Government revisits policy on tax-free spaces for businesses to invest

In one way or another, special economic zones (SEZs) have been one of the ways that TT attracted foreign investors to our shores since before independence.

The reliefs and exemptions that are identified as some of the key aspects of SEZs were provided to businesses through the Pioneers Industries Act, passed in TT in 1950. That act offered modest concessions to industries, including income tax exemptions and import duty relief on plant and machinery. These concessions were advertised to foreign investors through government as one of the benefits of doing business in TT.

These reliefs and exemptions were expanded in the Free Zones Act of 1988. To date, there are ten areas in TT where 18 businesses operate that have been designated as free trade zones.

Now, there's a plan to return to SEZs, as announced by Finance Minister Colm Imbert on October 4, during the 2021 budget presentation. Imbert proposed repealing the Free Zones Act to implement SEZs to be regulated through a special economic zones authority.

Imbert said the authority, aside from assessing the current performance of all free trade zones, would have to formulate standards and prescribe codes of practice, facilitate an enabling environment, develop the infrastructure needed to attract investors, stimulate domestic investment and in the long run further advance diversification of the economy.

TT in this exercise will join more than 140 economies that utilise more than 5,000 SEZs which employ over 60 million people worldwide.

Free trade zones

According to the World Bank, a free trade zone (FTZ) is an enclosed area that allows businesses exemptions from duties for warehousing and distribution facilities which support trade. These areas are usually located near a point of entry like an airport, port or land border, or on a “corridor” – a direct route to a point of entry with the same exemptions.

Nestle Caribbean has operated a free zone since 1993. On the TT Free Zones Co Ltd (TTFZ) website, Nestle shared how it received clear guidance from the the state regulating body. The communication between Nestle and TTFZ allowed the local subsidiary of the Swiss-owned food and beverage group to keep abreast of changes in business processes that allowed it to maintain compliance and expand opportunities.

Nestle was also able to resolve a few challenges in interpreting customs regulations.

“As one of the larger businesses operating with the TTFZ we have also been a reference, as a positive example, for others to emulate when considering a similar business model,” it said in its online testimony.

Special economic zones, however, are areas which governments use to facilitate industrial activity through fiscal and regulatory incentives as well as infrastructural support. Much like FTZs, tax breaks and customs relief allow businesses in SEZs to cut through red tape and improve the ease of doing business. SEZs, like science parks, regional development zones and urban regeneration zones, invite foreign direct investment (FDI).

The best examples of SEZs can be seen in China which started the network in its “reform and opening up” policy in the early 1980s. The SEZs were established first in Shenzhen, Zhuhai, Shantou and Xiamen near Hong Kong.

Afterwards, more zones were established in cities along the east coast. In 2018, China had five categories of 552 state level zones and 1,991 provincial zones, accounting for half of all SEZs in the world.

Locally, according to a SEZ proposal published by the Ministry of Trade in 2019, there are currently two types that operate in TT – light industrial parks – the responsibility of Evolving Tecknologies and Enterprise Development Co (Eteck), and free zones which are designated to attract foreign private businesses like Nestle.

Eteck currently owns and manages 19 industrial parks across TT, including Tamana InTech Park, designated for technology firms, the Milford Industrial Park and the Sangster’s Hill Mall in Tobago.

These parks, under the purview of the Ministry of Trade and Industry, carry out many activities, including food processing, bonded warehouse facilities, manufacturing, plastics, steel, electrical, concrete and wood products, steel fabrication engineering works, construction and maintenance of marine craft, and production of industrial gasses and other materials.

The free zones programme in TT is developed by private enterprises. Based on a Jamaican model, it was intended to take TT out of a drastic fall in revenue as a result of a collapse of oil prices in the 1980s which contracted the economy severely.

The current free zones programme allows private enterprises to acquire “free zone status,” even if they are outside of a free zone. Of the 18 firms currently operating as free zone-approved enterprises, 11 are single-user enterprises across TT. The remaining seven are in a free zone park or multi-user complex.

In a free zone, approved businesses get benefits like exemptions from import duties, land and building taxes, business levies, corporation and income taxes, work permit fees, import/export licensing fees, the Green Levy Fund and VAT.

Most of these businesses operate in the non-energy sector and operate as manufacturers, providers of services, like mailing and shipping services and international trading. In many cases, these duty free areas are used for re-exporting businesses, where a company would import products duty free, and export them.

According to the SEZ draft policy, there are no prescribed requirements of to be designated a free zone or free zone operator outside of the activities it can engage in within the free zone. There are, however, several regulations to follow to comply with the standards of the TTFZ.

For example, no prohibited goods or contraband is allowed to be imported into TT through a free zone, which includes firearms and ammunition, petroleum, dangerous explosives, inflammable materials, hazardous cargoes and oil fuels.

Customs officers, who are tasked to ensure that no illegal contraband is imported or exported, make arrangements to oversee the handing over of products, as it is not normally economical to have a customs officer stationed at every single free zone premises.

Free zone operators are required to submit quarterly reports and are also subject to random checks if customs officers so see it fit.

They are also required to maintain sufficient numbers of appropriately qualified locals. Additionally, they are required to carry out a physical inventory at least once quarterly to account to the Customs and Excise Division for items imported and a quarterly report on their activities to the TTFZ, as well as annual audited financial statements.

Illicit trade haven?

Despite the many regulatory requirements there is still concern that FTZs present an outlet for criminal elements to trade in illicit goods.

The TT Manufacturers Association’s (TTMA) Illicit Trade Desk, in a release in March, said FTZs are havens for illicit trade, as they operate as a duty-free ports for several products that are not as regularly monitored. As the items and products are directly stored in the FTZ and records are monitored via quarterly reports, there is a certain amount of room for illegal activity.

TTMA questioned whether companies in these zones were subject to rigorous disclosure and transparency requirements and if they are enforced.

It said there was an immediate need to revisit the risks of illegal activities, such as smuggling goods like alcohol, pharmaceuticals and tobacco, illegal wildlife and arms and ammunition.

In a post-budget forum, TTMA president Tricia Coosal again expressed concern over illegal activities in free zones. Having done work with the TTPS to combat the illegal trade of items like cigarettes, Coosal hoped to work on the proposed SEZ framework to ensure that progress is not lost when the zones are established.

“This would allow proposed gains to be realised and not at the expense of perceived wrongdoings that can accompany them,” Coosal said.

TTMA in additional correspondence explained that there is an increased likelihood for illegal activities to flourish in pure free trade zones because there are fewer incentives to check on goods which would more than likely end up on the domestic market, and would thus exhibit greater values of counterfeit and pirated exports.

“Based on calculations conducted on 2013 trade data, US$23 billion worth of counterfeit was exported from within FTZs.”

The Transactional Alliance to Combat Illicit Trade (Tracit) identified bonded warehouses – one of the main tools of FTZs – as one of the areas where illicit trade occurs. It added that the zones are also used to manufacture or assemble illicit products for shipment.

In Panama, for example, smuggling of illicit white cigarettes is rampant. These products are imported into the zone then re-exported to various markets, using a process known as “origin laundering,” where the certificate of origin is altered within the zone.

TTMA’s Illicit Trade Desk recommended that government develop separate policies that addresses illicit trade in free zones which would incorporate under OECD (Organisation for Economic Development) guidelines. It also suggested that customs not treat FTZs as extraterritorial but execute enforcement duties as part of the national territory through consultation with the Board of Inland Revenue, the Financial Investigation Unit, the TTPS and other enforcement agencies to prevent the conferring of free zone privileges to companies or people that have been linked to illicit trade.

TTMA also suggested that a track and trace system be implemented with scanners to monitor products manufactured or imported into free zones.

It added that government enable inter-agency co-operation to enhance the detection of illicit trade as well as the successful prosecution of perpetrators.

TTMA further said the use of FTZs restricts TT’s ability to benefit from duty-free trade with Caricom as companies would not be provided with certificates of origin.

“Caricom views the FTZ as extra-regional, which means that products manufactured in the FTZ are deemed to be manufactured outside of Caricom. Duty-free trade is dependent on products manufactured within Caricom,” it said.

There are other problems with FTZs. In the draft policy, the Ministry of Trade said that although there has been a level of participation by the private sector in the free zone regime currently established, it is largely traditional and behind time.

“A World Bank study explicitly labels TT’s operations as a “traditional export processing zone” and goes on to describe the zones in TT and other Caribbean countries as “not having kept pace with their Latin counterparts,” the ministry said in its policy proposal.

The ministry added that TT fell three spots to 88th out of 189 economies in a 2016 doing business report.

In her budget contribution to Senate earlier this week, Trade and Industry Minister Paula Gopee-Scoon added that the model has placed the country on a whole in a precarious position where the regime is not only considered as outdated but harmful.

“The existing free zone regime has proven to be unworkable,” she said. “It has been categorised as harmful under the Global Forum.”

“According to the August 2021 update of the forum for harmful tax practices, a peer review of the 18 regimes reviewed, only TT still has a ‘harmful’ regime because it was not able to fulfil its commitment to abolish the free zone regime.”

She said for the moment there is no immediate consequence for TT, but other jurisdictions could decide to impose defensive measures against the country, like non-deductibility of costs or withholding tax payments.

SEZs – the next step in garnering FDI

Creating a framework for the operation of SEZs, then, would tighten and enhance the FTZ regime.

“The SEZ authority should, regulate and supervise zones, advise the minister on matters of general policy, grant or cancel licences in accordance with the provisions of the act,” the TTMA said.

“Also it should review information provided by operators, SEZ enterprises and single zone enterprises under ongoing monitoring requirements to confirm whether eligibility criteria are still met.”

In its proposal, the ministry said its goals were to modernise the regime which would increase the economic and social impact of the zones. It also is intended to enhance the international appeal, being more compliant and more impervious to illegal activity; and to improve on existing mechanisms and develop new and emerging mechanisms to develop and manage economic zones.

These measures are expected to modernise the regulatory framework, increase the number of SEZs, increase the quality and quantity of investments by domestic and foreign firms and increase public/private partnerships in zone development and operations.

In the Senate, Gopee-Scoon said the draft bill has already gone through assessment by the ministry, the chief parliamentary counsel and the Office of the Attorney General and Legal Affairs.

The draft bill is currently receiving the attention of the Legislative Review Committee and is expected to be enacted later this year.

“What makes this new SEZ regime unique is the designation of different types of zones that accommodate various types of activities which are tied to our diversification agenda,” Gopee-Scoon said. “In keeping with global obligations, the government is working closely with the OECD to ensure that this legislation meets international standards, but also intends to work closely with local stakeholders to ensure that the transition to the new SEZ regime is a smooth and seamless one.”