Low commodity prices breed tax reform

What are the key objectives for KPMG laid out for 2016, in light of the new government budget and low fuel prices?
Nicole JOSEPH: The key objective would be proposals to nurture an environment that encourages development and growth of our economy especially with the falling energy prices on which we have grown to be reliant.
Against the budget theme of “Restoring Confidence and Rebuilding Trust” some key fiscal measures were proposed including the reintroduction of the property tax. KPMG had a tax seminar on the property tax, which is legislation going back to 2009, shortly after it was mentioned for reintroduction in the budget. Its reintroduction was not unexpected. Another big initiative mentioned in the 2016 budget is the introduction of transfer pricing (TP). As of the date of publication we are still awaiting information or feedback from the Ministry of Finance or the Board of Inland Revenue (BIR) as to the particular model that they are going to be adopting and the effective date of implementation.
From information that we have gathered, we understand it will be based on principles embodied in the OECD model. We also understand that the BIR are pretty much advanced in terms of training its staff on TP. They have been attending courses on TP, but when or how they will actually roll it out, we are not sure. KPMG is planning to host a tax seminar to deliver more guidance to our clients and the public at large on TP by utilising one of our TP experts from the Global Firm network.
Following the KPMG tradition, we issued our tax newsletter immediately after the budget presentation highlighting the contents of the Honourable Minister’s 2016 budget speech. This was followed up with a tax newsflash on the actual changes in the legislation and how it will affect taxpayers. At all stages we at KPMG keep our clients updated with publications explaining changes in the tax laws and the impact to them.
The VAT rate was reduced from 15% to 12.5% effective February 1, 2016. There was also the removal of several items from the VAT zero-rating schedule to standard rate of VAT. These measures together with a proposed aggressive effort to collect all tax arrears and to enforce compliance is intended to achieve TTD 12 billion (USD 1.79 billion) in VAT revenue.
Other changes include the increase in the green fund levy and business levy rates. The business levy does not impact the production and exploration companies, but the green fund levy does. Having said that, it’s a minimal levy that has been increased from 0.1% to 0.3% on gross revenues.
On April 8, 2016, the Minister of Finance had a mid-year budget review. In my experience of more than 18 years, this is the first time I’m exposed to the Minister of Finance having such a mid-year review, but there are extenuating reasons for this. The intention of this review was to present a review of economic developments for the first half of fiscal 2016 and to identify policy changes to meet the medium-term economic objectives. The Honourable Minster of Finance acknowledged that the economic environment turned out to be significantly worse than envisaged at the time of the 2016 budget presentation. Revenue collection was TTD 2.96 billion (USD 441 million) lower than expected primarily in tax receipts from energy companies. Fiscal operations are now based on an oil price of USD 35 per barrel (previously set at USD 45) and gas price of USD 2 per million Btu (previously set at USD 2.75).

Robert ALLEYNE: We’ve had the opportunity to sit down and talk to members of the political directorate. As you know, with lower oil prices there is another pressure in terms of our cutting back on expenditure. In the past, we’ve had more than 50% of expenditures being transfers to state boards and state enterprises. What’s happening right now is that the government is making a very big push to be more efficient. They don’t see any reason why they can’t cut cost, but it’s also getting more value for what they spend. And that’s very welcoming. Therefore, I’ve been talking to at least one of the ministers and his concern really is on cutting out improper spending. They are trying to ascertain what went on in the past and to correct any deficiencies, so that there is a solid foundation for the future.
One minister was focusing on procurement and how the government can get procurement right in terms of getting value from the onset from suppliers. That’s the situation right now. The ministers see that they can manage the government’s coffers in this low oil price environment. That’s interesting right now. That’s where we come in. We want to assist them.
What we’re also seeing is that the government ministers are very receptive right now. They’re listening to various views and that’s very refreshing. They are not coming from the perspective that they have all the answers. That mind-set provides the opening to us to assist them. As citizens and well trained professionals, we all have skin in the game and it is incumbent on us to assist in any way that we can. Being part of an international network of professional firms, we can bring global, tailored solutions to bear on local challenges. What we are experiencing right now is not unique to Trinidad and Tobago, however, we are ever mindful that the solutions may be unique.

When do you think the oil price will go above USD 60 per barrel?RA: I think it will reach that level by November 2017. That is probably the middle of the road. By November 2018, it will be up to over USD 70 per barrel.

What is the role of the 2014 Fiscal Reforms in increasing FDI and making Trinidad and Tobago a more business friendly environment?
NJ: The UN World Investment Report 2015 stated that Trinidad and Tobago, the Bahamas and Jamaica were the largest destinations for FDI flows to small island developing states in 2014. So fiscal reform, infrastructure and an environment that supports investment has always been a priority.
Fiscal reforms were introduced to make T&T more competitive in the energy industry by way of Finance Act 4 of 2014 which made provision for the full write-off of tangible and intangible assets in the year the expenditure was incurred, which was certainly welcome by the exploration and production companies.
In order to foster deeper external business and economic relationships, a new team was to be put in place to address treaty negotiations and re-negotiations with several countries including Japan, the UK, Luxemburg, South Korea and the Netherlands. In January 2014, there was a re-negotiation of the 40-year-old double tax agreement with Germany. According to the German ambassador, to re-negotiate the existing treaty reflects the importance of intensifying economic ties with Trinidad and Tobago. With more than USD 4 billion, Trinidad and Tobago is the third-largest destination for German investment in Latin America after Brazil and Mexico.
Additional reforms to increase FDI into T&T included an allocation of USD 587 million to the Ministry of Energy and Energy Affairs [now known as the Ministry of Energy and Energy Industries] to provide the necessary infrastructure to attract investment for economic development in the energy industry. This included the development of ports, industrial sites and the construction of a multi-fuel pipeline which initiatives were recognised as integral for expansion and deepening of the gas-based industrial sector.
Improvements were made to facilitate greater efficiency and quality in the delivery of government services, including at the Ministry of Finance and the Economy. These include investments in IT hardware and networking systems for the Board of Inland Revenue, the supply of hardware and software to support the upgrade and introduction of e-services and the implementation of the Gentax Upgrade.
These were just some of the initiatives adopted to increase or encourage FDI in T&T.

What are the best practices for attracting investors and encouraging entrepreneurs considering the limited access to capital and the lack of investment influx from the finance sector?
NJ: Ease of doing business – registration of businesses, financial support, infra-structure and of course taxation. With respect to taxation, my area of speciality, present and past governments have recognised that the Board of Inland Revenue has several deficiencies in the existing institutional framework. This is where the proposed Revenue Authority comes in especially from the taxpayer and international investor who expects a superior customer experience by treating taxpayers with respect and sensitivity. Taxpayer rights, including the right to certainty of a tax and its interpretation, expediting of settlement of objections and tax appeals and leveraging technology to increase the convenience delivered to customers.

What are the impacts of the petrol subsidiaries on Trinidad and Tobago’s energy market in the light of the IMF and its stance against petrol subsidies?
NJ: In the 2016 budget, the government recognised that the fuel subsidy fostered overconsumption and encouraged waste. Additionally, the subsidy also created a dirty and costly black market.
Starting in October 2012, at a time when the budget was set on USD 80 a barrel for crude, there was a reduction of the subsidy on premium fuel. So it seems that the various administrations have acted to reduce the fuel subsidies whether or not in direct response to the IMF or as a result of the need to cut expenditures. In the 2014 budget, the minister also signalled the gradual reduction in the fuel subsidy and announced the discontinuation of the fuel subsidy to Caribbean Airlines, effective October 1, 2013. Given low oil prices, the subsidy was reduced on super and diesel fuel, effective September 2015.
With the reduction of the fuel subsidies over the years, in the 2016 budget the Minister stated that the fuel subsidy is expected to exceed TTD 1 billion (USD 150 million).

RA: The subsidy was a gift to the people that could not be sustained. There can be no doubt, that given the current economic environment, that the subsidy had to be removed. The question is at what pace the adjustment should occur. I believe both this government and the previous one did a reasonably good job in sensitising the population to what is to come. And of course, as expected, the initial reaction to any reduction in the subsidy was a collective gasp. But I believe that we are settling into the new normal, as the kind of price increases for goods and services that were expected did not materialise. The message from the government is clear, we can’t continue with business as usual.

Considering the unpopularity of Supplemental Petroleum Tax (SPT) among onshore operators, what adjustments are needed to mitigate the financial burdens on producers?
NJ: The SPT is regarded as a windfall tax that is charged on gross income from the disposal of crude oil less royalty and overriding royalty. It was not designed for a low price environment of less than USD 50 per barrel at which price point the SPT is 0%. Some predictions say that oil prices are unlikely to exceed USD 50 per barrel in the immediate future so the oil companies would be relieved of this tax until such time as oil prices exceed USD 50 per barrel.
There was a harmonisation of the SPT rates in the 2013 budget that was well received by the industry and recognised as vital for the long-term future of the oil industry. The introduction of a 25% special SPT rate for approved new field developments significantly and positively alters the economics for many potential oilfields. It could also potentially help the economics of small undeveloped condensate-rich gasfields. We anticipate that this will positively influence potential investment decisions and should help to bring on a number of smaller oilfields in shallow marine areas.
The issue is whether Trinidad and Tobago is competitive with a PPT of 50% (35% in deepwater) plus 5% unemployment levy. We seem to be above average compared to other oil producing countries. Low oil prices combined with substantial supplies raises the question of whether Trinidad and Tobago can afford to retain a tax rate of 50%.

What are the key objectives of the 2015/2016 national budget and its impact on energy industry spending?
NJ: As a result of generous adjustments to the oil and gas fiscal regime by allowing substantial
early write-offs of capital expenditure combined with low oil prices of less than USD 40 per barrel, it is expected that corporation tax payments from the oil companies in 2016 will be nominal. This is one of the downsides of providing such incentives.
The government is acutely aware and mindful of the significant developments taking place in the production of unconventional energy resources such as shale oil, especially in the USA. In his 2016 budget speech, the Minister of Finance acknowledged the almost crisis situation in the energy industry and stated that “in the shortest time possible, after stakeholder consultation with the industry, Trinidad and Tobago will introduce a new and appropriate fiscal regime designed to encourage further exploration in fields on land, and in shallow and deepwater acreage.”
The proposed Revenue Authority envisages a merger of the tax collection activities of both the Customs and Excise departments and the Board of Inland Revenue recognising that this is well established in advanced, emerging and developing countries. Priority of this proposed Revenue Authority is to enforce tax compliance and minimise tax leakages. It will also aim to provide a superior set of services to the taxpayers of Trinidad and Tobago through transparent administration of the tax laws. We would add the reduction in time to process tax and VAT refunds and also to settle tax appeals.
The reintroduction of the Property Tax which is assessed as a percentage of the Annual Taxable Value (ATV) of the property. With respect to industrial properties, relevant to the energy companies, the rate is 6% of the ATV which is calculated based upon the cost of all buildings, structures, machinery, plant, pipelines erected placed upon in/over/under or affixed to land. The Property tax is 3% plant and machinery not located in a building and 5% for commercial. This tax could be a significant cost for the energy companies.
The introduction of transfer pricing legislation is another mechanism in the thrust to optimise tax revenue. It may have an impact on the multinational companies in terms of the pricing of shared services or transfer of products.
Another objective is for the private sector to partner with the government to make its share of the required investment to bring about economic revival.
The Mid-year 2016 Review was intended to give a review of the economy for the first half of fiscal 2016 and present for the approval of Parliament variations to the Appropriation Act 2016. The Honourable Minister highlighted that due to the dramatic collapse of energy prices and its effect on the wealth of T&T, we need to exercise financial discipline. Fiscal operations for the second half of 2016 was adjusted based on an oil price of USD 35 per barrel and a gas price of USD 2 per million Btu.

What is the importance of diversifying Trinidad and Tobago’s economy and reducing its energy market dependency in light of the low crude prices?
NJ: Diversification has always been recognised as a priority so that the country has an alternative to its reliance on the energy industry. This is supported by creating an enabling environment with infrastructure as well as appropriate incentives and support from the government.
Sectors targeted for development in diversifying the economy include manufacturing, tourism, finance, maritime (to include ship repairs and dry docking) and the creative industry.
Trinidad and Tobago has been successful in diversifying its economy by the development of downstream sectors such as ammonia, methanol, urea and fertiliser combined with a very competitive and competent workforce with the skills required to support the unique requirements of the energy services sector.
The success of these downstream industries were in part assisted by way of fiscal incentives that generally provided tax holidays to “approved enterprises” – meaning highly capital-intensive enterprises. It also provided for total or partial relief from corporation tax and/or Customs duty.

RA: We have been talking about this for many years. It is unfortunate that now we do not have the luxury of making the adjustments at our own pace and, therein, lies one challenge. We have to consider a quickening of the pace of diversification of the economy. Agriculture still remains underdeveloped and our tourism product is largely neglected. We also have to seriously embrace alternative energy sources in order to reduce our demand (and dependence) on carbon-based energy. In this regard, the private sector can play a pivotal role with government acting as facilitator.
One other sector which was quite important that we have been developing is the financial services sector. Our aspirations are to become an international financial centre and be the main provider in our region of back office services to various multi-national entities. We have had some success in attracting these support service to the financial services sector to our shores, but more needs to be done to raise our profile internationally as an attractive destination and a desirable place to do business.

NJ: In summary – the Budget 2016 proposed three major tax initiatives:

1. The introduction of the Revenue Authority. The government recognises that there is a lot of inefficiency with the current Board of Inland Revenue which institution has been neglected over the years. The intention is that the Revenue Authority will come on-stream by the end of Fiscal 2016. Going back to 2009/2010 we understand that significant headway was made in terms of bringing into being this Revenue Authority, but as a result of a change of government in 2010 this proposal was abandoned.

2. The introduction of transfer pricing legislation. This will have an impact on how branches or subsidiaries of multinational companies interact and charge each other for shared goods and/or services. Currently there is no specific transfer pricing legislation in T&T and the perception is millions of dollars of tax revenue was foregone as a result of profits being shifted out of T&T via higher head office charges resulting in lower taxable profits being reported.

3. The reintroduction of the Property Tax in 2016. Having had the grace of the last five to six years from paying this tax, it was not unexpected to see the reintroduction. The question was simply when.

Further in the mid-year review the Honourable Minister of Finance proposed to introduce a 7% levy on online purchases, increase the customs duty and motor vehicle tax on luxury private motor vehicles and increase taxes on alcohol and tobacco products.

What share of your income is generated by the oil and gas industry?
RA: I would say in the area of 35%. A couple of years ago we re-focused on the industry and grew gradually in stature. We have demonstrated that we have the capacity and the competence to serve any entity in the industry with audit, tax and advisory services.

For more news and features on Trinidad and Tobago, click here.