Cost and benefits
Export allowances were introduced as an incentive for companies engaged in foreign exchange earnings, and looking at the countries where they are still available several years after their introduction, there must be some doubt as to whether they have achieved their objective. When the allowances were introduced in Guyana in 1988, the country was in desperate financial straights, the black market for foreign exchange was thriving and America Street was the dominant non-bank foreign exchange market. Things have changed substantially since then with the introduction of the Economic Recovery Programme by Hoyte and its faithful continuation by the PPP/C government. In other words the economic justification for the export allowance seems to have reduced substantially. Whether Guyana should have abolished it earlier would depend on those changing circumstances as well as an analysis of its contribution, its benefits and its costs.
Tax data in Guyana at sectoral or geographical levels are impossible to come by which would make tax policy formulation difficult indeed.
Who are the beneficiaries and to what extent does the economy benefit from the tax foregone? Such information simply is not publicly available, but from the legislation the furniture sector would surely be among the beneficiaries in respect of non-regional sales.
The direct cost of the allowance is the tax foregone against which we should consider whether the incentive was the real cause of the investment and whether efficient companies would not find it attractive to invest in, for example, value-added processing of what many consider to be among the best wood in the world, without both tax holidays and export allowances. What would be the justification for similar exemptions for shrimps and minerals (other than gold, diamonds and bauxite) which are in international demand, when the law already allows tax holidays of up to ten years, carry-forward of losses till eternity, initial allowances of up to 40% on qualifying plant and machinery as well as annual tax allowances? Anything more than those suggests that the beneficiary business is a state-financed venture in disguise.
In other words, other than for the beggar-thy-neighbour policies on tax incentives pursued mainly by developing countries, there may have been little justification for the generous concessions in the first place, concessions which detracted from the broader issue of generally high rates of tax. Instead of fixing the whole tax system we consolidated the high tax rates for some in order to give relief to others – a story replicated in so many other sectors of the economy.
Incentive rewards evasion
There are two other consequences of the allowance that are worthy of mention. The first is that it not only discourages sales to the domestic market which may not only have the same needs as the overseas market but helps to cover some of the fixed costs, therefore making the company’s export prices more competitive – a different issue from dumping.
The second in some ways stems from the first, but is also inherent in the system. Even where such a company serves the domestic market it has an incentive to ‘duck’ those sales by not bringing them into the books, thereby evading the tax which would have otherwise been payable.
Loss of respect
Guyana needs to encourage all its earners – workers as well as entrepreneurs. It can do so by enlightened policies that do not discriminate against those who can least afford it and in favour of those who can. As long ago as 1993, I presented a paper entitled ‘Tax Reform – A Vehicle for Economic Recovery,’ in which I pointed out the unjustness of the tax system and that we were ignoring the experiences of other countries in a blind pursuit of attracting businesses at any cost.
Just incidentally that paper was quoted extensively but selectively in the parliamentary debate on the VAT legislation. Not that we should underestimate the contribution of businesses in general or exporters in particular. But in relation to the export allowance, the example of Trinidad and Tobago would be useful more than just for the fact that their manufacturing has taken off since its abolition, which may only be part coincidence and part lower energy costs.
Accompanying the removal of the export allowance, that country introduced lower rates of income and corporate taxes and very directly granted 150% allowance for expenses incurred in export promotion. We should encourage exports but let us do so within good logic, fairness and international treaty obligations.
This particular column arose out of discussions on the private sector, its independence and willingness to look the government in the eye. If our entrepreneurs are unable to compete internationally without undue reliance on government and subsidies in areas where we have natural advantages such as rum, forestry and wood products, then their claim to being world class will be no more than empty boasts.