The 2017 National Budget of the Republic of Trinidad and Tobago

10 October 2016


 The 2017 National Budget of the Republic of Trinidad and Tobago

Shaping a better future: A blueprint for Transformation and Growth

On the 30th September 2016 the Minister of Finance, the Honourable Mr. Colm Imbert delivered the second national budget of the current PNM administration.

It’s not all a story of “doom and gloom” – together we aspire, together we achieve

As a nation we have a lot to be thankful for. The abundance of oil and gas reserves – which may be a blessing or a curse depending on your own viewpoint – provides Trinidad and Tobago with advantages that other nations in our region simply don’t enjoy and are reasonably jealous of. Even though we have all suffered the twin effects of the impact of the financial collapse in 2007 and depressed commodity prices since 2014, there is a lot to be thankful for, and – so it seems – some light at the end of the tunnel.

Our country’s economic vital signs continue to be strong. Our debt levels measured against GDP, our unemployment rates, the fact we still have a heritage and stabilisation fund, our import cover at just over 10 months remain healthy especially when we measure them against our peers in the region who rely on tourism and are not blessed (or cursed) with the type and level of natural resources that we control and the world continues to demand.

The fact that our recent international US$ 1billion bond issue was so heavily over-subscribed should tell us something. If the world has confidence in us, then we should have confidence in ourselves.

And the light at the end of the tunnel?

OPEC’s recent decision to cut output should help to support and lift oil prices to more familiar and comfortable levels for producers.

If we didn’t know it before we know it now. We are not nor have we ever been alone in our struggle. Even the mighty Saudi Arabia can suffer the effects of sustained lower energy prices.

So it seems – in the end, everyone hurt.

 

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The problems we still face

Our recent bond issue, which was assigned a rating of Baa3 with a negative outlook, clearly identified the problems that we face as a nation. No one ever said our journey would be easy.

We still have to navigate and overcome:

  • Low levels of GDP growth
  • High exposure and over-reliance on flows derived from oil and gas activities
  • A weak fiscal policy execution capacity

Budgeted oil and gas prices

The budgeted revenue for Financial Year 2017 (FY 2017) is based on an oil price of US$48 per barrel and a gas price of US$2.25 per MMBtu. The estimates of oil and gas prices are below the IMF forecasts for oil prices in 2017, and lower than the current oil price forecasts made by the World Bank and the US Energy Information Administration (USEIA).

Budgeted revenue

Total revenue for FY 2017 has been budgeted at $47.4 billion. This is $2.5 billion higher than the estimated revenue for FY 2016. Factored into revenue estimates for FY 2017 is an additional $1.5 billion from new tax measures, and $9.69 billion from one-off revenue items. Of the $47.4 billion, 95% or $44.866 billion will derive from non-oil sources and 5% or $2.575 billion will derive from oil sources.

Expenditure

Total expenditure for FY 2017 has been estimated at $53.4 billion. This is slightly above the estimated expenditure of $52.2 billion spent in FY 2016. Within this sum capital expenditure is budgeted to increase by $400 million compared with FY 2016, while current expenditure is expected to be $800 million higher, primarily as a result of higher debt servicing costs arising from the recent bond issue made by the Government of the Republic of Trinidad and Tobago (GORTT).

The main areas of expenditure for financial year 2017 are in the areas of national security, education and training, and the provision of health services. The Minister noted that the country is fortunate this year in that we do not have to provide billions of dollars to pay for military vessels taken on credit or provide for the full back-pay for protective services as both those items have been met by payments made in 2016 (either fully or in part).

The main items of expenditure for 2017 are as follows:

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The Fiscal Gap – the great divide

The fiscal deficit for FY 2017 is estimated to be $6 billion representing 3.9% of Gross Domestic Product (GDP). This is less than the fiscal deficit for FY 2016 of $7.3 billion representing 5% of GDP.

Looking at revenue without the benefit of one-off items totalling $9.69 billion, the Minister expects to raise revenue from normal recurring sources of $37.71 billion. With expenditure forecast at $53.4 billion, the shortfall or true fiscal gap amounts to $15.7 billion.

It is intended that this gap will be financed by:

  • Sale of assets and other one-off items
  • Additional borrowings
  • Further resort to the Heritage and Stabilisation Fund
  • Repayment by creditors of past amounts loaned (assumed to refer at least in part to CLICO).
  • Dividends from state enterprises

A small change to Value Added Tax

GORTT has long targeted the maritime industry as a sector than can grow and help diversify the economy of Trinidad and Tobago away from its reliance on oil and gas related products. Trinidad and Tobago through a combination of its warm climate and its location outside of the normal hurricane belt enjoys a natural advantage over other nations in the Caribbean. In order to provide a stimulus to this natural advantage with effect from the first quarter of 2017 the Minister proposes to make foreign yacht repair services a VAT exempt supply.

The Revenue Authority

The Minister announced that the government will complete all the necessary legislative requirements and form the Revenue Authority in financial year 2017. The creation of a Revenue Authority will, according to the Minister, allow for the greater transfer of information between the Board of Inland Revenue (BIR) and Customs, and should result in less incidence of tax evasion. The Revenue Authority will be supervised by an Independent Board, which will be held accountable for introducing high quality and accountable management into the field of tax assessment and tax recovery. In the first year of operation the Revenue Authority is expected to boost revenues available to GORTT by at least $100m.

The tricky issue of Transfer Pricing

The government plans to tackle what is in reality a tricky problem faced by all economies including those in the first world. That issue is one of transfer pricing.

According to the Minister, illegal pricing arrangements have become a major source of tax evasion all over the world with the problem being especially prevalent in commodity producing countries like Trinidad and Tobago where vertically integrated companies are able to shift profits from host countries into lower taxed jurisdictions.

The minister announced that since 2011 it is estimated that at least US$1.4 billion annually has been lost by Trinidad and Tobago through the diversion of natural gas sales to higher priced markets through “unbalanced off-taking contracts.”

Placing this issue in a global context: the Organisation for Economic Cooperation and Development (OECD) estimated that the worldwide tax leakage from transactions that are not recorded on an arms-length basis amounted to between 4-10% of global corporate income tax revenues.

GORTT has therefore engaged the Inter-American Centre of Tax Administration to work on developing a policy and suitable legislation to govern the area of transfer pricing with the goal that all transactions will be recorded at an “arms-length” value.

The Property Tax

The Property Tax system will be fully implemented in 2017 based on the terms of The Property Tax Act of 2009, with minor amendments to the Valuation Land Act. Every property owner is expected to submit a return that will form the basis for calculating the Annual Rental Value (ARV) of the property.

The Minister stated that the Property Tax will be based on assessments to be published by the BIR in its assessment rolls. The rates applicable are as follows:

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If the land is vacant then the following rates are expected to apply:

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The amount of tax due under the Property Tax Act of 2009 is calculated on the annual taxable value. The annual taxable value is the annual rental value less an allowance of 10% to cater for periods when the property is not rented or in instances where the landlord does not collect any rental income.

Attacking the Gaming Industry

The Minister identified the Gaming Industry in his Mid-Year review as a sector that needed to be regulated and needed to make significant contributions to the nation’s coffers. The Minister stated that Trinidad and Tobago is the only country in the world with “an openly thriving gambling sector that is totally unregulated.”

The Government therefore proposes to reintroduce the Gambling (Gaming and Betting) Control Bill into Parliament. This bill will bring all forms of betting and gaming activities under a comprehensive and robust framework of regulations meeting the global standards required by the Financial Action Task Force (FATF) and the Caribbean Financial Action Task Force (CFATF).

Killing the Fuel Subsidy

According to the Minister, at current oil price levels, both premium and super gasoline remain unsubsidised. However, at the budgeted oil price, the break-even subsidy price for diesel is $3 per litre. In order to continue the incremental removal of the fuel subsidy in respect of diesel, the Minister increased the price of diesel fuel by 15% to $2.30 per litre. This means that effectively the price of diesel is now 75% of the true market rate.

Taxing Alcohol and Tobacco

The Minister announced that the GORTT is of the view that as a nation we need to curb our consumption of cigarettes and alcohol. Accordingly, the Minister announced the following measures which will take effect from the 20th October 2016:

  • An increase of 15% on the excise duty on locally manufactured tobacco products
  • An increase of 20% on the excise duty on locally manufactured alcoholic products
  • An increase of 15% on the excise duty of tobacco products from the Common Market
  • An increase of 20% on the excise duty of alcoholic products from the Common Market
  • An adjustment in the rate of customs duty paid on the importation of alcoholic and tobacco products from extra-regional sources to bring them to a position of parity with imports from the Common Market

These measures taken together are expected to yield $120m.

A return to progressive taxation

Since income year 2006, Trinidad has had one rate of income tax applicable to individuals. With effect from the 1st January 2017, a new tax bracket of 30% will be applied to those whose income exceeds $1m per annum. A similar measure will be introduced in respect of companies whose chargeable profits exceed $1m annually.

This effectively means that the first $1m of an individual or companies income will be taxed at 25% with any excess over the $1m being taxed at a rate of 30%.

These measures have been introduced – according to the Minister – to add an element of “social equity” to the tax system, and is based on the principle that the wealthy should contribute more to the benefit of society as a whole.

A new tax on on-line purchases

Taxing online purchases was first mooted by the Minister in his 2016 Mid-Year review. In an effort to reduce the demand for foreign exchange and assist local industry, with effect from 20th October 2016, an online charge of 7% will be levied on purchases that arrive in Trinidad and Tobago by way of air freight through the 31 courier companies that currently exist. The Minister expects that this measure will generate $70 million annually. Any tax due will be payable at the bonded warehouses operated by the courier companies before the goods are cleared to customs.

Selling the family jewels

In order to cover part of the shortfall of revenue against expenditure noted above, the Minister plans the sale of a number of assets in 2017. Earmarked for disposal include:

  • The National Gas Company of Trinidad and Tobago Limited remaining 51% shareholding in Trinidad and Tobago NGL Limited (TTNGL). The sale of these shares is expected to generate $1.5 billion, and preference will be given to existing shareholders.
  • GORTT will offer for sale an additional 20% of its shareholding in First Citizens Holdings Limited. The sale of these shares is expected to generate $1.5 billion, and preference will be given to existing shareholders.
  • The sale of 50% of the industrial estates now under the remit of Evolving Technologies and Enterprise Development Company Limited (eTecK). This sale of these industrial estates is expected to generate $500m.
  • The sale of 20% of Trinidad Generation Unlimited (TGU) to institutional investors such as the National Insurance Board and the Trinidad and Tobago Unit Trust Corporation. The sale of these shares is expected to generate $600m.
  • The partial divestment of Lake Asphalt to an International Strategic Partner who would be in a position to successfully market and diversify Lake Asphalts product lines.

Although earmarked for disposal in his Mid-Term review, the disposal of the assets of CLICO was not mentioned by the Minister.

Relief for low income households on their TTEC bills

Despite the Minister removing subsidies elsewhere, to assist low income households whose monthly electricity bill is $300 or less, a 25% rebate on electricity bills will be available. This rebate will be paid by GORTT to TTEC, and this measure will come into effect on the 1st December 2016. The minister expects that 120,000 households in Trinidad and Tobago will benefit from this measure.

Agro-Processing Tax Relief

One of the many serious problems Trinidad and Tobago faces as a nation is its reliance on imported food products. To stimulate the local agricultural sector, the minister announced that all approved agro-processing operations will now operate free of tax. To qualify for the relief at least 75% of the processing of agricultural products must be performed in Trinidad and Tobago, and 75% of the ingredients must be produced or have been harvested locally. Agro-processing tax relief is expected to be in place by the second quarter of fiscal year 2017.

Fostering the Public Private Partnership (PPP) through tax incentives and reliefs

The Minister announced that over the next four years, utilising a PPP approach, GORTT will provide 50% tax relief together with other incentives appropriate to the nature of the investment, to businesses that can mobilise private sector funding to provide public infrastructure and public facilities, amenities and services. The system for providing these tax reliefs and incentives is expected to be in place by the first half of 2017.

Could you enter the Shark’s Tank or the Dragon’s Den?

At the end of his speech, the Minister announced the launch of an Entrepreneurial Talent Grant. Under the auspices of this grant, every year citizens will be invited to present innovative business ideas for evaluation by a panel of accomplished businessmen and entrepreneurs. The top five projects annually will be awarded $1m grants to facilitate the development and implementation of their business concepts.

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Closing thoughts – time to consider your investing strategies

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