Trinidad and Tobago's FY 2018 budget introduces taxes to lower the fiscal deficit

Tax reform is a critical issue for Trinidad and Tobago, as the island nation struggles with ineffective collection and does not raise enough revenue to cover government expenditure. Statistics compiled by the OECD found that T&T collected tax revenue worth 22.9% of GDP in 2016, an amount in line with the 22.7% average of 25 Latin American and Caribbean countries that year, but less than the OECD average of 34.3%. T&T is, therefore, working to implement an array of new duties across various industries with the aim to offset falling oil tax income, as revenue from petroleum declined by 90% from TT$20bn ($3bn) in 2014 to less than TT$1bn ($148.3m) in 2016. Prime Minister Keith Rowley’s administration is now in the process of finding a balance between enacting measures that boost private sector activity and establishing new tax revenue streams.

Targeted Duties

In FY 2018, which runs from October 2017 through to September 2018, the government is experimenting with new taxes in an effort to raise revenue. One targeted area is the gambling industry, with officials increasing a 20% tax on mechanical games of chance to 40% in the 2018 budget, and introducing a 10% levy on all cash winnings from gambling effective December 1, 2017. Beginning in FY 2018 roulette devices in bars are subject to a TT$120,000 ($17,800) annual flat tax, while Baccarat tables and other game tables in private members’ clubs are subject to flat taxes ranging from TT$60,000 ($8900) to TT$150,000 ($22,200) per annum. Under the Liquor Licence Act, each amusement game in bars and clubs will be subject to a TT$6000 ($890) tax as well, up from TT$3000 ($445) the previous year.

These initiatives are designed to increase tax collection related to local gambling operations. During a budget debate in the House of Representatives in October 2017, Colm Imbert, the minister of finance, stated that T&T’s gambling industry generated a tax bill worth TT$500m ($74.2m) in FY 2017, but only TT$57m ($8.5m) – roughly 11% – was paid. Indeed, the 2018 budget statement, published in October 2017, notes that the tax changes are due to the “extremely low level of compliance and the endemic tax evasion in the sector”.

Although it is important for T&T to raise additional revenue and eliminate its decade-long reliance on fiscal deficits and foreign borrowing, private sector leaders have voiced opposition to the new taxes. In October 2017 Sean Clarke, the president of T&T’s Union of Members Clubs and Lottery Workers, wrote a letter to the government in which he said, “the punitive income taxes that have been unilaterally imposed upon the gaming industry by Imbert in the 2017/18 budget will have an immediate downsizing effect and reduce staffing requirements.”

Transportation

Another industry of focus is transportation. For FY 2018 the government announced a plan to remove tax exemptions for the import of hybrid vehicles with engines exceeding 1599cc, while maintaining the incentive for smaller engines. The authorities also imposed a 25% tax on all imported vehicles with engines over 1599cc to encourage the purchase of more fuel-efficient vehicles. Officials further implemented a 30% tax on the importation of both new and used tyres, as evasion was common due to the mislabelling of new tyres – which attracted a 30% tax – as Customs-free used tyres. An additional environmental tax of TT$20 ($2.97) per imported tyre will help cover the costs of proper disposal of used tyres in the country.

At the same time, a cut in fuel subsidies will reduce government expenditure and bring gasoline prices closer in line with the global market. However, the reduction in gasoline subsidies will increase the cost of taxis and buses for citizens, as well as impact many industries’ expenses. In October 2017 Michael Annisette, the general secretary of the National Trade Union Centre of T&T, told local press, “As the government is considering taking away the subsidy we ask them to please not walk that road, otherwise they will face an avalanche reaction from all the trade unions in the country. The removal of the subsidy would have serious implications for the working class and the government must consider this.” Still, subsidies were cut and gross margins for the fuel industry were raised in the FY 2018 budget, resulting in the price of Super gasoline increasing from TT$3.58 ($0.53) to TT$3.97 ($0.59) per litre and the price of diesel rising from TT$2.30 ($0.34) to TT$3.41 ($0.51) per litre.

Big Business

T&T also implemented tax hikes that affect the country’s largest businesses. On December 1, 2017 a new 12.5% royalty fee on the extraction of oil and gas was applied, calculated using fair market values set by the Petroleum Pricing Committee. Taxes on the hydrocarbons industry are T&T’s most important yet most controversial area of reform. The country needs to find a balance between remaining an attractive destination for foreign energy companies, while also ensuring that sufficient taxes are collected from the nation’s primary economic activity. T&T has seen tax revenue from oil companies drop from 45% of total revenue in 2008 to 31% in 2010 and to less than 3% in 2017. It has become clear to the government that the old tax structure is no longer serving the country’s needs.

The tax regime of all large corporates, not just those in the oil and gas industry, must be handled delicately. Large firms are major employers of local talent, thus T&T needs to ensure it remains a competitive location for multi-national companies, while also collecting a fair share of revenue from corporations. To this end, T&T implemented a new corporate income tax structure in 2018. As of January 1, 2018 ordinary companies, regardless of annual revenue, are taxed at a rate of 30% – up from 25% – while a rate of 35% was introduced for commercial banks and petrochemicals companies.

Expanding the Base

Property owners, private hospitals and online shoppers are also expected to shoulder some of the tax burden. In FY 2017 T&T enacted a new property tax applying to both vacant and occupied land. The levy is based on rental value and ranges from 3% for residential properties to 6% for built-up industrial land. The tax was scheduled to be applied in FY 2018. Meanwhile, private hospitals now encounter a higher annual licence fee. Facilities with less than 30 beds will pay TT$25,000 ($3710) per year, hospitals with 30-59 beds will pay TT$50,000 ($7420) and those with over 60 beds are now required to pay TT$100,000 ($14,800). For online shopping, consumers are liable to a 7% duty on goods dispatched from warehouses of companies resident overseas, as these businesses are not originally subject to tax in T&T.

Looking Ahead

Experts and analysts in the country continue to debate whether the new taxes will stunt private sector activity, limit the creation of new jobs or constrict the growth of income tax revenues. In an October 2017 report on T&T’s FY 2018 budget, accounting firm PwC explained, “It is likely that the increases in corporation tax will have a direct effect on the prices of goods and services, and therefore consumption. It may also impact the level of foreign direct investment by making T&T a less attractive jurisdiction.” In addition, some critics argue that with a corporate income tax rate of 30%, T&T is now at a competitive disadvantage compared to other Caribbean nations with lower rates.

Other observers believe that while tax hikes may be unpopular with certain interest groups, T&T has to make difficult choices if it wants to boost government revenues and eliminate its fiscal deficit. Dushyant Sookram, the managing partner at accounting and consultancy firm KPMG T&T, told local media, “Maybe this is what is needed given the new paradigm in which we must exist, and to put the economy on a sustainable path.”

In the short term, at least, the new tax measures are having a positive impact on public finances. In its mid-year budget review, the Ministry of Finance reported that from October 2017 through to April 2018 the country was able to collect TT$4.9bn ($726.8m) from companies outside the energy sector, TT$1.1bn ($163.2m) more than originally projected. In those seven months, net collection of corporate tax was up TT$1.3bn ($192.8m) compared to FY 2017. In total, T&T was able to collect TT$19.5bn ($2.9bn) in tax revenue between October 1, 2017 and March 31, 2018, exceeding expectations by 4.3%. If local businesses and consumers can successfully adjust to the new fiscal environment, the country’s tax reforms should help bolster the balance sheet in coming years. In conjunction with recovering energy prices and production levels, T&T should be able to narrow its budget deficit as long as government spending is kept under control.