Thu | Jul 18, 2019

G. Anthony Hylton | Is the SEZ for you?

Published:Sunday | June 9, 2019 | 12:14 AM

Are you considering a SEZ investment? Save yourself a lot of time, money, and energy by contemplating this question first.

Is the SEZ for you? It is more than a question of cost-benefit.

In Jamaica, just like anywhere else in the world, the special economic zones (SEZ) are a serious business venture.

In a previous article, ‘Cracking Jamaica’s SEZ Code’, I shone a light on the very yummy profits that are already being made from SEZ investments, namely in the business process outsourcing (BPO) and the auto-logistics sectors.

What I propose to do in this article is to continue along the same vein, but this time around, I am going to take you a bit deeper down the rabbit hole so that you, too, can reap the benefits of the SEZ.

My aim is to give to you a recipe that, I hope, will assist you in determining: Is the SEZ for you?

Jamaica’s SEZ benefits are real, substantial, and, importantly, globally competitive. What business would not want to be incentivised to build and manage a zone with duty-free importation on building materials or equipment and no general consumption tax (GCT) on purchases from suppliers located in the Jamaican economy?

Just imagine what no GCT on electricity would mean for your monthly cash flow, much less your bottom line. And who would not want to pay zero per cent on corporate income tax (CIT) as SEZ developers now do? I know I would. These incentives are, of course, given in exchange for building, managing, and attracting occupants and meaningful jobs to modern, purpose-built SEZs.

For occupants, their CIT of 12.5 per cent, going as low as 7.75 per cent with performance-based tax credits, such as the employment tax credits, is given in exchange for conducting productive economic activities that are sustainable and which contribute to national development.

And this is just a rough sketch of what and how the SEZ fiscal incentives are applied.

WHERE TO START?

It is trite to say that businesses don’t invest millions of dollars, time, and energy for their own health or just for the sake of doing so. Businesses make investments for the purpose of making profit. In fact, profit making is the raison d’être of business. The SEZ represents a vehicle through which investments, and, in turn, profits can be made. But how do you determine if the SEZ is for you?

Conventional wisdom would say do a cost-benefit analysis. And there is nothing wrong with that.

This is what a prudent business person ought to do. After all, it’s only logical that before making a substantial investment one would want to know what the risks are as compared to the benefits to be gained.

The SEZ legislation (act and regulations) and the SEZ policy are a good place to start, along with your business plan, or at least a preliminary outline. The logical expectation would be for the answer to the question (is the SEZ for you?) to bolt off the page like a sprinter out of the blocks. Well maybe not so fast, if at all. The answer that ought to be apparent may not be so apparent after all. This is because the legislation, the policy, and your business plan provide great ingredients but do not a recipe make.

If one thinks of the SEZ as a pie (or for the growing health conscious these days a gluten-free cake), then the SEZ legislation, the policy, and your business plan are the ingredients. But having the ingredients doesn’t mean you know how to make a pie or cake.

So what is the recipe? Patience, I am getting there.

SEZs are serious business for serious business people. They are geographically designated areas that are used to attract foreign and local investment. They typically have trade laws that are applied differently from the rest of the country, and companies are offered tax incentives to set up operations. SEZs are a major policy tool being used in Jamaica and elsewhere to boost job creation, economic growth, and development.

BASIC ELIGIBILITY

A SEZ is not for the faint at heart or men of straw. Before the signing of a licence agreement with the Special Economic Zone Authority (JSEZA), a SEZ developer has to show US$1.5 million in issued and paid-up share capital and propose to build a SEZ sufficient to accommodate at least three occupants. The licence agreement is one of two major documents, the second one being an operating certificate that gives you the right to operate as a SEZ developer. The licence agreement, of course, encapsulates the terms (for example, rights, duties, and obligations) between the developer and the JSEZA while the occupant, on the other hand, has to show US$25,000 issued and paid-up share capital and US$50,000 in zone-related investments (building machines, equipment, etc).

The basic eligibility criteria outlined above are just that, basic, and only represent but part of what determines eligibility to be able to bake, eat, and enjoy the SEZ pie or cake. Yum!

A critical first step, therefore, to determine whether to undertake a SEZ investment (is the SEZ for you?) is not a cost-benefit analysis, rather it is asking: am I eligible?

Determining eligibility is the beginning of the recipe that will deliver the tasty profits of the SEZ pie or cake.

SEZ eligibility is a nuanced area of the law, and it pays to understand it. Not only does an entrepreneur have to consider the basic eligibility criteria, they must also answer the following questions:

- Am I an existing business already operating in Jamaica? If no, then you may be eligible. If yes, then, are your proposed SEZ business activities similar to or the same as what you currently do (that is, is it a mere expansion of the old business or a new investment in a new industry)? If no, then you may be eligible. If yes, then you are not eligible.

- Do I already enjoy or plan to enjoy certain fiscal benefits (for example, Urban Renewal Act)? If no, then you may be eligible. If yes then you are not eligible.

- Is your proposed SEZ business activity on the SEZ negative list of industries (those that are prohibited from enjoying the SEZ fiscal benefits, for example, tourism and retail trade)? If no, then you may be eligible. If yes, then you are not eligible to be a developer or occupant but may be a zone user (businesses allowed to be established in the SEZ but which do not enjoy the SEZ fiscal benefits and are free to enjoy any other fiscal benefits they may be eligible for).

These measures were largely put in place to prevent the erosion of the Jamaican tax base through the migration of existing businesses to the lower SEZ tax rates. They also help to prevent double dipping by investors into tax incentives without the addition of greater productive capacity and jobs. Jamaica’s SEZ regime was always intended to be a pragmatic way to grow the economy, grow the tax base, grow jobs while at the same time mitigate against revenue and tax leakages.

NEXT ARTICLE

In my next article, I plan to explore three scenarios of how the SEZ can have a direct positive impact on the bottom-line of companies, including those that would be deemed ineligible for SEZ status.

- Ambassador G. Anthony Hylton is a partner at Samuda & Johnson, member of parliament for Western St Andrew and former minister of industry, investment & commerce. Email feedback to columns@gleanerjm.com