Narda Graham | The special economic zone – A remix of the free zone?
Is a free zone by another name still a free zone? The Special Economic Zones Act (SEZ Act), which came into force on August 1, 2016, has repealed the Jamaica Export Free Zones Act (JEFZA).
The SEZ Act provides for the designation, promotion, development, operation, and management of special economic zones, the establishment of a Special Economic Zone Authority, and the granting of tax incentives and other benefits.
The Jamaican Government envisions that SEZs will attract investment and new economic activities - for example, logistics - to Jamaica; generate employment; give domestic suppliers the opportunity to sell to companies located in the SEZs and thus become part of global supply chains; and create other synergies and linkages with the rest of the Jamaican economy to maximise broader positive economic impact.
Like many legislative reforms in today's Jamaica, this one was strongly encouraged by international multilateral bodies.
The entire progress of the reform can be traced in Jamaica's Letters of Intent with the International Monetary Fund - from the December 13, 2013 Letter of Intent, in which the Government committed to review the export free zones regime to ensure compliance with World Trade Organization rules, through to its August 30, 2016 letter, where it finally reported that the SEZ Act had been brought into force to replace the Export Free Zones Act.
The structure of the SEZ regime is very similar to the free zone regime.
The supervisory body under the SEZ Act is the authority, whereas under the JEFZA, it was the council. The authority has similar functions to the council, but also appears to have an expanded portfolio of responsibilities, including managing and operating a business acceleration centre, promoting research and development on zone activities, and marketing the SEZs.
One gets the impression that the authority is expected to carry out a more modern, proactive and commercially oriented role than the council did.
'Developers' under the SEZ Act have replaced 'promoters' under the JEFZ Act. Instead of receiving a licence from the council, a developer will enter into a master-concession and lease, or a licence-agreement, with the authority, valid for up to 50 years, and receive an operating certificate.
Developers and occupants
Developers will design, finance, construct and maintain infrastructure within the SEZs, and enter into subconcessions with 'occupants', who have replaced 'approved enterprises'. An occupant is a person who, with the consent of the authority, conducts business in a SEZ via a subconcession with a developer.
Similar to the previous requirements, both developers and occupants must be companies limited by shares registered in Jamaica. Issued and paid-up share capital must be at least US$1.5 million for a developer and US$25,000 for an occupant.
A developer must make investments in an SEZ sufficient to accommodate at least three occupants, unless the SEZ is designated as 'single-entity' or 'specialised'.
An occupant must invest at least US$50,000 in zone-related buildings, equipment and facilities in the first year of its subconcession. However, these requirements can be waived for micro, small and medium enterprises, as defined in the act, with "sufficient development potential", if they have a subconcession with a developer and meet certain conditions.
Under JEFZA, there was a fixed list of 'approved activities' that could be carried out in a free zone. These activities included services, but were mainly geared at manufacturing, processing, packing and assembling items for export. The SEZ Act contains no such list of approved activities, but instead a list of 'excluded activities' - extractive industries like mining and quarrying, tourism, telecoms, financial services, construction, real estate, health services, catering, and retail trade.
It therefore appears that, for the time being, all other legal commercial activities are permissible. This may reflect an effort by the Government to diversify the economic activities within the SEZs, and, therefore, multiply the potential linkages with businesses and individuals in the wider economy.
The tax incentives to be enjoyed by developers and occupants are quite similar to those under the JEFZA. These include exemptions or zero-rating in respect of asset tax, transfer tax, and customs duty and GCT on items imported into the SEZ.
Required to pay income tax
However, one major difference is that while promoters and approved enterprises under JEFZA paid no income tax on profits earned from manufacturing or international trading, developers and occupants must pay income tax - albeit at a reduced rate of 12.5 per cent - on income earned from conduct of trade within the SEZ. They will receive a tax credit for expenditure on research and training up to a maximum of 10 per cent of income tax payable, and pay no income tax on profits derived from rentals in the zone.
Any existing Jamaican business considering moving to an SEZ in order to benefit from these incentives should note that this will not be permitted for another 10 years.
Existing free zone promoters and approved enterprises will keep their fiscal incentives until December 31, 2019, or any earlier date on which they become entitled to benefits under the SEZ Act.
In order to benefit under the SEZ Act, within four years from August 1, 2016, promoters must apply to the authority to continue as developers, and approved enterprises must enter into a sub-concession with a developer to continue as an occupant.
Apart from certain changes in the fiscal incentives and the responsibilities of the relevant actors, the special economic zone appears to be rather similar to the free zone.
However, in renaming the law, the drafters apparently wished to signal a clear departure from the past. Here's hoping that small legislative changes lead to significant economic impact.
- Narda Graham is an attorney in the Kingston office of the law firm DunnCox.