The Trade License Regime: A ‘tax’ by any other name (Part 3)

The Trade License Regime: A ‘tax’ by any other name (Part 3)

Contributed by the Belize Chamber of Commerce and Industry

In this final installment of this three-part piece on the Trade Licensing Regime (TLR) it is necessary to bring two final elements into this discussion: The Productive Footprint and the now famous Schedule VII.

Productive Footprint

Let’s begin with what is arguably the most intricate of the three: The Productive Footprint (PF). The PF is not new to the current version of the amendment Bill. It finds its roots in the consultations that ultimately led to the Trade Licensing (Amendment) Bill 2017, which as history would tell us, died after its first reading in the National Assembly. Back then it was the Mayors—much like it is the private sector, today—who have objected to that version of the Bill. In the 2017 attempt at Trade Licensing reform, the stakeholders had agreed to the following definition for PF:

“‘Productive footprint’ in relation to carrying of any trade by any person, means the area of the premises where the trade is carried on where interaction by the person with the customer base happens and includes showrooms, offices, conference rooms, and front desks, but does NOT include parking lots, landscaped areas, warehouses, basements, file rooms, laboratories, and bathrooms”—from Trade License (Amendment) Bill 2017.

Now, for completeness, it is useful to compare that definition to the present definition found in the Trade License (Amendment) Bill 2022. It reads thus:

“‘Productive footprint’ means the usable square footage of the premise where the business is conducted exclusive of common areas of the premise such as lobbies, restrooms, stairwells, customer parking, storerooms, and shared hallways, except where these areas are used as part of the business for profit.”

As a side note, the new Bill has a second definition of productive footprint, but it is quite likely the double inclusion was simply a drafting error; therefore, we will focus on the definition highlighted above.

Now, it is possible for someone to look at the 2017 and 2022 definitions and argue that there really isn’t any real, substantial difference between the two. However, on closer inspection, one would appreciate that the 2017 version was quite specific by referring to “where interaction by the person with the customer base happens.” Consequently, for stores, this narrowed the areas that could have been considered for trade licensing purposes. For a bakery, it was clearly not going to include the entire production facilities and would be limited to where customers can enter and purchase the products. Finally, for the farmer, where does the farmer interact with his customer base? Is this on the full range of the farm? Or is it when that farmer sets up a stall to sell his produce? One could only hope it’s not the former, as many small farmers have enough to combat with just pestilence and natural disasters.

Of course, given that the Belize Trade Licensing regime (TLR) is based on a property tax-like design, one would quickly appreciate that the local authorities are incentivized to want to include as much of a business’s square footage as possible. For this reason, if Company A’s full area is 10,000 square feet, but its PF is only 3,000 sqft, in the mind of the local authorities, this represents a notable loss in potential tax revenue. It is this line of thinking, inter alia, that had inspired influential members of the then the Mayors’ Association of Belize to raise objections to the 2017 Bill.

The astute reader would also realize that the 2017definition would have not captured firms that are exclusively online (so-called E-business operators). And one should ask this simple question: Why should it? If the alleged justification for the trade license regime is to compensate the local authorities for physical spaces used up by businesses and for services rendered by the local governments to businesses using said physical space, then for a company that is 100% digital, how does that justification apply?

Under the 2017 definition, where does the E-business operator interact with his clients in terms of a brick-and-mortar location? In this modern era, there are Belizean online businesses whose clients often are not even located within the country, and the owner is operating predominantly from a laptop computer or maybe even just a smartphone.

Now enter the 2022 definition that speaks to where “business is conducted.” While this could imply a similar meaning to that of its 2017 predecessor, it also opens us up to a broader interpretation. Let’s return, for example, to the farmer. Where is the farmer’s business “conducted?” Is it, as per the 2017 amendment, where interaction by the “farmer” with the farmer’s customer base happens? Or is it the entire farm?

Section 21(2) of the 2022 Bill attempts this definition: “For the purpose of calculating the fee for an agricultural trade, the productive footprint shall be the area used for processing the agricultural product.”

While a fairly broad definition, this does help to move one away from thinking that the entire farm (sometimes acres of it) would be subject to the TLR. Instead, it is ostensibly narrowed to include (albeit not limited to) wherever the crops are cleaned, fruits are dried, livestock is slaughtered, and so on.

It is narrower than the whole farm, but likely larger than the space where the farmer would “interact” with his customers.

The point here is that the differences between the 2017 and 2022 definitions are not merely cosmetic. It is for this reason that the BCCI has stressed the need for sector-specific consultations to help clarify and define the PF per key sectors. To the government’s credit, in principle, they have agreed to this. Would we feel more comfortable with this type of thing being ironed out BEFORE the law is passed? Of course!

Schedule VII

Enter now Schedule VII. This is the portion of the 2022 Bill that has certainly caught the attention of the general public, especially with the charges being made to entertainers.

To understand the BCCI’s concerns regarding Schedule VII (“The Schedule”), it is, once again, useful to return to where we were with the 2017 amendment, which can be found on the BCCI’s PolicyTracker.bz website. Therein, you’d be hard-pressed to find any amendment to The Schedule (originally Schedule VI). Why? Because the increases to The Schedule was not part of the original premise for the reform, which has been guided by the principle of revenue neutrality.

For example, under the original schedule, commercial travelers were charged $100 per year. The 2022 Bill envisions a charge of $250 per truck per annum. Remember the online business we spoke about earlier? The proposed amendment seeks to charge these E-business operators $600 per year. The only saving grace is that the $600—although of a debatable amount—is closer to an actual flat fee by design.

But let’s look at the revenue neutrality concept this way. If we had only one business per category under the existing Schedule, and there was only one transaction with each of those businesses, at most the relevant local authority would make about $385 (excluding “moving picture show” which is charged as 25% of the annual value of the premise).

Following that approach, for the newly proposed Schedule VII in the 2022 Bill, let’s likewise assume that each category only has ONE business. And these singular businesses only engage with the municipality ONCE. For example, there is one commercial traveler with only one truck. There is only ONE entertainer that carries out only ONE show for one day, and there is only one peddler. Just using this on-the-margin illustration would yield a total of $3,953—a more than 900% increase on the margin.

Now, of course, the Bill sets the Schedule VII fees as “Maximums.” Therefore, it can be argued that the various municipalities may choose the lowest fees possible for each category. However, even cutting the hypothetical example to 25% is still more than two times higher, on the margin, than where things currently stand.

The point is this: The changes to the schedules offend revenue neutrality. And while we can accept that most of the fees are actually fees, there is space for further discussions on the maximum amounts presented.

To Conclude

As we’ve said before, the Trade Licensing reform has many moving parts. In these three column entries we still have not touched on all relevant matters, but we have tried to highlight the primary areas of concern.

Among other things worthy of discussion is whether or not there is still need for a Board to approve each and every business, especially those that pose absolutely no public-safety concern. There may still be need to consider whether the per-square-foot rates for all municipalities reflect the true market rates. And there is still the need to consider alternative sources of income for the village councils outside of the TLR.

The running advice from the BCCI has been and continues to be twofold: For the existing towns and cities, a revenue-neutral approach that does not add more costs to businesses is acceptable within the short-to-medium term. Added to that, the intention has always been, however, to gradually transition the system towards a flat fee in the long term.

It is for this reason that you would NOT find any reference to any expansion to the rural areas in the 2017 amendment. The goal was to reform the existing regime in such a way that it aligns more closely with international best practice first. Thereafter, when it operates as an actual fee—as opposed to a tax by another name—then the conversation could be had about expanding a true flat-fee system to other parts of the country.

Both public- and private-sector stakeholders have agreed that the TLR is a very broken system. Therefore, there is limited prudence in expanding such a system without first fixing it.