Posted: Tuesday, December 27, 2016. 11:29 a.m. CST.
By Richard Harrison: As Belize crawls into 2017, it faces daunting financial and economic challenges….BUT there are no challenges without opportunity.
These challenges and opportunities require bold, decisive action on the part of ALL Belizeans.
I have previously offered ways of fixing the Belize economy, which did not appropriately take into account the important commercial distribution trading sector.
Below are my revised recommendations for tax reform that would set the stage for Belize being rapidly transformed into a production, tourism, financial and trading mecca….with full employment, stable economic fundamentals, rapid growth and relatively high standard of living for ALL Belizean citizens and residents.
I. Business Tax (BT)
The government collects around BZ$145 million from turnover on all businesses with sales over BZ$75,000 per annum at a rate of 1.75% of sales. This suggests that businesses completing returns for business tax reported total turnover of BZ$8.3 billion. My own estimates, given businesses under the threshold, business who evade or avoid the tax by non-reporting or under-reporting, and those who are exempt from paying the tax legally through government concessions, are that total turnover in the economy in 2013 was between BZ$10 – 13 billion.
This tax needs to be lowered to 1% of turnover on ALL businesses, no exceptions nor exemptions.
At this lower rate, increased compliance can be expected, such that total revenue from this source could reach BZ$90 million….or BZ$55 million less than currently captured.
II. General Sales Tax (GST)
The government collects around BZ$240 million at a rate of 12.5% of sales on goods and services that are not exempted or excepted.
This number suggests that GST was paid only on a turnover of around BZ$1.92 billion….which is only 23% of the total trade reported under Business Tax.
The tax rate should be decreased to 10% and charged across the board on ALL trade, no exceptions nor exemptions.
The Hotel Tax should be repealed, and BTB budgeted for under the Ministry of Tourism.
Thus, the revenue from this source could be expected to come in at around BZ$700 million….at a capture rate of 70%.
This is BZ$460 million more than currently being collected….which after compensating for the BZ$55 million loss in Business Tax receipts would leave an surplus of BZ$405 million.
Before this rate is lowered, the BZ$90 million tax on fuel needs to be repealed….so that the pump price of fuel is competitive with Mexico and USA agricultural belt…and so that the price of basic commodities produced in Belize for domestic consumption should not be adversely affected.
The surplus GST will compensate for this and will thus be reduced to BZ$315 million.
III. Environmental Tax (ET)
The government collects around BZ$26 million in ET at a rate of 2% of goods being imported that are not exempted or excepted.
This number suggests that ET was paid only on BZ$1.3 billion of trade….while total imports are reported at around BZ$2 billion.
Informed estimates are that around 40% of imports go unrecorded….thus imports are more realistically estimated at around BZ$3.33 billion.
The rate of this tax should remain at 2% and charged across the board, no exemptions nor exceptions.
The revenue from this source can be expected to increase to around BZ$46 million….or around BZ$20 million more than is currently being collected. This money should be used exclusively for investments in solid and liquid waste management.
This would make the surplus reach BZ$335 million.
IV. EXCISE TAX
The government collects around BZ$25 million in Excise Tax. This is a fee charged to beers, soft drinks and liquor producers in exchange for tariff and non-tariff market protection against import competition.
This tax should be eliminated completely…..and beer, soft drinks and liquor producers given 10 years to use this money to make themselves more competitive and productive….that they can make adjustments so that they can export….and so that tariff on imported competitive products are reduced from the current 100% import duty to 20%.
This reduction in revenue will be offset by the surplus GST, such that the surplus would now be back to BZ$310 million.
V. CUSTOMS TARIFF
The government collects around BZ$160 million from this source….which on total reported imports of BZ$2 billion would mean that the average rate of import duty is around 8%. BUT, if the total imports are actually BZ$3.33 billion, then the average rate of import duty is only around 4.8%.
The Customs Tariff Law should be completely overhauled along three lines (1) inputs for production should be set at 0 % import duty, so that no development concession, EPZ, IBC or Free Zone is required for production investments in Belize (2) a flat rate of 5% should be charged on all finished products (3) those products that compete directly with local production should be rated at the “bound rate” and managed according to our CSME and WTO treaties, such that the average rate of import duty is 8% and charged on minimum of BZ$2 billion of reported imports, for worst case scenario total revenue of BZ$160 million.
This is the secret of turning Belize into both a production and trading mecca. Producers need not be enemies of traders….in fact the conditions should be made for them to work together.
This stategy will turn Belize into a lowest-cost producer of goods and services….significantly improving the enabling environment for rapid increase in domestic and foreign investments….while reducing the incentive for corruption through evasion and avoidance of the Customs Tariff Law.
The volume of trade to Mexico, Central America, Caribbean and visiting tourists will likely double within 3-5 years, such that declared imports would reach around BZ$4 billion, 50% for the domestic market and 50% for re-export; and the total revenues that can be expected would be BZ$320 million.
In the short-term no net gain or loss of revenue from customs tariff should be expected.
VI. PERSONAL INCOME TAX
The government collects around BZ$65 million from personal income tax on persons earning BZ$25,000 or more.
Tax on income should be reduced to 10% on all income over BZ$25,000, such that revenue from income in the short term can be expected at BZ$25 million.
This loss of BZ$40 million will be offset by surplus GST revenue, so that the surplus will now be reduced to BZ$270 million.
A consideration should be given to allow born Belizean diaspora to pay income tax of 10% on BZ$25,000 income earned abroad, which would give them the right to vote by proxy, to run for elected offices under certain conditions, and to qualify for appointments to government positions and to apply for government contracts. If 25,000 such persons choose to pay BZ$2,500 per year, this could total BZ$62.5 million per year. Half could be dedicated to paying off debt, and half to re-invest in developing the power and influence of our diaspora.
VII. FOREIGN CURRENCY TRANSACTION TAX
The government collects around BZ$20 million from this source.
This tax should be repealed and the loss compensated for by surplus GST, reducing the surplus now to BZ$250 million.
This BZ$250 million in new revenue is sufficient to service debt at BZ$125 million per year, and to make capital investments of BZ$125 million per year.
One of the first capital investments that need to be made is the computerized integrated management of all these revenue streams and linking them directly with the database of our trading partners, so that what is declared as exports from any other country is automatically recognized as imports in our system, eliminating discretion and corruption of our customs services. Valuation of all customs declarations should be based on manufacturer prices and not based on values declared by freight forwarders with intent to avoid customs tariff.
The economy will start growing at an average rate of 5-7% per annum….within 5 years we will reach full employment and need to attract more workers to Belize….the standard of living of ALL Belizeans will significantly improve.
A law should be put in place to require government to operate ONLY on balanced budgets….and to place a cap on growth of government spending only at the rate of the previous year GDP growth.
There should be a moratorium on government borrowing from external sources for the next five years.
This tax regime will create somewhat of a firewall between the private sector and individual citizens, and the government, such that the private sector and individuals workers will be able to prosper with significantly less retardation impact from government corruption.
This is not to say that Belizeans should not continue to push for anti-corruption measures….and for justice and political reforms.
This is the silver lining on the dark clouds that are looming over Belize’s 2017-2022.
The views expressed in this article are those of the writer and not necessarily those of Breaking Belize News.
This article was written by Richard Harrison, Belizean investor in production and services businesses in Belize. He holds a Master’s in Business Administration degree from Lancaster University.