Reforming Tax Incentives to Support Sustainable Development A Caribbean Perspective: Saint Lucia s Roadmap Dr. Reginald Darius Permanent Secretary, Ministry of Finance Saint Lucia
Background Revenue performance Fiscal and Growth Tax Incentives Structure Cost Vs Benefits of Fiscal Incentives Fiscal Incentive Reform- Saint Lucia Proposed Reform Agenda Progress to Date/Challenges Conclusion
Tax Revenue (% GDP) Country Avg. 2000-2005 Avg. 2006-2012 25 Average Tax Revenue (as percent of GDP) Antigua & Barbuda 16.1 18.6 Bahamas 12.4 14.9 Barbados.. 25.5 Dominica 19.6 23.6 20 15 Grenada 18.2 19.0 Jamaica 25.0 26.7 St. Kitts & Nevis 18.6 20.6 St. Lucia 22.4 23.4 St. Vincent & the Grenadines 21.0 22.8 10 5 0 ECCU Latin America and the Caribbean OECD Trinidad &Tobago 22.6 28.2 2000-2005 2006-2012 Source: WB DataBank, Author s Calculation 3
Revenue Composition (In Percent of Revenue) 2012 100.0 80.0 60.0 40.0 78.4 68.2 69.7 69.6 61.2 20.0 0.0 Direct Taxes Indirect Taxes Other Revenue Source: WB DataBank, IMF WEO Database, Country Reports 4
Caribbean: Debt and Fiscal Balance (2014, in percent of GDP) Debt/GDP 160 Jamaica 140 120 Barbados Grenada Antigua 100 St. Vincent St. Lucia 80 Dominica St. Kitts 60 Bahamas 40 20 Trinidad 0-10 -8-6 -4-2 0 2 4 6 8 Fiscal Deficit/Suplus 5
GDP Growth Rates (%) 10 8 6 4 2 0-2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-4 -6 LAC (Developing Only) Small states Emerging Market and Developing Economies Caribbean
Improving Investment & Business Climate Stimulating Economic Growth Fiscal Consolidation Restoring Fiscal & Debt Sustainability
Saint Lucia is the pilot for the ECCU Business Taxation Reform with support from the IFC Assistance provided to improve the administrative, regulatory and institutional framework for paying taxes Rationalization of the tax incentive being a core component
Incentives Corporate Income Tax Holidays (5-25years) Import duties on imports of plant, equipment and inputs (up to 100% waiver) VAT Exemptions and Zero Rating Property Tax Exemptions 9
14.00 Net Inflows of FDI (% of GDP) (Period Averages) 12.00 10.00 8.00 6.00 4.00 2.00 0.00 1980-1989 1990-1999 2000-2009 2010-2013 Saint Lucia ECCU LAC Small States Middle Income States Source: WB DataBank
Revenue Forgone (Tax Type) (% of GDP) (Average 2008-2012) Revenue Forgone (By Activity) (% of GDP) (Average 2008-2012) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Dominica* St.Kitts and Nevis St.Lucia St.Lucia St.Kitts and Nevis Dominica* 0.0 2.0 4.0 6.0 8.0 CT/VAT Import Duties Excise Tax CIT Tourism Industry Other Source: IMF Country Estimates (2013) * Dominica average 2010-2012 * Dominica average 2009-2012
Clarifying the role of incentives in attracting FDI Simplify existing framework of incentives Targeting incentives to maximize economic growth impact and minimize revenue leakages Regular monitoring and assessment of impact of incentives
Assess Effectiveness of Existing Regime Increase Predictability & Transparency Improve Communication on Incentives Regional Harmonization & Integration Investor Motivation Study Inventory of Incentives Cost/Benefit Analysis Rationalize Incentive Framework Revise Legislation/ Regulations/ Procedures Tax Expenditure Budgeting Targeted Communication Strategy Draft Regional Policy Guideline Facilitate design of Regional Policy Framework
Simplified Legislation Consolidation of tax incentives currently under varying instruments into the tax laws Limit Discretion Rules-base approach Limit use of executive discretion Incentives administered by tax agencies Improved Transparency Estimate and publish tax expenditure statements, highlighting largest beneficiaries by individual tax payer and sector
Regular Assessments Periodic reviews of existing incentives, evaluated against stated objectives Minimize Revenue leakage Minimum taxes to replace tax holidays and link the continuation of incentives to investments Regional Tax Harmonization Limit harmful tax competition through regional cooperation on tax incentives
Progress Inventory of Incentives Estimating Tax Expenditure Capacity Building Challenges Data limitations Crafting a framework acceptable to the executive Managing change process (private sector buy-in)
While tax incentives can be useful in attracting FDI, the costs in terms of revenue forgone is significant in the ECCU. Ongoing reforms are aimed at improving transparency, simplicity and certainty in the application and administration of tax incentives. Data limitations and political buy-in remain major challenges to the reform process.