The Trade License Regime: A ‘tax’ by any other name (Part 2)

Business Perspective

The Trade License Regime: A ‘tax’ by any other name (Part 2)

Contributed by the Belize Chamber of Commerce & Industry

In the immediately preceding Business Perspective (BP) Column entry, we had delineated the distinction between a “tax” and a “fee.” More precisely, we had looked at the fact the trade license regime (TLR)—which is based on a percentage of a business’s annual rental value (ARV)—functions much more akin to a property tax than the “fee” it proposes to be. And as far as “fees” are concerned, we had underscored that TLR breaches several international best practice principles.

For those reasons and more, the Belize Chamber of Commerce & Industry (BCCI) had to take a mixed position when it comes to the Trade Licensing Bill 2022 (“the Bill”) that was tabled before the National Assembly recently. On Monday, May 23, the BCCI presented its position to the Public Service, Labour, Industry, and Trade Standing Committee (“The Committee”). Fundamentally, our position can be divided into two general categories: The Short-to-Medium Term and the (Medium to) long term.

Revenue Neutrality & The Short-to-Medium Term

Let’s begin with the short-term. As the BCCI communicated to The Committee, our position has been one of “compromise with the local government’s need to preserve a center level of revenue.” This compromise, however, has been limited to only the nine municipalities that currently rely on the trade license regime. It is for this reason that the reform process—again, which dates back to at least a decade—has revolved around five principles: Revenue-Neutrality, Predictability, Accountability, Administrative Ease, and Transparency.

Most of the other four principles are somewhat self-explanatory, but Revenue Neutrality demands some special attention.

Let’s start here. Across the nine municipalities, the regime generates approximately $9 million, with Belize City accounting for almost 60% of that amount. The balance is split among the remaining eight localities; namely, Belmopan City, Corozal and Orange Walk towns, Punta Gorda, Benque, Dangriga, Santa Elena/San Ignacio, and San Pedro.

For Belize City, as we discussed last week, the revenue from trade licenses represents approximately 20% of CITCO’s total income. The other municipalities have likewise—although to varying degrees—come to rely on this source of cash in order to carry out their function. As a result, it would be deemed irresponsible for the business community to advocate for the complete and immediate eradication of the regime, even though—as we’ve previously highlighted—the trade license’s design deviates from international best practice.

To that end, we have worked along with the Ministry’s proposal for a new, ARV-based methodology that would satisfy all five principles mentioned above. For this reason, we had accepted that—IN THE SHORT-TO-MEDIUM TERM—adherence to revenue-neutrality would essentially entail preserving the property-tax-like design of the trade license regime, with the understanding that it is gradually phased out.

Enter the Ceiling

However, even with the new ARV approach, the reality existed that while some businesses may have seen notable decreases, several companies would have witnessed sharp jumps in their “fees.”

The word “sharp,” in some cases, would have been an understatement, when it is considered that some firms might have incurred increases in the so-called trade license fee of an average of more than 1,200%—and no, there isn’t a misplaced decimal place. One company, for instance, would have seen its current fee jump from less than $1500 to more than $30,000—a more than 3,000% hike. Try to imagine that is supposedly a “fee” for just starting and operating a business.

Observing these vast increases, the BCCI—during our consultations with GOB—had advocated for a “ceiling”. The Government, to its credit, agreed, and ultimately chose to implement a 10% ceiling, which is captured in section 53 of The Bill.

Of course, the government, in an effort to preserve the local authorities’ revenues, also put forward a “floor.” Consequently, a company that is paying, for example, $20,000 in trade license tax, and would have otherwise been reduced to $10,000, would only be allowed to save $2,000. The new tax—with the floor in place—would be $18,000.

Clearly, this is an imperfect system. However, it was one that the BCCI was ready to work along with in the short term, on the condition that the government incrementally TRANSITIONED towards a flat fee within the next five to ten (or even 15) years. This was consistent with the Revenue-Neutrality principle. This transition phase was to allow the local authorities the time to identify alternative sources of income, so as to become less reliant on a system that is in clear breach of international best practice.

Regimes’ Expansion to Villages Breaches ‘Revenue-Neutrality’

With the above in mind, then it should become easier as to why certain parts of the Bill were met with far less support from the BCCI. Predominantly, those offending areas violated revenue-neutrality which the parties to this reform process had initially agreed to.

Remember what we said. We opted to compromise with a dysfunctional system in the municipalities that already had the regime because those nine local governments had already become dependent on the trade license revenues. The idea was to wean them off this cash cow over a period of time, acknowledging that that time period may span several years.

Therefore, the idea to export the already dysfunctional regime to the villages could not be countenanced and benefited from absolutely no support from the BCCI when it came to businesses with square footage ABOVE 1,000 square feet. Of course, this requires some elaboration.

Let’s start here. Section 2 of the Bill expands the definition of “licensing district” to include “the limits of each village as defined under the Village Councils Act.” Despite repeated objections to this concept when it was presented to us during the consultations, this change still found its way into the Bill.

Section 21 of the Bill creates certain agreeable carve outs. Businesses located in the villages with area below 600 sqft would be exempt. That’s fine. Firms with square footage between 600 and 800 sqft would be charged a flat-fee of $100. That’s also fine, as that’s a flat-fee. Businesses between 800 sqft and 1,000 sqft, would be charged a flat fee of $250; this is also okay.

The problem enters when the businesses have an area greater than 1,000 sqft. The Ministry’s idea is that companies located in the rural areas with square feet GREATER than 1,000 sqft would fall under the same Annual Rental Value (ARV) system that currently exists in Belize City and the other eight municipalities.

If the only reason (the only reason) the existing dysfunctional system was largely being preserved in the nine municipalities was due to revenue-centric reasons, how then can there be any justification for expanding it to areas where it previously did not exist? And if the goal is to transition us away from that ARV-based system over time, why, then, would it be acceptable for the same system to be exported to the rural areas? That is the very opposite of phasing something out, or moving towards best practice.

Furthermore, it offends revenue-neutrality because the would-be expanded regime would now surpass the earlier mentioned $9 million in takings from the regime. Even the more acceptable flat-fee approach for rural-area businesses below the 1,000 sqft threshold would offend revenue-neutrality, but at least that would have been an actual fee, as opposed to a property-tax by another name.

Of course, some stakeholders would argue that it best to expand the ARV-based regime to the villages to, as the saying goes, “equal the playing field,” especially when the villages in question are contiguous to cities or towns. The operative question, here, is this: If the goal is to eventually phase out the licensing regime, why would it be deemed appropriate to expand it to even those contiguous localities. The risk, here, would be getting the villages accustomed to a certain revenue source only to eventually try and remove it in the future.

But, most importantly, the Trade Licensing Bill did not limit itself to villages contiguous to urban areas such as in the case of Ladyville bordering Belize City. Instead, the Bill targeted all villages throughout the entire country.

Furthermore, how can it be deemed as “equalizing the playing field” between businesses in the rural and urban areas? Cities and towns—especially Belize City—enjoy greater infrastructure and access to consumers than do their less developed village counterparts.

For example, when discussing potential consumer base, going by the 2010 census, Belize City had a population of 57,169, while Crooked Tree had only 805. Double Head Cabbage had 406 residents. Ladyville had 5,458, and Hattieville was reported at 2,344. Clearly, a lot has changed in 12 years, but the ongoing census is needed to confirm exactly the nature of those changes. However, if things remain relative—and they most likely will—then idea of “equality” may need to make way for “equity.”

On a final note, there is also a public policy consideration that should be weighed. Yes, it is true that some businesses do leave the urban areas for the villages. And, of course, the revenue-centric paradigm leads the local authorities to view this departure as “bad for council business”.

Consequently, to “stop” or “slowdown” this migration of economic activity from urban areas to the villages, the councils consider the regime’s expansion as being necessary. However, this is somewhat contradictory from a rural development standpoint, as one would think that the default economic-public-policy position would be to encourage increased economic activities in otherwise poor communities.

Other Matters

Once again, the Trade Licensing Bill matters are too intricate to have been covered completely in one piece. We are still yet to speak to the concept of the productive footprint, and there is still the matter of Schedule VII.

For now, the government has indicated that they will conduct a review of the Bill, following the interventions made at The Committee; however, it still remains necessary for these issues to be illuminated. For this reason, we will finalize this discussion in the next Business Perspective column.