By Richard S. Harrison, BSc Pharm, MBA
A fair and balanced tax system is important for any economy seeking to grow investments…whether domestic or foreign…because it should earn government the amount it needs to provide essential services and infrastructure, while allowing private investments to make honest profit and workers to earn fair wages that can afford the basic necessities of life.
Belize has not been doing so well in attracting foreign direct investments (FDI)….neither has it been meeting the governments needs, since we consistently depend on foreign grants to plug deficits in our national budget…and workers have been clamoring that cost-of-living is fast outpacing increases in real-incomes.
From 2001-2013, the World Bank estimated that Belize attracted net positive Foreign Direct Investments (FDI), however net inflows went down from US$194 million (2004-2008) to US$89 million (2009-2013)….the lowest 4-year record since 1989-1993.
On the domestic front, with excess liquidity piling up in the banks, domestic investments don’t seem to be doing well either. The Central Bank of Belize estimated excess cash balances in domestic banks in January 2011 to be around BZ$52 million….by December 2013 this excess had climbed to around BZ$160 million.
This is the reason why, with all the government investments in infrastructure, the finances for the majority of families and private businesses continue to deteriorate….because there is a decrease in rate of inflow of new capital….and domestic private investors are either liquidating or being liquidated, with that liquidity piling up in the banks, instead of being invested and re-invested….once bitten, twice shy. This “cleaning up the books” exercise in the banking system is doing much to destroy domestic WILL, capacity and capability to invest.
Why is this so?
The principal culprit is an unjust, broken tax system inherited from the colonial days and only amended since Independence in favorable response to special interest lobby….to meet government’s voracious appetite for increased spending….and to feign concern for consumers by lowering import duties purporting to “lower cost of living”, coincidentally for products that favor importers who are close political allies …..not with any kind of development objective in mind.
The existing tax structure does not allow for honest profits to be made from most investments, especially if the investment does not benefit from some kind of special tax status set up especially for that kind of investment or investor. This is why the vast majority of individuals and businesses who “succeed” in Belize do so by way of evading and/or avoiding the laws and taxes, or by way of legal arrangements and loop-holes that allow them to avoid those taxes (such as development concessions, EPZ, IBC, PIC, special tariff and non-tariff “accommodation agreements”, etc)….even the lawyers have a licensed-based “accommodation agreement” that prevent competition coming from outside the CARICOM region (India, Canada, Australia, etc) to compete openly with them for providing legal services in Belize and its related virtual “off-shore” jurisdictions.
This fiscal structure turns Belize into a TRAP….where only those who are already heavily invested….those who are unaware or ill-informed….and those who are properly linked-in and/or comfortable with the political establishment and the “exclusive” benefits and rights that flow from that….dare to invest. This is not an enabling environment that will attract large amounts of green-field bonafide investments who prefer to rely on merit, ability and integrity to succeed.
To boost investments….Belize needs to drastically improve its competitiveness and productivity profile. It needs to drastically reduce the cost-of-doing-business. Many in the status quo know this, and pay lip service to it….but none, including those represented in the only private sector organization (Belize Chamber of Commerce Western Union -and industry) venture into making specific recommendations on how to achieve this…because they know that this can only be achieved by setting the captives free….with many middle-class “slaves” set to become their equals in economic status….harvesting from their education gained from investment of hundreds of millions in education improvement since Independence….a reality which the current tax system prevents them from doing honestly and within the law.
I. OBSERVATIONS, ANALYSIS & RECOMMENDATIONS FOR FISCAL REFORM
a. BUSINESS TAX – in 2013, the government reported collecting BZ$135 million from turnover on all businesses with sales over BZ$75,000 per annum at a rate of 1.75% of sales. This suggests that businesses completing returns for business tax reported total turnover of BZ$7.7 billion. My own estimates, given businesses under the threshold, business who evade or avoid the tax by non-reporting or under-reporting, and those who are exempt from paying the tax legally through government concessions, are that total turnover in the economy in 2013 was between BZ$10 – 13 billion. Yet, total imports reported was only BZ$1.9 billion, which would translate into about BZ$3.5 billion in retail sales, and would suggest that Belize produced the other BZ$4.2 billion of what it consumed in goods and services….which is difficult to believe, given the visible consumption. This tax needs to be lowered to 1% of trade, across all businesses operating in Belize (no exceptions nor exemptions) thus would likely come in at around BZ$90 million, given that capture rate should increase at this lower rate. This will lower the cost-of-doing-business by leaving an additional BZ$45 million in the hands of ALL investors according to their scale, to grow their businesses.
b. GENERAL SALES TAX – in 2013, the government reported collecting BZ$220 million at a rate of 12.5%. This suggests that total turnover on which GST was charged amounted to BZ$1.76 billion….which is only 22.9% of the total turnover as suggested by the Business Tax receipts. This either means that 77.1% of all the goods and services sold are exempt from paying GST, or that there is massive evasion and/or avoidance of reporting and paying this tax. This is in line with the massive Belize Customs evasion and avoidance suggested in (a) , the wide range of large-volume items that are exempt from this tax and the speculation of wide spread evasion and avoidance of the GST Tax law. This tax rate needs to be reduced to 10%, and charged across the board (no exceptions nor exemptions, with repeal of Hotel Tax and provisions made for financing of Belize Tourism Board, which currently depends on the Hotel Tax which is earmarked to them)….which would increase GST intake from BZ$220 million to BZ$520 million, if the capture rate can be increased from 22.9% to 54% of total reported trade. If the government proves a higher capture rate, this rate should be reduced further. The numbers here suggest that the rate can be reduced to as low as 5%, if capture rate reaches 90%. BEFORE this recommendation is implemented, all levies on import of fuel, except the 10% GST, should be removed, which would result in a loss to government of around BZ$70 million….so that the price of diesel falls to around BZ$7/gallon and premium fuel to around BZ$7.50/gallon…competitive with Mexico and USA, our two principal competitors. This will allow the prices of basic commodities to remain the same or be reduced, with significant decreases in cost-of-production and transportation. The net effect will be a redistribution of BZ$300 million (increase GST) minus BZ$70 million (loss from fuel), or total of BZ$230 million that will accrue mostly to the middle class and spread across ALL domestic production investors, instead of accruing to only a handful of favored investors as is the current scenario. The rebuilding of a vibrant, entrepreneurial middle class should be a primary objective of Belize’s post-Independence economy.
c. ENVIRONMENTAL TAX – in 2013, the government reported collecting BZ$24 million at a rate of 2% on imports that qualify. This suggests that only BZ$1.2 billion of imports qualified…..which is 63% of the total declared imports of BZ$1.9 billion. This means that BZ$700 million of imports either are exempt from paying this tax, or are imported by means that evade or avoid the law. This tax needs to be implemented across the board for ALL imports. It cannot be that local producers have to pay this tax on their raw materials, but finished products, whether from CARICOM or not, can be imported into Belize without paying this tax. This puts domestic investors at a disadvantage in their own country. This recommendation would result in an increase in government revenue from BZ$24 million to BZ$38 million, potentially putting an additional BZ$14 million into domestic investors bottom line, either to lower cost-of-doing-business or to boost profits for re-investment in growth.
d. EXCISE TAX – in 2013, the government reported collecting BZ$23 million in Excise Tax. This is a mafia-style “protection fee” that the government is charging on local production of rum, beers and soft drinks (not certain if on cigarettes, since that is no longer manufactured in Belize)….in return for keeping import competition at bay….either by tariff (100% import duty plus Revenue Replacement Duty charged on imports) or non-tariff (discretionary licensing requirements for imports of competitive products) measures. This law needs to be repealed. No investor should need to pay government a protection fee….as it is the government’s DUTY to protect. This money should be left with the investors so that they build their competitiveness and productivity by reducing the cost-of-doing-business in these important sectors that should be exporting. Belize will gain by increased investments, jobs and export income. Removal of this tax might just be the factor that allows much bigger investors to decide to invest in Belize in these sectors….whether in equity partnership or independent of the existing investors.
e. CUSTOMS TARIFF – in 2013, the government reported collecting BZ$153 million from import duties….which on total declared imports of BZ$1.9 billion suggests an average rate of import duty of 8%. The WTO agreement requires that Belize implement an average of 20%, thus Belize is voluntarily FAR BELOW the WTO requirement. Belize needs to develop a greater home court advantage of domestic investors….which only produces a narrow range of products anyway. This can be done by increasing the average rate of import duty to 15%….by charging ZERO import duty on inputs of raw materials for ALL production in Belize, and charging no less than 5% on finished imported products (currently many large volume items are at ZERO)….and decreasing import duty on ALL those items which Belize does not produce, nor intend to produce, to 20%….which will allow many more persons to consume what was considered “luxury” way back in the colonial days when this law was drafted. This would raise government revenue from import duties to BZ$285 million, from BZ$153 million. Again, this has the potential to put another BZ$132 million into domestic investors hands, creating all kinds of jobs and developing industries for export.
f. PERSONAL INCOME TAX – in 2013, the government reported collecting BZ$60 million from personal income taxes, at a rate of 25% of income on all income over BZ$25,000 per annum. This discriminates and punishes persons who invested in education and positive work experience unfairly, while rewarding those that drop out of school or develop poor work habits and attitudes by not taxing them. This rate should be reduced to 10% and charged on all income over BZ$18,000 per annum. All persons should be able to deduct a maximum of $2,500 per annum for investments in health insurance, home construction or expansion and education for children under their care and control, so that those now earning between BZ$18 – 25,000 are not affected negatively, but can actually gain from this change. This will result in a loss to government of BZ$40 million, which will be left in the hands of the middle class….for them to save, invest or consume.
g. FOREIGN CURRENCY TRANSACTION TAX – in 2013, the government reported collecting BZ$19 million from this source. This tax needs to be repealed, so that capital can flow more freely. This tax is in place because we KNOW our environment is not conducive to investments, and we FEAR capital fleeing….but this also produces FRICTION for capital inflow as well. With the fiscal reforms recommended here, Belize can be CONFIDENT that capital inflow will far exceed capital outflow, and thus there would be no need for this FEAR-BASED tax to be in place. This will result in BZ$19 million more in the hands of investors and individuals, effectively reducing the cost-of-doing-business.
h. ROAD CONSTRUCTION & MAINTENANCE FUND – there is currently no sustainable fund to construct new roads and maintain existing ones…this is currently funded mostly through loans and grant funds from foreign sources. More recently, the tourism head tax was used to finance a Belize City municipal bond floated on the local institutional market for cementing of over 100 streets. With the reduction in fuel price to BZ$7.50/gallon (from the current BZ$12.00/gallon) suggested here, every private car owner will save on average BZ$800 per year, and every commercial vehicle will save on average BZ$3,600. At the time of licensing these vehicles, private cars should be required to pay BZ$200 and commercial vehicles BZ$400 per annum towards this fund. This will raise BZ$20 million annually for local governments, from a domestically-determined sustainable source, specifically for building new roads and improving existing ones in the municipalities. It would amount to a decentralization of another BZ$20 million in the economy. The revenues from this law could be invested slowly each year after it is collected, or it could be bundled to finance a municipal development bond of BZ$300 million to rapidly transform our municipalities streets and road infrastructure. Perhaps a balance of these two choices would be most prudent.
This article was written by Richard Harrison, Belizean investor in production and services businesses in Belize. He holds a Masters in Business Administration degree from Lancaster University.