Time to rethink corporate tax regime

T&T finds itself in a weak fiscal situation, having recorded negative growth since 2009 and the Government must find a way to grow the country’s economy. This is the picture of the country’s economy painted by Fitun’s pre-budget document. Fitun president Joseph Remy delivered the document to Finance Minster Larry Howai at one of the Ministry of Finance’s pre-budget meetings last week, held at the ministry’s office.

Members of Fitun include the Communication Workers’ Union (CWU), Oilfield Workers’ Trade Union (OWTU) and the Fire Association.

Fitun’s document recommendations stated that it has been warning the Government of this economic situation for years.

“It must be noted that in the past, Fitun expressed its concern with regard to several of these problems in previous budget proposals, as well as in national campaigns, such as the campaigns organised in response to rising food prices and against mega-projects and corruption. However, these warnings were not heeded. Were these warnings heeded, it is quite likely that the economy would be in a more favourable position than it is today.”

 

 

 

Macroeconomy

The Fitun document stated that while the challenges must be dealt with, the macroeconomic fundamentals must be stabilised.  They listed the main indicators:

i. A stable exchange rate

ii. Steady inflows of foreign exchange earnings

iii. A low rate of inflation

iv. Sustainable employment

“It is acknowledged that managing the current fiscal crisis while forging a way forward, and at the same time ensuring that certain key economic indicators, as identified above, are maintained at favourable positions, represents a challenge. Nonetheless, efforts need to be made to attain the same if this country is to achieve sustainable growth and development in the future.”

Fitun believes the Government can use the high levels of liquidity to assist in growth. “Although T&T’s current economic situation is characterised by numerous challenges, the path of sustainable growth and development still remains attainable.  “Furthermore, advantages currently exist that can facilitate this growth and development. One of these advantages is the high liquidity levels that currently exist. This excess liquidity exists both at the level of the nation’s commercial banks and also at the Central Bank. 

 

 

“Indeed, it is a contradiction that precisely when such high levels exist there are simultaneously stagnant growth and increasing unemployment. These levels of excess liquidity represent funds that are available for injection into the economy to stimulate the desired growth and development. However, this measure must be implemented with caution, so as to avoid worsening an already high inflation rate.” Fitun recommended that this excess liquidity be injected into the economy through investments in sustainable activity via the productive capacity of the economy and not by way of consumption loans.  The document stated by stimulating sustainable activity, both foreign exchange and jobs could be generated. On the issue of inflation, Fitun said: “Following a period of consistent decreases in the inflation rate, this is once again on the upswing. In this country, we are all too familiar with the dangers of a spiralling inflation rate and targeted efforts must be made to manage same. “In this regard, it is recommended that the Fair Prices Commission be empowered to make recommendations on instances of price gouging and other activities that impact negatively on the unsuspecting consumer population. This authority should determine the fair price for all basic goods (such as food, hardware goods, etc) by totaling the cost price, transport costs, and other related costs. “This fair price should then be published and consumers would thereby be made aware of said fair price. It is intended that this empowerment would serve to discourage consumers from purchasing products priced above the established fair price through moral and economic suasion.”

 

 

Economic diversification

Fitun stated the diversification process must not be seen as being independent of the existing economic framework and investments required for diversification need to be funded by revenues from the energy sector. Fitun argues that rent from the offshore sector, like oil and gas, should be efficiently utilised to propel the expansion of the onshore sector such as agriculture and manufacturing. Fitun proposes a National Development Fund, which should be administered by the Economic Development Board. “In this way, the effort to mobilise resources and build national consensus on the way forward could be simultaneously achieved. Investors in this fund would be drawn from institutional investors (pension funds, NIB and mutual funds), individual citizens and firms and the diaspora community. It has been established that these funds should be invested into sustainable activity. “Areas of sustainable activity that Fitun recommends for such investment include agriculture, the development of cultural products and key infrastructure.” The document said development of the agricultural sector should incorporate both upstream and downstream agricultural products. The development of this sector must be geared towards import substitution of agricultural products. 

As this is achieved, several benefits would be derived. These include:

i Deceased food import bill

ii. Reduced foreign exchange outflows

iii. Increased job creation

iv. Increased revenue generation

 

 

Financing these investments

The Fitun document also gave recommendations on how to diversifying the economy and finance project. It argues the Government could save substantially and have funds available for injection into the economy if it were to eliminate a number of the existing special-purpose companies. “Under the previous regime, these entities were established with the supposed intention of avoiding the bureaucracy of the public sector in an effort to accelerate the pace at which government projects were completed.  “Whether this objective was achieved is questionable, but what is clear is that these entities, in fact, served to facilitate and encourage increased levels of corruption in the state sector, together with the diminution in the role of the public service and local government and a concomitant increase in the concentration of power in the hands of the executive. At the same time, multiple bureaucracies were created with all the costs that these incur.”Fitun recommended some of the key special-purpose companies that should be eliminated as soon as possible, include the Rural Development Company of T&T—the duties carried out by this agency should be returned to the local government authorities; the Education Facilities Company and the Palo Seco Agricultural Enterprise Ltd. The document also identified measures to increase the current tax revenue levels.

 

 

 

“The People’s Partnership Government must be consistent with its manifesto commitments to rescind the Property Tax and to abandon the establishment of the Revenue Authority (TTRA). “With respect to the restoration of the Land and Building Tax, the Government should seek to update the current database to include persons (business owners and private landowners) into the tax net who, at present, are not paying tax on their property. Such a measure would increase the stream of revenue. “With respect to tax collection, rather than implement the TTRA, a comprehensive process of reform should be undertaken to eliminate the various leakages that currently exist, improving the efficiency of the tax-collection system and increasing the Government’s tax revenue. Furthermore, the implementation of a system of penalties for non-compliance to the existing regime could also serve as a source of revenue for the Government.

 Fitun also proposes that the current rate of corporate tax: 25 per cent be reviewed. “The intention behind previous decisions to reduce the tax rate—to stimulate increased spending by increasing net income, occasioned by a reduced rate—has not proven to be effective, and therefore warrants review. “Our recommendation is that a tax rate of 30 per cent (the rate from 2003 to 2005) should be levied on businesses above a certain size (specific criteria to identify this are stated below). However, should the business invest in defined areas which would contribute towards sustainable growth and development, tax credits could be earned, to reduce the rate to the current level of 25 per cent. “The investment areas by which a business could earn such tax credits would include education and training (including re-training of workers), research and development, job creation and export promotion (or other such foreign-exchange earning activity).”