The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government has been urged by its own consultants to address “ease of doing business” concerns in Freeport, amid warnings that job-creating investment and expansion is being deterred by an increasingly unpredictable Bahamian tax policy.

McKinsey, in its now-disclosed report, indicated that the Freeport private sector’s tax, Immigration and speed of approvals concerns were all issues that could undermine plans to revive the island as a ‘free trade zone’ hub.

It quoted executives interviewed for its November 2014 report to the Christie Cabinet, who expressed displeasure about the 1 per cent Customs administration processing fee, and other taxes such as the Environmental Levy, which were imposed in the 2013-2014 Budget.

The Customs fee has now been removed for Freeport, but the private sector also lamented the lack of certainty and transparency in the Government’s fiscal plans, and the impact this was having on their businesses.

This is especially relevant to Freeport’s current situation, with the Government yet to clarify what it plans to do about the city’s expiring real property tax, Business Licence fee, capital gains and income tax exemptions, which expire in less than three weeks on February 5, 2016. Nor has it made public its intentions on longer-term reforms to the Hawksbill Creek Agreement.

One executive was quoted by McKinsey as saying: “The [Customs administration fee] was passed at the 11th hour without consultation, without notification... It sends investors the message that you can’t trust the Government.”

All executives spoken to by McKinsey were not named, but another said: “Our global headquarters is constantly asking about the tax situation for strategy and budget planning, but we just don’t know.... there’s no transparency.”

Another, looking to the future, added: “We need the Government to clarify how it will handle new taxes and incentive expirations. Else we can and will shift operations to other places in just two weeks.”

Investors and businesses the world over have frequently asserted that a lack of predictability, and continuity, from Governments over tax policy is a major deterrent to investment, growth and job creation.

Bahamian tax policy has been subject to numerous changes and adjustments in recent years, as well as major reforms such as Value-Added Tax (VAT), all of which have had a disruptive and unsettling effect on commerce.

Taxation was also cited as a concern by Freeport’s major industrial players, although McKinsey estimated that the expiration of Freeport’s real property tax and Business Licence fee ‘breaks’ would have a relatively modest impact on the sector.

The international consultancy estimated that the imposition of both taxes on PharmaChem and Polymers International would be equivalent to losing 2 per cent of their annual revenues, some $1-2 million and $3-$4 million respectively.

BORCO, meanwhile, would incur tax payments equal to $15-$20 million per year, or 10 per cent of its revenues.

One industrial executive even referred to the possible imposition of real property tax and Business Licence fees as “a blip” compared to the former 1 per cent Customs administration fee.

Yet the sector still warned: “[Government] is opening the door to major increases. It’s reasonable to worry they’ll keep upping the ante.”

McKinsey also produced ‘case studies’ for the Christie Cabinet to note, which suggested that “modest and predictable tax increases do not drive severe business flight, but large unpredictable ones do”.

It pointed to India’s Special Export Zones (SEZs), where the sudden imposition of two taxes on profits and dividends - at rates of 18.5 per cent and 17 per cent, respectively - in 2011-2012, resulted in a decline in export growth from 31 per cent to 7 per cent over the next two years.

McKinsey suggested that the Government create “a detailed communication plan for the upcoming Hawksbill Creek Agreement negotiations and discussions”, which is something the Christie administration has conspicuously failed to do, to address the tax concerns.

Meanwhile, the ability to import specialised, key workers on either a short-term or work permit basis was also cited by Freeport’s private sector as another impediment to doing business.

“Key people need to be able to get here in 30 days or investors aren’t interested. The Cayman Islands should be thanking our Government for all the business we’re sending them,” one private sector executive said.

Another added: “We need highly experienced managers, but work permits are expensive and lengthy.”

The ‘availability of professional workers’ was rated by Freeport businesses as the most important factor for stimulating investment in the city, followed swiftly by a ‘fair and predictable legal environment’ and a ‘responsive Government and regulators’.

The timeliness of approvals was also raised, with one person interviewed by McKinsey stating: “The Bahamas Investment Authority is constantly holding up transactions that limit the growth of Freeport. We’re in the fetters of these approvals.”

Another added: ‘If a foreign investor wants to start a business, it could take three months, it could take six months. They get discouraged and move on.”

McKinsey recommended that the Government review approvals timelines for Grand Bahama-based applications, and compare these to other jurisdictions, while also “setting or revising standard timelines for common categories of approvals”.

It added that Immigration concerns needed to be discussed in more detail, with practices aligned with the Government’s goals and policies.