Sun | Sep 23, 2018

Mr Shaw’s interesting idea

Published:Monday | March 23, 2015 | 12:00 AM

Among the more interesting of Audley Shaw's suggestions when he spoke in the budget debate last week was for the government to offer "investment tax credits" to foreign firms to hold their profits in Jamaica. It is an idea that is worthy of explanation and debate.

Unfortunately, Mr Shaw, the shadow finance minister, who expended far too much time defending his four-year tenure in the actual job, didn't elaborate on the proposal, including its possible fiscal and legal implications, or how it might be accomplished.

But he argued that repatriation by foreign firms of profits made in Jamaica "represents a serious annual depletion of foreign exchange, which itself helps to put pressure on the exchange rate".

He added: "Investment tax credits should be offered to these companies to retain and invest their profits in Jamaica, including diversification and backward and forward vertical integration into linkage sectors".

Full data for last year are not yet available, but this newspaper's calculation for the decade up to 2013 shows that such firms repatriated around US$6 billion, or around J$690 billion at current exchange rates. The greatest net outflow during that period was in 2007 when it was over US$735 million, or more than double the US$334 million of two years ago.

Looked at another way, the profits foreign firms repatriated in 2013 would be around seven per cent of the total deposits in Jamaica's commercial banks at the end of last year. Apart from its potential impact on exchange rate stability should that money remain in Jamaica, another spin-off implicit in Mr Shaw's idea is the softening effects on interest rates if the bulk of this cash remained in the banking system.

In other words, its value wouldn't only be to the companies that own the cash, but anyone who wants to borrow and invest in Jamaica. That would be good for the economy.

The case of Puerto Rico

Indeed, there are examples where arrangements such as that proposed by Mr Shaw, or similar thereto, have worked to the benefit of countries/territories. Puerto Rico is a case in point, where the then section 936 of the US tax code allowed for a deferring of tax on their Puerto Rican profits by American firms if the money remained in the island. A huge build-up of such cash in Puerto Rican banks allowed the Reagan administration in the 1980s to sanction a scheme for the preferential lending of some of that cash to specified Caribbean Basin countries, including Jamaica.

There are some other issues, too, relating to the sustainability of the proposal, that would require serious analyses. For instance, we expect that a substantial amount of the profits that would fall under this scheme would be earnings by American firms, which currently are not liable to US corporate income tax on their foreign profit until they take the money home, at which time they are also allowed set-off against taxes paid overseas.

It is estimated that US firms now hold around US$2.1 trillion abroad. In an effort to bring it home, the Obama administration has proposed to Congress a one-off 14 per cent tax on this cash, and going forward a 19 per cent tax on such foreign profits.

All this provides an interesting backdrop for Mr Shaw's suggestion, to which we look forward to a response from the finance minister Peter Phillips, as a broader expert debate.