A time to act Introduction For several weeks now, Barbadians have been waiting, in anticipation and perhaps trepidation, for the 2013 Financial Statement and Budgetary Proposals, delivered today by Hon. Christopher Sinckler, Minister of Finance. While budgets have always stimulated some anxiety, interest in this year’s presentation has been heightened by the recent disclosures that a major fiscal adjustment of 4.4% of Gross Domestic Product (GDP), approximating to $400 million, will be required to address the country’s serious economic challenges. Further, there have been differing schools of thought as to how this adjustment should be effected – whether sharp and swift, or slow and gradual. The Minister of Finance, in presenting the 2013 Budgetary Proposals acknowledged that the country’s macroeconomic program is dangerously off track. The numbers paint a stark picture. To put the decline in perspective, debt as a percentage of GDP has doubled since 2006 and now exceeds 98%. On the current trajectory the fiscal deficit as a percentage of GDP, if left alone, would likely end the current fiscal year between 8% and 9%, up from 2.7% in 2006. Interest payments on government debt have increased over the same period from 14.8% of revenue to 36.8% for the latest quarter ended June 30. Foreign exchange cover has fallen to 16 weeks and, without intervention, is projected to fall further to around the international minimum standard of 12.5 weeks. Reflecting on the loss of over $300 million in reserves in just over three months, the Minister noted that it would be reasonable to deduce that much of this could be attributed to a decline in the level of overall confidence in our economy by foreign and domestic investors alike. In March 2013, Parliament approved the Estimates of Revenue and Expenditure for 2013-2014, which set out revenue projections of $2.63 billion. These estimates also set budgeted expenditure at $3.87 billion, giving rise to a projected deficit of $1.24 billion, or 5.6% of GDP.
Budgetary Proposals in summary
Barbados Growth and Development Strategy The aim of the Barbados Growth and Development Strategy is to create sustainable economic growth and development though enhanced productivity, efficiency, competitiveness and service excellence. This strategy replaces the Medium Term Fiscal Strategy. The government has targeted the productive sectors of the economy such as tourism, international business. The proposed strategies include expenditures as follows: increased investment in the Barbados Tourism Authority to boost tourist arrivals; additional funding for Invest Barbados to promote international business; major infrastructure projects including roads, schools, and Barbados Water Authority mains replacement; investments in the physical plant of the tourism sector through developments Almond Beach Resort and the Silver Sands Hotel; and the construction of a sugar factory.
Fiscal Adjustment Measures The Fiscal Adjustment Measures (“FAM”) are designed to reduce the fiscal deficit to below 3% over a 19 month period commencing September 2013. Collectively, the measures are expected to result in $150.9 million in increased revenues and $285 million in cost savings. The total fiscal adjustment of $435.9 million is expected to result in a deficit of less than 3.0 of GDP by 2014-2015. Major fiscal revenue adjustments include: an additional land tax charge of 0.7% of the site value of land ($49. 3 million); a temporary “consolidation” tax on gross income of persons earning at least $50,000 per annum ($42.1 million) and temporary tax on the assets of commercial banks ($38.0 million). Expenditure reduction measures include a reduction in the public sector wage bill through reduction in estimates for temporary posts ($30.0 million); reduction in transfers and subsidies to certain statutory corporations (Transport Board, National Conservation Commission, Queen Elizabeth Hospital, Sanitation Service Authority and the University of the West Indies; as well as a 12% cut in other transfers which translates to a reduction of $60.0 million.
This year’s Budget was divided into two sections: (i) Barbados Growth and Development Strategy; and (ii) Fiscal Adjustment Measures.
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The numbers paint a stark picture Overall assessment Generally, the budgetary proposals, as presented, set an appropriate tone and intent for reversing the deterioration of public finances and restoring confidence through a suite of short-term and medium term initiatives. It is particularly interesting to note the following:
The move to stimulate economic activity through an extensive capital projects programme;
The intent to use Private Public Sector Partnerships (PPPs) to finance major infrastructural projects, namely roads, schools and housing;
Addressing cost containment through consolidation and/or elimination of statutory entities;
Reduction of transfers to UWI by requiring students to pay tuition fees.
It should be noted, however, that there are a number of prerequisites for the success of these initiatives. These include:
Identification and execution of ‘quick-win’ projects, i.e., those that can be implemented in a three- to six-month timeframe. This will increase confidence thereby allowing government to more readily access the capital markets;
Accessing credit on a timely basis to fund the capital works programme and to improve the foreign reserves position;
Implementing cost containment and reduction measures to complement revenue enhancement initiatives;
Using reduced transfers to statutory entities as a measure to stimulate internal reforms designed to increase the efficiency, economy, and effectiveness of their operations; and
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Creating institutional capacity to drive implementation.
There is no doubt that the incentives as proposed are designed to provide much needed stimulus to the target sectors. However, historically incentives have been hampered due mainly to the following:
Delays in drafting and enacting the enabling legislation;
Lack of clarity in the process for accessing benefits; and
Inefficient administrative processes.
Traditional thinking would suggest an action plan including strong elements of expenditure reduction, growth stimulation and debt reduction through a robust privatisation program. While the Minister’s presentation included elements of the first two, there is a notable absence of any mention of a privatisation program. We commend the government for its innovative thinking in the establishment of five different project teams whose aims are to oversee the implementation of business facilitation and Special Projects to improve efficiency in the public sector. While we applaud these initiatives, their success will be shaped by the persons who lead these project teams.
Consolidation tax The Minister has proposed that from September 2013 a temporary consolidation tax on gross income of persons earning over $50,000 be implemented. It is proposed that the tax remain in place until March 2015. The measure has been described within the proposals as follows: Gross Income $50,001 - $75,000 $75,001 - $100,000 $100,001 - $200,000 Over $200,000
Tax Rate 0.5% 1.0% 2.5% 3.5%
Comments The manner in which this proposal is to be implemented has not been made clear. The application of the consolidation tax at a “flat rate” would disadvantage those individuals whose gross income only marginally exceeds the thresholds used.
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For example, an individual earning $75,000 would pay tax of $375 on his gross income, whilst an individual earning $75,001 would pay tax of $750, effectively incurring an additional $375 of tax on $1 of gross income. Further clarification with respect to the application of the tax is required in order to fully understand its impact on Barbadian taxpayers.
Other proposed measures
Reverse tax credit - It is proposed that effective September 2013 the reverse tax credit allowing individuals earning less than $18,000 annually and not more than $1,500 per month to receive a cash payment will be reduced by 50% to $650;
25% increase in excise taxes on tobacco products;
15% tax on lottery winnings of $1,000 and over;
Excise tax rebate on new cars rolled back to 15%;
Temporary tax on the assets of commercial banks applied at 0.2%;
A 0.7% municipal solid waste tax placed on the non-improved value of the land.
Comments In total the above measures are projected to earn $161.1m in revenue. A 50% reduction in the reverse tax credit with not reduce the administrative burden on the Department of Inland Revenue. Whilst recognising that these measures impact all income groups we view the measures proposed as having the greatest impact on Barbados’ middle class.
Tourism In a recent press conference the Minister of Tourism outlined Government’s ten-point plan to assist with the short term recovery of the sector. The Minister of Finance has proposed additional measures to support this important earner of foreign exchange. The Minister proposed that over the next eighteen months an additional US$50 million dollars will be made available for marketing and promotional activities by the Barbados Tourism Authority (“BTA”),focusing on both traditional and new markets. All current liabilities of the BTA will be immediately settled using US$13 million of the designated sum. These funds will be sourced from a proposed US$100 million fiscal based loan to be negotiated with the IADB. The BTA in collaboration with the National Cultural Foundation and the Ministry of Culture, Youth and Sports, will launch the Barbados International Culture and Sports Tourism Initiative in 2014.
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The goal of this initiative is to establish a complete tourism calendar and promote the island as a hub for international events, thereby maximizing tourism arrivals throughout the year. Government will make an initial investment of Bds$20 million to sponsor and/or promote these events. Additionally, the implementation of the BDS$50 million Hotel Refurbishment Fund announced in the Minister’s 2012 budgetary proposals has been undertaken by the Industrial Credit Fund (“ICF”) and Credit Guarantee Schemes as administered by the Central Bank. A registered tourism accommodation establishment may seek financing via a proposal made to a financial intermediary, who will in turn submit the proposal to the ICF. The ICF may advance up to 90% of the requested loan amount. The NIS will assist with the financing by periodically depositing surplus funds at reasonable interest rates with the ICF. The Minister outlined the following additional features of the loans:
Loan projects will remain under full private sector management and be subject to all elements of a private financial institution loan and repayment arrangements to help mitigate the risk to State entities;
Loans will be given at highly reduced rates with an appropriate moratorium on repayments of principal and interest;
Government will offer a special duty and tax waiver programme for any property owner accessing the available funding over eighteen months. The aim is to see a major improvement in the number of rooms and amenities of not less than 75% of those properties in need of improvement.
Government will initiate the purchase and rebuilding and/or refurbishment of two major properties, Almond Beach Resort and Silver Sands Hotel, the goal being to work through the BTA and in partnership with the private sector to bring at least 1,000 rooms back into production. This will be achieved by accessing low-cost financing from the People’s Republic of China. Work on these properties should commence in the latter half of 2014 and will result in approximately Bds$350 million in investment and the creation of at least 600 jobs during the construction phase. With effect from October 1, 2013 the new VAT rate on hotel accommodation will be 7.5% instead of 8.75%. In addition, direct tourism services will be brought in line with the new accommodation VAT rate of 7.5%. With effect from September 1, 2013 the bound rate on heavy cream which is used in the sector will be reduced to 40%.
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Comments
Stakeholders in the industry will be pleased with the increase in funding allocated to the Barbados Tourism Authority for marketing and promotional activities. The initiative to have a full tourism calendar of cultural and sports activities throughout the year is an imaginative approach which will also be well received.
150% deduction for a period of 10 years on the amount expended on staff training relating to renewable energy;
150% deduction on the marketing of renewal energy related products;
150% deduction on product development and research on renewable energy related sources and the installation and servicing of same;
exemption from the payment of corporation tax by a venture capital fund invested in the renewable energy sector for a period of 10 years;
deduction of contributions to a venture capital fund for a period of 10 years for investments made in the renewable energy sector;
exemption from the payment of withholding tax for a period of ten years on dividends earned by shareholders of companies engaged in renewable energy related services; and
exemption from the payment of tax for a period of ten years on interest earned by financial institutions for the financing of renewable energy related products.
The Hotel Refurbishment Fund will be appreciated by hoteliers however the amount spread over the industry is not significant and the administration of the facility may slow access. Hoteliers will welcome the reduction in VAT rates to a standard 7.5%. It is not yet clear what services will be classified within “direct tourism services” which will benefit from the reduced VAT rate. Clarification of the waiver programme is required. Government must be commended for its far reaching proposals to support the resuscitation of the tourism sector, a critical engine of growth and a major foreign exchange earner.
Alternative/Renewable Energy Renewable energy has been a feature in a number of budgetary proposals in recent years. The Income Tax Amendment Bill as proposed encompasses the majority of the proposals put forward by the Minister in his 2012 budgetary proposals with respect to renewable energy, including:
exclusion from tax of income earned from the sale of electricity produced from the utilization of renewable energy equipment by an individual who owns and wholly occupies residential property;
deduction of amounts spent or incurred in respect of training in renewal energy and energy efficient systems or in respect of a minor or a student under 25 years of age who is unemployed and pursuing a course in renewal or energy efficient systems. The training is to be provided by an educational or vocational institution that is approved by the Barbados Accreditation Council;
income tax holiday of ten years granted on the certificate of the Minister Responsible for Energy to a developer, manufacturer or installer of renewable energy systems and energy efficient products;
150% deduction of loan interest relating to construction of a new facility or the upgrading of an existing property relating to renewable energy;
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The Minister has indicated that the government is pushing ahead with the revelation of “a major renewable energy initiative” with the intention of utilising some major government buildings to generate electricity for sale to the Barbados Light and Power Company, while reducing the government’s energy cost. The measures include a proposal to invite the private sector to supply, erect, operate and maintain solar electricity systems on the roofs of selected Government owned buildings using the modality of a Solar Power Purchase Agreement. The Public Sector/Private Sector Partnership arrangement is intended to advance the penetration of solar electricity systems in Barbados. It is proposed that solar electricity systems be erected on the roofs of hurricane shelters, twelve Government owned buildings, nineteen schools and National Conservation Commission facilities. These installations are to be funded wholly/partly as follows:
Hurricane shelters - US$2,000,000 grant;
Government owned buildings – part of the US$24,664,000 Public Sector Smart Energy Programme to be funded by the Inter-American Development Bank and European Union; and
Schools and National Conservation Commission facilities – Government Resources.
The minister has indicated that the Government does not have the resources for the installation of the solar systems and therefore requires Private Sector assistance to achieve this.
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Comments It is a positive development that the bills relevant to the Minister’s 2012 renewable energy proposals are available for parliamentary debate. It is not clear whether the amendments to the Income Tax Act will be retroactive. It is our hope that businesses and individuals who stand to benefit from these initiatives will be able to take advantage of the significant opportunities that will be created by a vibrant alternative energy sector. The proposals on renewable energy in the current budget relate mainly to Government initiatives that should result in significant cost savings in this area, while in turn providing opportunities for the private sector to earn income. However, a private sector struggling with its own financial challenges may find it difficult to obtain the financing needed to take full advantage of the opportunities. The Government itself is seeking financing from the Inter-American Development Bank.
Agriculture The Minister has announced the Barbados Cane Industry Project, a three year project which will see the re-engineering of an existing sugar factory into a state of the art sugar cane processing and electricity co-generation facility. The project will be financed by Japanese lenders to the tune of $270 million and is projected to have a positive spin-off impact on nonsugar agriculture. The other initiatives mentioned by the minister include a $2 million grant for small farmers to provide an incentive for crop production and a programme to create an incentive for hotels to use more local produce in their operations.
A $2 million grant for small farmers to provide an incentive for crop production Comments The agriculture sector continues to struggle. The Barbados Cane Industry Project aims to increase the end value of our sugar outputs as a means of increasing foreign exchange earnings and profitability of the sector. The co-generation facility is intended to reduce the cost of energy utilised in the production process, leading to increased efficiency, a lower cost of
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production and reduced demand on foreign exchange reserves. Little is known of the Barbados Cane Industry Project at this time, so there is a need for much information sharing to explain the vision behind this project.
Manufacturing The Minister has indicated his intention to provide subsidies to the local rum distilleries to create a level playing field with the U.S. based distilleries which are being subsidised by the U.S. government. While CARICOM trade representatives continue to negotiate with the US government for the withdrawal of these subsidies, it is anticipated that it may be necessary for a complaint to be filed with the World Trade Organisation (WTO) in respect of the U.S. subsidies. However, the government recognises that such a complaint is unlikely to achieve a satisfactory result within a reasonable time frame and is committed to maintaining the size of the local distillery industry. Given the contribution of the rum sector to the economy (approximately $60 million per year), government intends to explore the possibility of using excess alcohol production as an additive to gasoline. This is especially critical while rum sales are negatively impacted by the unfair competition from U.S. based distilleries. This would require new processes to be implemented by the distilleries and government is seeking to have the Barbados National Oil Company work with local distilleries to determine the specification of ethanol required and develop a plan to produce the required product and have it utilised as a fuel additive.
Comments While this appears to be an imaginative initiative, the extent to which retooling of existing production facilities will be necessary, the cost and estimated timeline of such an investment and the overall practicality and profitability of such an investment is unclear.
International Business Provisions The Minister outlined the following initiatives with respect to International Business and Financial Services Sector: 1.
The Regulations to accompany the International Corporate and Trust Provider Act have been prepared and will be laid in Parliament in October 2013.
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2. Starting from January 1st, 2014 the International Business Unit will be empowered to issue international business companies with multi-year licenses for up to three years. 3. The Ministry of Finance will instruct the Inland Revenue Department to procure, on a consultancy basis, a local company and tax law expert to handle tax law resolution issues and provide advice to the department to allow for timely decisions being given to the businesses in the sector that require them. 4. From budget year 2014 the Ministry of Finance will increase the marketing and investment promotion budget of Invest Barbados by an additional $7 million to beef up its presence in the Foreign Direct Investment market. 5. Further amendments to the Special Entry Permit Regime have been proposed to encompass foreigners who have bought high valued properties here, or who are interested in buying such properties. With effect as of September 1, 2013 such individuals will be allowed to apply for a Special Entry and Reside Permit for five years, and insodoing there will be no further requirements to apply continually for extensions of stay. Please refer to the attached schedule of the features and requirements of the Special Entry and Reside permit scheme.
Comments International Business continues to be second only to Tourism in terms of its size and importance to the Barbados economy. During 2012 and the first half of 2013 International Business continued to face tough challenges through the continued uncertainty in the global economy; poor business facilitation; vigorous international political and media focus on the fairness of taxes paid by large multi-national enterprises; changes in the competitive environment as a result of changes in Canadian tax laws; and increased focus from the Canadian Revenue Authority on Canadian owned Banks. Whilst new international business licenses increased by 8% in the first six months of 2013, renewals of licenses declined by 14% in the same period, bearing witness to the contraction of the sector as a result of the challenges noted above. Business facilitation continues to pose a significant challenge to the survival and further growth of this key sector, which contributes not only through the taxes paid by the sector, but also through the employment of a significant number of highly skilled and well paid Barbadians. Barbados ranked 88th of 185 countries in the World Bank's 2013 Doing Business Report, registering particularly low scores in the areas of protecting investors (169th), registering property
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(154th) and enforcing contracts (105th). Business facilitation is an area which has received much comment from both the International and Domestic business organisations and this continues to be a challenge. The Minister acknowledged both the importance of and challenges faced by the International Business and Financial Services sector. His acknowledgement of the need to grasp the low hanging fruit of improved business facilitation, through the creation of a National Business Facilitation Unit, will undoubtedly be welcomed by those who have repeatedly called for reforms in this area. It is notable that International Business Licenses will be granted for periods of up to three years which will reduce the administrative burden for existing businesses. Whilst these are positive developments it is imperative that the Unit be adequately empowered to effectively execute this mandate, and to avoid the addition of another level of bureaucracy. The strengthening of Inland Revenue’s resources, through a consultant, to handle tax law resolution issues will be welcomed, particularly by Canadian owned international financial services entities, which have faced significant challenges of late. Similarly, the Regulations to accompany the International Corporate and Trust Provider Act have been long awaited by those in the sector, as a measure necessary to properly regulate and protect the operation and international reputation of the industry. The proposed amendments to the Special Entry Permit Regime will reduce the administrative burden on the Immigration Department. A definition of “Investment” has been provided and includes rental real estate, property development projects, manufacturing, tourism, bank deposits, mutual funds or bonds or any financial instrument. Holders of SEPs will be issued with a Barbados Identification card, as is done for work permit holders, suitably coded to identify their status so that they will be able to obtain Barbados drivers’ licenses and otherwise conduct business in Barbados. Whilst the additional funding of $7 million for Invest Barbados to strengthen its presence in the FDI market, together with the other initiatives outlined by the Minister, will assist in the promotion and redevelopment of the International Business Sector, these are by no means guaranteed to return the sector’s contribution to the Barbados economy to precrisis levels. The effective implementation of these measures and greater responsiveness to external international pressures will be vital elements in the country’s protection of this revenue generator.
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The sub-categories of individuals eligible for Special Entry and Reside permits, including the categories now proposed, are as follows: Category of Persons Indefinite Special Entry Temporary Permit Proposed Fees and Reside Permit for Permit Persons >60 years and retired Granted once security $10,000 requirements met; the individual has adequate health insurance, retired and is not employed in Barbados Persons < 60 years and retired Valid until they reach age $7,000 per term 60. Granted provided all security requirements met, source of wealth clear with confirmation through Central Bank or commercial bank and there is evidence that the individual is not seeking employment in Barbados and some of their income is taxable in Barbados. An indefinite special entry permit is granted. Persons > 60 years and wish to Granted an indefinite special $10,000 plus engage in employment in entry permit on payment of $30,000 for an Barbados an additional work permit. indefinite work permit or $10,ooo plus $3,000 per year for a work permit Persons < 60 years and wish to Granted an indefinite special $10,000 plus engage in employment in entry permit. Fee equivalent $40,000 for an Barbados to the value of multiple longindefinite work term work permits. permit or $7,000 plus $3,000 a year for a work permit. Newly proposed: Granted for 5 years once $7,000 per term Persons holding property valued security requirements met (to be confirmed) at US$2 million or more and the individual has purchased with funds sourced adequate health insurance outside of Barbados and mortgage free Newly proposed: Granted for 5 years once $7,000 per term Persons with special skills needed security requirements met (to be confirmed) in the country as determined by and the individual has the Ministry of Labour, Social adequate health insurance Security and Human Resource Development, acting in concert with the respective Ministries with oversight of the sectors where the special skills are to be employed Newly proposed: Granted for 5 years once $7,000 per term The spouse of a person granted a security requirements met (to be confirmed) Special Entry and Reside permit and the individual has adequate health insurance
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Schedule of Financial Proposals Additional Government revenues - tax increases & other increased charges Reduction in discretionary waivers on import duties and excise tax - ranging from 0% to 100% at the discretion of the MOF. A 0.7% municipal solid waste tax placed on the non-improved value of the land A temporary consolidation tax on gross income of persons earning $50,000 and over. 25% increase in excise tax on tobacco products. 15% tax on lottery winnings $1000.00 and over A reduction in the current VAT rate on Tourism Accommodations/ direct services to 7.5%. Excise tax rebate on new cars rolled back to 15% A temporary tax on the assets of commercial banks applied at 0.20%. Total projected annual revenue increase Projected reduction measures A $30 million reduction in the $ 121.780 million provided in the 2013/2014 Estimates for temporary post/employees Reductions in Transfers and Subsidies A 12% cut in transfers A 5% cut in Goods and Services A reduction of $20 million in the amount allocated for the 2013/2014 estimates Reduction in reverse tax credit Projected reduction measures Proposed Growth Measures Tourism and related marketing and promotional activities ($100 less $26 to settle current liabilities)IDB policy based loan to be negotiated Hotel Refurbishment Fund (from the NIS) Almond Beach and Silver Sands hotels (People’s Republic of China lost cost financing) Barbados Cane Industry Project (funding from the Japanese Bank of International Corporation) Higher investment in non-sugar crop production Special events incentives Public Sector Short Term Investment – Special Roads and Bridges Package Energy Efficiency Solar Power (PPP) Public Sector Short Term Investment – MOE –Maria Holder Trust – Nursery Schools Public Sector Short Term Investment – NHC –Exmouth Housing Complex BWA Total proposed growth measures
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($ millions)
49.3 42.1 9.9 7.9 (10.3) 13.9 38 150.8
30 140 60 20 20 15 285
100 50 800 500 20 30 125 48 33 100 1,806
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Contacts If you have any further questions in connection with the above or would like to explore how these budget pronouncements may impact your business or personal arrangements, please feel free to contact any member of our specialist tax team listed below or your usual PwC contact. Gloria Eduardo Tax Leader T: (246) 626 6753 gloria.eduardo@bb.pwc.com
Lorenzo Forde Manager T: (246) 626 6762 lorenzo.forde@bb.pwc.com
Ronaele Dathorne-Bayrd Engagement Leader (Corporate) T: (246) 626 6652 ronaele.dathorne-bayrd@bb.pwc.com
Joel Hope Manager T: (246) 626 6760 joel.hope@bb.pwc.com
Louisa Lewis-Ward Engagement Leader (Tax) T: (246) 626 6756 louisa.lewis-ward@bb.pwc.com
Bibi Jaikaran Manager T: (246) 626 6762 bibi.jaikaran@bb.pwc.com
Sophia Weekes Senior Manager T: (246) 626 6758 sophia.weekes@bb.pwc.com
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