Introduction:
As we enter the new year, already there are signs of desperations from the government, none more so than the rather strange decision to do deals with Cost-U-Less, one of those US-based cheap retail outfits. But, as the old people used to say: ‘every skin teet ain’t a laugh’. Or, more pertinently, all that glistens is not gold.
Let us look at the publicly known concessions the government has granted Cost-U-Less and how this will benefit Barbados as an economy.
First, exemptions from import duties and VAT on fittings, furniture and other construction materials, which in itself exposes the government’s lack of strategic thinking, since although exemptions could form part of strategic thinking, this is only applicable where there are obvious skills and knowledge that are transferable.
In other words, regardless of the commercial success or failure of the enterprise, they will be leaving something behind in their footprint that Barbados as an economy could continue to benefit from. But the concessions go further than this: they also apply to the personal household effects and vehicles of foreign staff, which is beyond belief.
However, the most scandalous of these exemptions is the fifteen-year break the company would have on dividend taxation. In other words, they will be free to grab their profits and run.
The principle behind offering tax incentives to multi-national corporations to set up base in developing nations is that, as has been pointed out, there will be a spin-off: of skills, knowledge, expertise, and the additional taxation will benefit the exchequer. However, if all the obvious tax gains are given away upfront as golden welcomes, then any benefits to the economy would be in the medium to long term. Therefore we have to look at the nature of the business, the quality of any job creation and the benefits to the economy of these spin-offs.
Strategy:
The first consideration in a fiscal strategy is the likely contribution of the policy being considered to the wider economy. If successful, would it resolve any short, medium or long-term issues, such as job creation or skills training? Do the products or services meet an immediate national need, or will they simply force out existing firms? What new skills will this company bring to Barbados: check out boys and girls? Car parking attendants? Security guards?
Cost-U-Less is a grocery warehouse-style club business based on the principle of piling stock high and selling it relatively cheaply. In other words, it is competing in an already over-crowded market place in which the main victims will be the local village shops, the very people the government should be fighting to protect. The decision to offer the firm a long-term exemption allowing it to withhold tax on dividends and interest to share holders, financial institutions and individuals making loans to the company, is preposterous.
Apart from anything, the government’s decision to allow these exemptions, effectively paying a low-cost grocery to operate in Barbados, is that it reveals an ignorance of the late pre-independence history of Barbados. Since the 1960s, Barbados had a number of foreign-owned enterprises which came to the island with the promise of shooting out the lights, when it came to new business. Most, if not all, were granted tax breaks and a number of exemptions, on the implicit promise that if they prove commercially successful Barbados would remain a base for their operations. And, as we now know, they defected from the country as soon as the tax holiday was coming to an end. This has happened under previous governments of all colours, and is something that one would have thought we had learned from. Clearly this is not the case.
The Politics of Taxation:
There is a fundamental difference between promoting enterprise and job creation and encouraging tax avoidance. In framing a public finance policy, in which the encouragement of foreign direct investment forms a central part, and firms are fiscally incentivised to locate in Barbados, it is important to understand the difference between the taxation of labour income and capital income. As things stand, certainly in the case of Cost-U-Less, the punitive labour income that most Barbadian undergo (including a 17.5 per cent sales tax), effectively subsidises the ease with which the taxation of capital incomes can become an inducement.
On the other hand, small businesses – including sole traders and the self-employed – are taxed more punitively than major companies, especially those operating under the pretext of bringing foreign direct investments to small island economies. But this becomes outright robbery when corporate tax advantages are merged with personal tax privileges, such as allowing individuals to bring in their own personal vehicles – over and above those that are brought in under the guise of corporate vehicles, which in any case will be used exclusively as private vehicles by senior executives.
These generous corporate and personal incentives are not the government’s to give; what they are in fact doing is passing on taxation that should rightly be paid by this foreign-owned businesses to the Barbados exchequer to already hard-pressed taxpayers (for Cost-U-Like read The Republic Bank). For, it is certain, that the government is not going to introduce an austerity programme this late in its rule, in order to make up for the short-fall from Cost-U-Less. The gap will almost certainly be filled by VAT, increases in road tax, PAYE, national insurance, property tax for ordinary homeowners, a further extension of the scandal of subsidising the multi-millionaires on the West Coast, and cutbacks in health and education costs.
Destructive Innovation:
A foreign-owned low-cost supermarket warehouse chain, with no tax or national obligations to Barbados, will source its goods, including agricultural produce, from favourite suppliers, with total disregard for local producers. It will also have its pricing policy decided at head office, rather than according to local conditions.
And, in a global environment with a rising population and escalating food price inflation, Barbadian consumers will find themselves faced with the pricing out of the market of local producers and businesses, and the introduction of foreign products and higher prices.
The bottom line is that the incentives offered to Cost-U-Less and others are a legally sanctioned form of tax avoidance and idiotic ideas such as that they pay national insurance and VAT are too silly to discuss with any seriousness, as firms like |Texas Instruments (remember them?) and others must be laughing their way to the bank. In any case, such interventions as Cost-U-Less in new markets means that they must start from a standing position to gain market share and the way they do this is by themselves offering incentives. In marketing theory, this new customer proposition is called disruptive innovation and some of the current players do suffer as a key part of the strategy. So, local shopkeepers are likely to suffer badly, and so do some of the village and smaller supermarkets and farmers.
Even the major supermarket groups will have to compete if only to hold on to their current market share, and so profitability. In reality, Cost-U-Less is more likely to bring destructive innovation to the Barbados retail grocery market. If you want to see what business theory has to say about this, just read Professor Clay Christiansen of Harvard University on new business models. (or better yet, send the minister of finance a copy).
Legal Structure:
Final there is the question of the legal structure of the enterprise. Will it be a subsidiary, branch or franchise. No doubt with its top legal and accounting brains coming out of the US (the locals will simply be bag carriers), this is going to present a mammoth challenge.
Will Cost-U-Like (Barbados Ltd) be paying for an intellectual property rights licence for the use of the title? Will it be free to source its products from a global market, or buy what the head office orders it to? Of course it won’t. Will the salaries paid to executives and senior managers for taxation purposes be the same as they receive in their pay packets? Like Hell.
As we have seen in the UK, with commercial giants such as Amazon, Starbuck, and other, being accused of not paying any corporation taxes, the obvious conclusion to draw is that if they can do this in a developed and highly sophisticated society such as the UK, then they will do as they please in a small island economy like Barbados. If all independent nation states in the Caribbean were to indulge in this silly gamesmanship, it will be a rush to the bottom, and not a beneficial policy initiative, as policymakers pretend.
Analysis and Conclusion:
In a low corporate taxation environment, such as Barbados, to offer a foreign firm seeking to establish a presence in the local market a package of fiscal incentives, is a double whammy: ordinary taxpayers are being penalised on the dubious grounds that the inward firm will bring jobs and, in time, add to the revenue take; yet, at the same time, the additional incentives as attractions to get the firm to locate in Barbados rather than a rival island, will bring any real benefits.
In reality, of course, as we know through experience, as soon as the tax holiday comes to an end these foreign firms usually move on to another market which no doubt will offer similar attractions. But local politicians and policymakers live in hope. They dream that this time it will be different, that these smiling businesspeople, who appear to be of the highest ethical standards, will play fair. They never do.
The world is changing at a faster pace than at anytime in human history and for some of us it looks as if Barbados is caught in a time warp, not only in terms of our collective ideas, but in our politics and policymaking.
I have called before for an overhaul of the taxation system, given that it is outdated and is not fit for purpose, but this must form part of a wider restructuring of public finance and of company law, in particular, which allows corporates to effectively rob the poor and disadvantaged through accounting practices that are clearly designed in the interest of big companies.
Under the current accounting system, firms do not have to manage their inventories in the way they claim to for tax purposes. For example, in an inflationary climate, given that costs will be much higher than a low inflation environment, the firm may adopt a last in first out accounting system, given the difference between cost and sale price, the mark up, will be relatively small. But in some tax jurisdictions, firms can use a totally different accounting method for filing tax returns and for accounting for profits.
For financial analysts, this presents a problem when valuing the company. Which figure reflects reality? Under the current accounting system, firms do not have to manage their inventories in the way they claim to for tax purposes. For example, in an inflationary climate, given that costs will be much higher than a low inflation environment, the firm may adopt a last in first out accounting system, given the difference between cost and sale price, the mark up, will be relatively small. But in some tax jurisdictions, firms can use a totally different accounting method for filing tax returns and for accounting for profits. For financial analysts, this presents a problem when valuing the company. Which figure reflects reality? Where are the voices of protest? Where is the chamber of commerce? Where are the many commercial vehicles sales teams? Where is the voice of consumers? Where is the voice of the unemployed? Where are the trade unions?
Discussing economic policy, as an avalanche of financial pressure bears down on us, can often be a luxury. In any case, those in charge just seem to be running for cover behind the intellectually anaemic fundamentalism of an outdated and simply wrong neoclassical economic policymaking.
The blogmaster invites you to join the discussion.