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Has the paradigm shifted?
The following is an excerpt of KPMG’s commentary on the Minister of Finance’s 2018 mid-year budget review on May 10, 2018.
In this piece, KPMG seeks to examine hereunder some of the recurrent and topical tax initiatives pronounced by the Finance Minister and offer our perspective on where we are.
The Minister of Finance, Colm Imbert, has expressed with great confidence that the economic climate of T&T has made a “welcoming turnaround” due to the economic expansion in both the energy and non-energy sectors. The estimated GDP growth rate is 2% in 2018, rising to 2.5% by 2020.
He indicated that the main factors contributing to this turnaround were the increased revenue collection, non-oil sector growth and increased production in the energy sector.
Over the last few years, the economic climate in T&T has been constricting—to put it mildly.
Both individuals and companies alike have been subjected to austere fiscal measures and have been asked ‘to do more with less’—as the nation seeks to navigate its way through the current recession.
The country faces the conundrum of maintaining T&T’s economic engines of productivity and investment, whilst it is in the midst of foreign exchange issues, new and increased taxes, and reducing government funding and subsidies.
Given that the Central Bank announced in December 2015 that T&T is in an economic recession, the government’s message of prudence and austerity must be examined in light of the ability of the country to see tangible return and progress for sacrifices made.
However, in his 2018 mid-year budget review the minister stated that T&T is now witnessing a welcome upturn. Following the presentation, a pulse check of the progress made since the 2018 Budget is necessary.
• Implementation of Property Tax
Property Tax has been a hot topic for some time now. It has been met with legislative controversy, disagreement as to its imposition by some portions of the populace, as well as an acceptance to pay but uncertainty by others.
In recent times, uncertainty was noted with respect to the applicability and ability to access exemptions from the property tax as noted in the Property Tax Act (PTA).
Commendably, the government has sought to clarify to whom such exemptions apply in the Property Tax Amendment Bill. The bill also proposed dispensing with the obligation to pay property tax for income year 2016.
With respect to the obligation to pay property tax the minister in his mid-year review has assured the nation that the waiver of said taxes will be extended to 2017—which means that property tax will be payable for 2018.
This will be welcomed by companies that have been struggling to make accounting provisions for property tax for 2016 and 2017. However, the business community and the general populace await the enactment of these pronouncements.
• T&T Revenue Authority (TTRA)
The current administration has mentioned from its inception that it intends to constitute an integrated Revenue Authority that would see strengthened collaborative efforts between the present Inland Revenue and Customs & Excise Divisions, amongst other benefits.
The proposed TTRA has also been met with mixed views by citizens and businesses in the midst of government promises that the TTRA will bring improved efficiency and administration, as well as a more robust compliance and collection system.
The TTRA is also being proposed as a solution to the alleged high revenue leakages, inefficiencies in the administration process and general dissatisfaction amongst taxpayers.
Countries such as Jamaica, Guyana and Barbados have consolidated their national revenue collection institutions into one central Revenue Authority in an aim to mitigate revenue leakages by having a 360 degree view of taxpayers’ transactions.
Much to the commendation of the government, tangible transition and progress can be seen by the relocation of Inland Revenue and Customs Division offices to new and improved facilities.
Despite prior pronouncements by the government that the TTRA will come into effect in fiscal 2018, the minister has now indicated that legislation is imminent and that the benefits of a TTRA should crystallise in the next fiscal year.
It is to be hoped that, by the time of the 2019 Budget Speech, all infrastructural mechanisms for the TTRA, inclusive of legislation, would have been put in place so that a bestowing of a functional TTRA to T&T would be completed by then; there should be no further delays.
While T&T awaits the official operation of the TTRA, we wish to take the opportunity to stress to the government the importance of specialised training of personnel and a shifting in culture to one of diligence and excellence—both of which will be key to ensuring the success of the TTRA.
• Transfer pricing
It is well known that T&T currently has no transfer pricing regime. As a result, there is a common suspicion that related party transactions may not be at arm’s length. As such, the Board of Inland Revenue (BIR) reserves the discretion to invoke provisions of the Income Tax Act where they believe transactions to be artificial and/or fictitious-- particularly between related parties.
In recognition of the fact that many multinational companies have complex related party structures, which can be used as a medium for legitimate tax reduction, the government has acknowledged the need for T&T to develop a transfer pricing regime.
It is our understanding that the BIR has been and continues to engage in consultations with regard to transfer pricing. However, to date we have not seen any tangible development in this area.
Given the current economic climate, where there is a need to maintain and increase revenue, the development of a transfer pricing infrastructure is essential to managing and reducing the outflow of taxable revenues in the long run.
We had hoped that the minister would have updated the nation on this long outstanding pronouncement.
• Access to Foreign Exchange
The availability of foreign exchange continues to be a sore issue for businesses and citizens alike.
Companies are under continued pressure to source foreign exchange to meet supplier obligations and, in some cases, have ceased operations where ingenuity could not be implemented.
The average citizen continues to struggle to source the most minimal of foreign currency even where foreign currency accounts are owned.
Recently, the Export Import Bank (Exim Bank) was granted a licence to trade in foreign exchange. The minister announced that the Exim Bank was provided with a capital injection of US$100 million, which it is authorised to distribute to manufacturers for the purposes of export expansion. This was further emphasised in the review.
While this is indeed commendable, it does not address the difficulty encountered by companies that do not manufacture for export, nor the hassle faced by citizens in accessing the smallest amounts of foreign currency.
Whether we care to admit it or not, some companies and individuals out of desperation are turning to alternative source options, fearing that there is no end in sight to the shortages through official markets.
• Lottery Winnings Tax
The minister, in an effort to remedy the shortfall in revenue collection, sought to introduce a new Lottery Winnings Tax at the rate of 10% on all cash winnings, in excess of $1,000, paid out by the National Lotteries Control Board (NLCB).
Whilst it was noted that the NLCB would be responsible for withholding and remitting this tax to the BIR—this tax is not yet in effect.
It is our view that the NLCB may be grappling with how best to collect and administer this tax as the infrastructure to do so may be virtually non-existent.
Not to mention, the current National Lotteries Act provides that the NLCB is exempt from tax but under the new lottery winnings tax to be imposed under the Miscellaneous Taxes Act the said NLCB will now face steep penalties and interest for failure to withhold and/or remit the tax to the BIR.
It should be noted that the minister did not provide any guidance on when this tax will come into effect or when various legislative gaps would be remedied.
• Gambling Industry
The requisite bill is before a Joint Select Committee of Parliament for review; such bill will hopefully be finalised by the end of 2018. It is expected that a well-regulated gambling industry will be in force by 2019.
• Oil and gas taxation regime
The minister proclaimed the revitalisation of the energy sector, evidenced by significantly higher levels of average gas production—up 20% from 2016 levels.
Both the Trinidad Region Onshore Compression project and the Juniper Platform, which came on stream in April and July 2017 respectively, were the main contributors to this boost in production.
Production volumes are expected to further increase due to enhanced activities among major oil and gas producers such as Shell, bpTT, BHP and EOGR as well as access to additional gas from Venezuela.
The minister reported that the increases in production levels, unwavering negotiations with the international oil and gas companies, and appropriate adjustments to the oil and gas taxation regime are already bearing fruit from a revenue perspective. No further details were given by the Honourable Minister on these adjustments to the taxation regime.
In his 2018 budget speech, the minister recognised that there were important issues to be addressed with the fiscal regime for the energy sector and that a start of the review of the energy tax regime was made in order to simplify and rationalise the terms of both exploration and production licences (E&P) and production sharing contracts (PSCs).
The main objectives of the reform were to encourage investment in the energy sector and to raise the Government’s revenue take. Certain critical areas mentioned included:
• making the supplemental petroleum tax responsive not to price but to underlying profitability;
• extending the supplemental petroleum tax to gas;
• reconciling and simplifying of the fiscal regimes applicable to the E&P Licence and PSC systems
• standardising and applying uniformly a 12.5% royalty rate on the extraction of oil, condensate and gas—proposed date December 1, 2017.
Recognising that this will be a gradual process, we are not aware if the necessary legislative changes are in train to give effect to the implementation of the measures mentioned above; we would have appreciated an update from the minister on this.
We await the much anticipated overhaul of T&T’s oil and gas fiscal regime which should provide incentives to the energy sector to stimulate investment, encourage exploration and, ultimately, securing a fair share of the value for T&T.
• Other Matters
We would have appreciated an update on the following matters, namely:
• The National Statistical Institute; and
• The re-establishment of the export allowance
We are hopeful that the worst is over and some light has begun to emerge at the end of the tunnel. Based on the Minister’s 2018 mid-year review it seems this is the case and expect the country is pleased with this good-news.
There was very little in terms of progress on key tax measures that should have been implemented.
Nonetheless, the positive outlook combined with no further increases in tax is a relief.
As T&T seeks to shift the paradigm and restore economic prosperity, it is questionable whether we have as yet made the progress and reaped the benefits envisaged as a result of embracing the austere fiscal measures that the current administration pronounced as necessary.
We therefore need to continue to be very prudent for when it’s not “a bright sun-shining day.”
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