Incentives galore for investors

Fri Feb 20, 2015

by: HANS M KING

PRESS SECRETARY TO PRIME MINISTER

THE ISSUE

Since March 29, 2001, the Unity Labour Party (ULP) government has been actively encouraging private sector investment, both domestic and foreign, at unprecedented levels and with a focus unmatched since independence in 1979. The facts, figures and policy framework attest to all this, despite politically-jaundiced comments to the contrary. To some critics, it appears as though “encouraging private sector investment” means an unbridled “open sesame” with little or no regulatory framework and an absence of legitimate consideration for the nation’s welfare overall. Only a permission for wanton “investment buccaneering” of the Ottley Hall type would satisfy some of these politically-motivated critics.{{more}} Our government, however, has been successfully attracting substantial legitimate, private investment, domestic and foreign.

POLICY FRAMEWORK

In summary, the policy framework for encouraging and attracting private investment includes the following central elements:

(i) The building of an efficacious partnership between the private, cooperative, and State sectors of the economy, in which the private sector (domestic and foreign) provides the lead activities in the economy, but without compromising the legitimate spheres of economic activism by the State in terms of facilitation, regulation, and even ownership, in whole or in part, of economic enterprises, where necessary and desirable for the nation’s public good.

(ii) The engendering of the fundamentals of “a sound/good business climate” regarding political stability; citizen security; high quality and independence of the judiciary; democracy and freedom; the provision of essential services (electricity, water, sanitation, telecommunication, national emergency systems, and so forth) of quality and competitive pricing; modern banking and insurance services; the provision of education, health, and housing at levels fit for a modern, sophisticated society; the presence of “doing business better” indicators at satisfactory competitive levels; optimal access by sea and air, and a sound road network; and the functioning of “good governance” arrangements, generally including optimal administrative efficiencies and measures against official corruption.

(iii) The establishment of institutional arrangements to facilitate the promotion of investment.

(iv) The elaboration of a bundle of fiscal and other incentives necessary and desirable for private investment.

Together, these elements amount to a “Good Business Climate” Plus, For Private Investment! The evidence abounds. The reader has simply to reflect momentarily on each of the above to grasp the point about the ULP government’s friendliness to private investment. Let us, though, look specifically at the package of fiscal incentives put in place additionally to pre-existing ones, since 2001.

FISCAL INCENTIVES

A summary of these fiscal incentives include centrally:

(i) The reduction of the top marginal rate of corporate and personal taxation from 40 percent to 32.5 per cent, with the consequential downward adjustments.

(ii) Specific incentives for the manufacturing sector, namely:

(a) Tax rate of 30 percent on chargeable income derived from sales on the local market and from exports to the OECS market

(b) Tax rate of 25 percent on the chargeable income derived from exports to the non-OECS CARICOM market.

(c) Tax rate of 15 per cent on the chargeable income derived from the exports to the extra-CARICOM market.

(d) The quite generous incentive of duty-free concessions on raw materials and spare parts for all manufacturing enterprises, including agro-processors. This is in addition to the pre-existing incentives for plant and equipment (excluding spare parts).

(e) The removal of the demand charge and a lowering of electricity cost for industrial (manufacturing) and commercial consumers. A reduction in electricity tariff for industrial users with effect from March 2012: The basic charge for industrial consumers was reduced from 45 cents per kilowatt hour (kwh) to 42 cents per kwh. A system of volume discounts for industrial (and commercial) consumers has been put in place: Industrial consumers using more than 150,000 units (kwhs) per month is entitled to a 5 per cent discount and those consuming over 200,000 units per month, a 10 per cent discount; a five percent discount is also applied to commercial consumers utilising more than 150,000 units monthly.

(iii) Specific incentives for the hotel/tourism sector includes:

(a) A reduction of the corporate tax on income accruing from a hotel has been reduced from 40 percent to 30 percent.

(b) The legislation was amended in order to ensure that hotels are allowed to claim a capital cost allowance in respect of any building used solely in the carrying on of hotel business, including buildings used for housing and welfare facilities for employees.

(c) The introduction of a Tourism Development Incentive credit in respect of the development and sale of villas, bungalows and other similar properties. This credit amounts to 5 percent of the selling price of each property and is to be used for the settlement of the stamp duty payable by the developer on the initial sale of the property. To qualify for this incentive credit there must be in the tourism project a minimum of 20 units and an initial investment of not less than US $10 million.

(d) Hotel investments of at least US $50 million receive tax concessions on food and beverage for the hotel for initial periods of up to 10 years. VAT is, of course, always payable.

(e) Special rebates or volume discounts for electricity used by hotels are granted.

(f) Special, and generous, concessions outside of the normal hotel incentives for property-owners to build or add rooms to accommodate overseas students and other visitors.

(iv) Specific concessions for the construction sector. In 2003, in order to boost housing development, the tax law was amended to exempt income accruing to a housing developer from sale of residential units up to $300,000. This means that a housing developer is not required to pay taxes on any income earned from the sale or rental of houses valued at $300,000 or less.

(v) Specific concessions for qualifying small enterprises. In 2005, the government introduced a business tax credit for these small entrepreneurs in the amount of 25 percent of the tax payable by the business. To qualify for this tax credit the business must:

(i) Have annual sales of $300,000 or less; register with the Ministry of Trade and with CIPO;

(ii) Have honoured all its statutory obligations including those to the NIS and Inland Revenue

(iii) Not be owned and controlled by an enterprise which does not qualify for these benefits.

This in effect means that the rate of taxation on income earned from qualifying small business is reduced by 25 percent from income year 2005. If that business is operating as a corporation, the effective tax rate is 30 percent.

(vi) Specific tax credit for ICT was introduced in 2012. A tax credit in the amount of 25 percent of eligible expenditure in any given tax year and any unused portion may be carried forward indefinitely. Further, in the application of this measure, the Inland Revenue Department will permit the carry back of any unused credit against previous years taxes.

(vii) Specific additional relief for farmers in respect of subsidies on fertiliser and other inputs and 2 percent loans through the State-owned Farmers Support Company.

(viii) Other additional tax concessions or incentives generally, including:

(a) An amendment to the Income Tax Act to permit businesses which participate in the Youth Empowerment Service (YES) and other Public/ Private Partnership (PPP) programmes to claim up to 125 percent of the expenditure incurred as an eligible deduction for the purpose of computing chargeable income. This means, in effect, that private businesses may recover a minimum of 50 percent of the cost incurred.

(b) As part of our government’s continuing effort to reduce the tax burden on workers, the Income Tax Act was amended periodically since 2002 to increase the standard deduction from twelve thousand dollars ($12,000) to eighteen thousand dollars ($18,000).

(c) Effected pro-business reform of the tax law by the introduction of VAT and at the same time assisting the consumer through a wide range of zero-rated and exempted categories of commodities from the application of VAT.

FINAL COMMENT

Between 2011 and 2013, St. Vincent and the Grenadines has the highest rate of foreign direct investment (FDI) as a proportion of Gross Domestic Product (GDP) in Latin America and the Caribbean. Absolutely, in the OECS it has been in the forefront of attracting FDI, second only to St. Kitts-Nevis. Look around and you will see the extent of FDI in St. Vincent and the Grenadines even in the years of a global economic down-turn.