The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Chamber of Commerce's chief executive yesterday urged the Government to "put in safeguards" to prevent abuse of its promised Over-the-Hill 'tax free zones'.

Edison Sumner told Tribune Business that unless the necessary controls were implemented to monitor who was receiving tax concessions, the Minnis administration's long-touted plan could further fuel growth in an already-large "informal economy". The Government is promising real property tax and Business Licence exemptions, as well as the elimination of Customs duty on imported building materials and equipment, for so-called 'inner city' or Over-the-Hill areas it is still defining the boundaries for.

The revitalisation of these areas, and the reduction of poverty and unemployment, were a key election campaign pledge by the Minnis administration, but Mr Sumner yesterday urged it to guard against opening up opportunities for fraud, tax evasion and other financial abuses.

"We don't want to see this get to the stage where persons are taking advantage of this by going into these areas considered free zones to set up businesses, and do trade in goods and services, to evade taxes," he told Tribune Business.

"The Government has to be sure they're putting in place the very rigorous controls to ensure there are no abuses of the system. It's going to be important for us to understand that system, and once we understand how that's going to work and the engineering of it, we'll be able to provide some feedback to the Government."

Many observers have already questioned how the Government will be able to monitor its tax-free plan such that it ensures incentives and 'tax breaks' can only be accessed by businesses and residents within the zones.

The Customs duty and VAT exemptions, in particular, are seen as open to abuse, with persons potentially able to import materials and equipment at the concessionary rates via friends/family living within the zones even though they do not.

Businesses could employ the same tactics, even registering 'shell' companies in these areas solely to access the tax breaks, while concerns have already been expressed that the Government's initiative - though well-meaning - could end up pushing existing Over-the-Hill residents out by attracting wealthier people and companies from elsewhere eager to exploit the concessions.

Mr Sumner expressed concern that the 'tax free zones' could inadvertently fuel an expansion of the 'informal economy', representing businesses that do not pay due taxes and lack the necessary Business Licences and permits to operate.

"We're already having a significant challenge here with so many businesses operating in the informal sector of the economy," he told Tribune Business, "taking advantage of situations where the controls are not as tight as they should be.

"Many companies operate without the requisite licences and permits, and this becomes an affront to businesses operating legitimately in the formal sector. We don't want to create another type of competition where firms are competing against a competitor operating without any licences or oversight.

"That has created an uneven playing field. We want to make sure any company pays their fair share otherwise that will be creating inequity in the way business is done."

Mr Sumner said the Chamber was "anxious" to learn how the Government's 'tax free zone' plans for inner city revitalisation will work, and added: "We are all for developing business, all for ensuring businesses small, medium and large, who have struggled making their business work, and want to do all we can to ensure we support their business and concessions issued by the Government.

"But we also want to make sure everyone operating in the economy is doing so properly, and has access to the same resources to make their business work."

Meanwhile, Michael Maura, the Chamber of Commerce's chairman, said the private sector's concerns over the Government's plan to exempt from Value-Added Tax (VAT) so-called 'breadbasket' food items, utility and medical bills, and other essential goods remained unchanged from one year ago.

The issue came to the forefront again this week after the Prime Minister pledged to 'exempt' breadbasket foodstuffs from VAT in the upcoming 2018-2019 Budget year, and Mr Sumner again called for more details on how this will work.

"While this may be good for consumers, it requires an awful lot of work from businesses that operate in these areas and others to reverse engineer their systems where they are already filing and collecting VAT on the products they sell," Mr Sumner told Tribune Business.

"For us, it's going to be a matter of seeing how this plan is going to work. It's going to require reverse engineering for businesses on the products they sell. We went to great lengths and very intense discussions with the government of the time to narrow the number of exemptions being offered under the VAT regime. That was an onerous and extensive discussion.

"When removing VAT off these items, businesses have to reprice them on their shelves and systems. You have to separate what is VAT-able and what is not VAT-able. And when you file VAT returns that is going to become a very onerous exercise for many businesses."

The Minnis administration had also pledged before the May 2017 general election to remove VAT from education fees, water and light bills, medicine, healthcare and insurance. It is unclear whether it will also follow through in these areas, having argued that its plans were delayed by the worse-than-expected fiscal position it inherited.

The main arguments against the Government's plan are that introducing such 'exemptions' will undermine the concept of a low-rate, broad-based VAT, and potentially 'open the door' to further exemptions in the future - something that would create pressure for an increase in the present 7.5 per cent rate.

Increased exemptions also make VAT filings by businesses, and its administration by the Department of Inland Revenue, more complex and costly. And, for those retailers who sell 'breadbasket' items, the 'exemptions' will increase their costs and force them to increases prices on other items.

'Exempting' products from VAT means that, while end-consumers do not pay the 7.5 per cent levy on their purchases, businesses are unable to reclaim their input costs in proportion to the volume of 'exempt' goods they sell.

For example, if 60 per cent of a company's inventory was VAT-able, and 40 per cent 'exempt', that business would be unable to reclaim 40 per cent of the VAT paid on its 'input' costs - such as rent and utilities.

This, in turn, increases that business's operating costs, forcing it to increase prices to compensate. These price increases might encompass a broader base of goods, and greater rises, than if all goods had been VAT-able.