Fri | Dec 9, 2016

Ministry of Finance waffles on incentives for special economic zones

Published:Friday | January 16, 2015 | 12:00 AM
File Financial Secretary, Devon Rowe.
File Eric Deans, chairman of the Jamaica Logistics Hub Task Force.
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The special economic zones being created by Jamaica will not be accompanied by large tax breaks - a message that the Ministry of Finance appears to be telegraphing ahead of public debate on the programme.

A letter to the Cabinet secretary from Financial Secretary Devon Rowe, which accompanies the Special Economic Zones Green Paper tabled in Parliament on Tuesday, suggests that the ministry wants to manage investor expectations on what sweeteners the SEZ programme can deliver.

Rowe wrote on January 9 that the finance ministry had no objections to the tabling of the Green Paper, but only "on the proviso that the language on the fiscal incentives will be sufficiently generic in order to avoid any appearance of a firm commitment by the Government".

The suite of fiscal incentives will not be disclosed at the consultation phase, which the Green Paper facilitates, but in the subsequent phase, at the refinement of the policy and development of the White Paper.

"Please be guided accordingly," Rowe said.

Jamaica aims to encourage foreign investment by creating 16 special economic zones as a sub-project of a global logistics hub programme - both anchored by the Ministry of Industry, Investment and Commerce.

The SEZ Green Paper in fact proposes a number of fiscal and non-fiscal incentives to attract business over the medium to long term, including a low corporate tax rate for qualified companies.

It proposes a single uniform low/positive rate of 10 per cent to 12.5 per cent corporate income tax, or CIT, on profits, which is less than half the 25 per cent rate now applied to unregulated companies and 33.3 per cent for large regulated companies; exemption from dividend tax for shareholders resident abroad; and potential exemption from tax for SEZs targeting high-technology/ innovative activities linked to the use of a licence or patent/ intellectual property.

The Green Paper also suggests that the developer of an SEZ may qualify for a 'developer's tax credit' on capital expenditures directly incurred during construction or improvement works in the economic zone. The credit may be offset against other income-tax liabilities of the SEZ developer from any other source, but SEZ policymakers are proposing that the offset be limited to 50 per cent of that liability in any one year of assessment.

To access this concession, SEZ developers must be accredited as 'Approved SEZ developer' at the time of filing tax returns. Tax credit may be carried forward to the subsequent tax assessment period, but may not be applied to prior assessment periods.

The proposed policy measure offers no special relief on personal income.

On withholding taxes, it is proposes that these should be "comparable to other jurisdictions and should have limited impact on the overall effective tax rate on income for corporations linked to SEZs".

The Green Paper recommends that withholding tax on dividends be applied at the rate of 10 per cent, but won't be applicable to any other form of passive income, such as royalties, interest, management fees or technical service fees, for operators of SEZs. Instead, those incomes will be allowed as deductions in computing taxable profits.

The SEZ developer will be liable for property tax, but may be exempted from paying it in cases where the economic zones is located on lands vested in the SEZ Authority. The SEZ Authority, which is to be created by legislation, will be exempted from the payment of property tax.

The SEZ developer will also be exempted from property transfer tax and stamp duty on lands acquired for the development of an SEZ, but not the vendor of the property, unless the seller is also an SEZ developer.

The Green Paper also proposes full relief from Common External Tariff charges, customs fees, levies, stamp duty, additional stamp duty and GCT on trans-shipped supplies into the SEZ; however, goods sold into the domestic market will be subject to the prevailing customs duties.

The paper discusses incentives extensively, saying they are needed to allow Jamaica to effectively compete with other regional shipping centres.

"The research shows that fiscal incentives are offered by jurisdictions in and outside the region," the paper asserts.

"Countries such as The Bahamas, Dominican Republic, Trinidad & Tobago and the United Arab Emirates offer a diverse mix of attractive incentives, including tax holidays, exemptions from stamp duty and import-export duties for qualifying transactions, and exemptions from other national taxes and contributions."

It also references Panama, which offers various investment incentives in the form of lower tax rates or exemptions, particularly for business operations in the Petroleum Free Trade Zones and the Colon Free Trade Zone.

And, it cited Taiwan and the Republic of Korea, where local producers are provided with duty-free access to inputs supplied to the zones. Tax credits and rebates on duties paid are also provided on imported materials used in products sold to the zones.

"At the heart of the discussions among policymakers is recognition of the need to develop fiscal incentives for SEZs that are attractive to investors that will be targeted for the SEZs," the Green Paper notes.

The Ministry of Industry and its Logistics Hub Task Force are pushing for strong incentives at a time when the finance ministry has pulled back from waivers and other tax subsidies, under pressure from the International Monetary Fund.

The elimination of tax subsidies is a central plank of economic reform under the four-year IMF bailout programme, which wraps up in fiscal 2017.

However, while the SEZ Green Paper acknowledges that Jamaica has made commitments to rein in subsidies, under its Medium Term Economic Framework (MEFP), the Ministry of Industry is contending that its proposals are not inconsistent with the reforms.

"With respect to incentives, the MEFP emphasises a shift from a reliance on specific tax holidays/exemptions and more towards performance and rules-based incentives that are broadly applicable across sectors and will typically take the form of credits and allowances," says the Green Paper.

"A key outcome of the SEZ regime, therefore, is the harmonisation of the existing incentives framework in order to increase transparency, reduce discretion, and establish a more competitive and predictable playing field for all firms," it contends.

The Green Paper also sought to assure that the SEZ taxes and incentives "will be 'fit for purpose' and will not cause the country to give up more than it needs to, in terms of lost revenue for the Government."

The SEZs are meant to replace export free zones that Jamaica must eliminate this year under its World Trade Organisation commitments.

To integrate the new zones with the rest of the economy, the green paper proposes an "equal footing" policy, under which incentives will also be offered to domestic suppliers of capital and intermediate goods.

Additionally, it is proposed that bonded facilities be developed to support value-added activities between operators within the zone and businesses outside the zone; and that goods and services provided to the SEZs are zero-rated for GCT.

"Equal-footing measures are intended to expedite the countrywide business climate reform process that is essential to creating a logistics-centred economy. The policy seeks to ensure that businesses in the domestic economy are integrated into the SEZs through supply-chain activities that encourage value-adding between local producers and businesses in the zones," said Dr Eric Deans, chairman of the Jamaica Logistics Hub Task Force, on Thursday.

"One measure to support integration is to zero-rate for GCT supplies into the SEZs, another measure is to support subcontracting arrangements between local goods and service providers and zone-based enterprises," he said.

The finance ministry itself has opted not to signal what incentives it plans to place on the table. Donovan Nelson, the communications adviser to the finance minister, said the letter from Rowe was self-explanatory and that currently a working group was developing more detailed proposals for inclusion in an SEZ White Paper.

avia.collinder@gleanerjm.com