for main taxes and fiscal incentives, alongside an analysis of their respective economic consequences;
(ii) recommendations on the optimal measures for the institutional strengthening of the tax administration process; and
(iii) the final dissemination, stakeholder discussion and validation of the reform proposals.
Trade-Related and Excise Taxes
Naturally, the three primary areas have been further broken down into several specific activities: "Strengthening of the institutional capacity of Belize's Tax Administration"; the streamlining of trade-related and excise taxes; the establishing of a new tax incentives policy that promotes investments; ensuring that officials in the Ministry of Finance are trained in the use of the model for tax and trade reforms assessment; and upon achieving consensus among key stakeholders, the final implementation of the reforms that the review proposes.
In last week's Strictly Business, we focused on the first objective. This article will pick up on the second aspect of the overall trade and tax review: the streamlining of trade-related and excise taxes.
According to Amparo Masson, Director of EDC's Secretariat-the Public-Private Sector Dialogue (PPD)-trade-related taxes make up more than 20% of the total tax collection in Belize.
Masson, referencing the Prime Minister's budget speech for the fiscal year 2015/2016, reminded that of the more than $800 million in tax revenue projected, approximately $212 million is expected to come from trade-related sources. "This is indeed a priority area for us," Masson said.
"The EDC's mandate is to help improve the level of competitiveness for Belizean businesses, and working on measures to address the concerns raised regarding trade-related taxes is paramount. However, because of its sizeable contributions to the country's tax revenue we literally cannot afford to be careless in how we approach this goal."
For Belize, trade-related taxes include import duties, Revenue Replacement Duty (RRD), and Environmental Tax (ET). As the name implies, import duties are paid by the importer, and its rates range from zero percent up to 45 percent in some instances. The most common import duty rate, however, is 20 percent on commodities. Import duties are calculated on the CIF (Cost, Insurance, plus Freight) value of the goods, and are applied to goods that are not "zero-rated".
RRD-which is installed as a type of cost recovery mechanism for GOB and applied to a specific list of more than 60 categories of goods-is also worth looking at. The RRD rates range from 5 percent to 50 percent, with, of course, some exemptions for goods from CARICOM countries. The Environmental Tax, with an average rate of 2 percent, is also levied on all goods that are imported into the country, with the exemption of basic food items such as beans, butter, cheese, coffee, baby formula, and medical supplies, to name a few. It must be noted that this tax is not charged on domestic goods, and that the ET goes against World Trade Organization (WTO)'s "non-discrimination" principles. There is also an excise tax that is levied on locally manufactured goods such as cigarettes, soft drinks, beer and alcohol.
Analysis of the Economic Consequences of Tax Reforms
As is true for the entire review process, the review of the trade-related and excise taxes discussed above cannot be approached carelessly. While the EDC is determined to see the requisite reforms, it has to ensure that these reforms do not erode government's revenue stream.
"The Committee must also look cautiously at the economic consequences of tax reforms for the country," Masson stressed. "While we all would love this process to be completed overnight, they (The Committee) cannot and will not simply suggest removing or combining taxes; that would be awfully irresponsible of any entity, especially a government, to do. Instead, this study will analyze the impact of a streamlining of the trade-related taxes and the excise taxes."
Masson also reminded that the process, at the very least, must be "revenue neutral", while simultaneously improving the business environment. "While we are being careful not to throw away the proverbial 'baby with the bath water', we are dedicated to seeing this through. If I may refer back to the Enterprise Survey done by the World Bank about four years ago, it is a salient concern for the government that 56.7 percent of the 150 private-sector representatives surveyed said that they found the 'tax rates' as a major constraint," she said. "Additionally, 44.6 percent also found customs and trade regulations to be a significant constraint. We are fully committed to seeing these constraints relaxed, because the stronger we can make our private sector, the better. All we're doing is making sure that whatever we do, we do prudently."
The PPD Director also underscored that the actual implementation of the streamlined trade-related and excise taxes shall follow the adequate stakeholder consultations, so as to ensure that the highest levels of benefits and costs are sufficiently accounted for. "We don't want to solve one problem by inadvertently creating another of equal size. Currently, we have one of the most revenue-effective tax systems in Central America and Caribbean; we'd like to keep that status, while making the business environment more conducive."
About the EDC
The Economic Development Council (EDC) serves as the principal liaison body between the public and private sectors, and is designed to advocate for, plan, and coordinate the institutionalization of policy reforms that engender the business- and investment-friendly environment that is suitable for Belize's private sector development and overall economic growth. The EDC executes its function by maintaining constant and open communication with both sectors via its technical unit, the Public-Private Sector Dialogue, which is housed in the Office of the Prime Minister.