By Sir Ronald Sanders
WASHINGTON, United States, Friday December 6, 2019 – There has always been tension between encouraging foreign investment and promoting local entrepreneurship. In many countries, local businesses are expected to pay a range of domestic taxes while governments exempt foreign investors from obligation for the same taxes in order to attract their money, knowledge and, in some cases, their technological skills.
Where foreign investors do bring their own money, have greater knowledge and possess technological skills, granting them tax holidays for prescribed periods of time is utterly fair. But granting such tax holidays on a perennial basis, as many investors have come to expect in small countries, is unfair and the practice should be re-examined.
The purpose of granting a tax holiday is three-fold: to provide an investor with a fair return on investment, to allow a business to establish, and to transfer technological skills to the local population. However, unless the business model is flawed and its success is predicated on a subsidy from the government (which is what continuous tax waivers would be), the investment should be reviewed.
An example of how tax holidays could be justified is coming into sharp focus in relation to the ‘Blue Economy’ – a short-hand term for developing the resources of the sea which form part of the territory or the exclusive economic zone of a country. In Guyana, for instance, where large reserves of oil and gas have been discovered within the country’s territorial waters, those resources would have remained in the sea-bed for centuries longer than they already have, if investors with the money, knowledge and technological skills had not sought to develop them. And Guyana would not today be looking forward to the immediate financial gains and long-term economic benefits that are expected to result from the investment.
The benefit of this investment in Guyana is worth the government entering fair, cooperative and predictable arrangements with the investors. All sides would be rewarded, particularly if Guyanese companies participate in the industry through the provision of goods and services, and Guyanese are trained to assume positions in all aspects of the business.
However, in other instances where investors, local and foreign, enter a market in competition with existing businesses, they should not expect or be granted any tax or other concessions that are not enjoyed by the current operators.
Investors entering an industry where other companies are already established, bring no new knowledge or skills. If they choose to compete with new money, they should do so on terms no better than those applicable to established businesses. Should they be granted additional concessions, existing business would rightly demand a level playing field. They will demand the same concessions, resulting in government giving away much needed revenues. In the end, government’s revenues suffer and so too does human and economic development on which government must spend.
The tourism industry, in all its aspects, has become an area where governments grant tax concessions that should be significantly reduced. After more than 50 years of existence, tourism is a mature industry in the region. Governments should not still be granting decades of tax concessions to hotels – established or new – nor should they be accepting the minimalist passenger head tax that cruise ship companies pay to many of them.
Cost-benefit analyses that have been conducted of the cruise industry, have revealed that far greater benefits are reaped by the cruise ship companies than accrue to the government and the country. This reality is especially glaring when consideration is given to the cost to governments of building, maintaining and expanding port facilities, and complying with environmental requirements.
Each of the governments in the Caribbean is trapped by the other in relation to tax and other concessions in the tourism industry. Governments have been unable to fashion a common approach to the fees that they should charge cruise ships. They have also not been able to agree a regime for tax concessions to the hotel and yachting businesses. They hurt themselves still further by competing with each other to lure business by lowering their fees for cruise tourism, and by granting bigger tax concessions to hoteliers and yachting companies.
It should be noted that some hotels and yacht businesses pay their taxes. They should be used as the example for others.
It is fair enough that the cruise ship companies, the hotel owners and the yacht companies should earn profits. After all, they are putting their money into a business which employs people, buys goods and services, and trains employees. Additionally, their investors are entitled to a return on their money. However, the return should be fair and equitable on all sides. To get there, governments in the region should first agree on minimum standard beyond which none of them will fall. Further, they should establish machinery for enforcing the minimum standards with penalties if they themselves break it. A gentleman’s agreement will not do; such agreements are respected more in breach than in compliance.
Perhaps a law, justiciable under the Caribbean Court of Justice, is required under the terms of the CARICOM Treaty. One thing is for sure – if the business continues as is now usual, the Caribbean will be consigned to the role of hewers of wood and carriers of water; a seat at the feasting table will evade the region.
Wrapped up in all this is the refrain that to question the terms of foreign investment is somehow to be “hostile to foreign investment”. That refrain is short-sighted. It is an excuse for those who would do nothing to remedy inequities or to balance relationships more fairly. Every investor, local or foreign, deserves fairness, cooperation and the right to benefit from their investment. So, too, does a country and its people.
That is why governments and investors should seek to maximize fairness and proportionality in the arrangements they make.
Sir Ronald Sanders is Antigua and Barbuda’s Ambassador to the US and the OAS. He is also a Senior Fellow at the Institute of Commonwealth Studies at the University of London and at Massey College in the University of Toronto. The views expressed are entirely his own.