In the 2017 budget presentation, Finance Minister, Colm Imbert, introduced a new tax bracket of 30 per cent on individuals whose chargeable income exceeds $1 million per annum and on companies with chargeable profits in excess of $1 million per annum.
Mr Imbert framed the increase in the tax rate on high-income individuals and certain companies to 30 per cent from 25 per cent as part of the administration’s effort “to ensure social equity.”
“Madam Speaker, as we make adjustments, it is imperative that we spread the burden of adjustment across the society. The burden cannot fall on just one group alone. The time is thus opportune to widen and deepen the tax net within Trinidad and Tobago...
“Consistent with the objective of spreading the tax burden across the society, this measure will be introduced on January 1, 2017 and will ensure that higher-income individuals and corporations make an appropriate contribution to the fiscal adjustment effort. This measure is expected to generate from high income individuals and businesses, an additional $560 million in tax revenue.” And the revenue situation in the first three years of the current administration was very tight.
And then in the 2018 budget, the Minister of Finance made two additional adjustments to the corporate tax regime.
He said: “Among the fiscal measures which became applicable in 2017 was the introduction of a new tax bracket of 30 per cent on companies with chargeable profits in excess of $1 million per annum.
The base tax rate bracket for companies remained at 25 per cent. To spread the burden of adjustment, I now propose to increase the base tax rate bracket for companies which were previously subjected to a tax rate of 25 per cent to 30 per cent, thereby harmonising the corporation tax rate.”
He also signalled the introduction of a new tax bracket of 35 per cent on chargeable profits for commercial banks “consistent with the need to spread the burden of adjustment across all sectors, including wealthy corporations.”
Both of those measures took effect from January 1, 2018.
Did tax hike achieve
Unfortunately, in delivering the 2018 budget, the Minister of Finance did not include an analysis of the impact on revenues of the increased tax rate on high-income and companies with chargeable profits of more than $1 million.
In other words, no mention was made of how close the Government came to achieving its target of $560 million in additional tax revenue from the increase in the high-income personal and corporate tax from 25 per cent to 30 per cent, as at January 1, 2017.
The same is true of the additional adjustments to the corporate tax regime announced in the 2018 budget presentation, including the increase in the tax rate on commercial banks to 35 per cent.
There has been no analysis or impact assessment of the tax measures.
However, the Review of the Economy 2020 tells an interesting story about the revenue generated by non-oil companies in the period between the 2016 and 2019 fiscal years.
In the 2016 fiscal year—which was the year before the tax increases—taxes on income and profits on “other,” that is non-oil companies, amounted to $7 billion.
In the 2017 fiscal year—which was the year of the tax increases—taxes collected from the non-oil companies declined by 1.15 per cent to $6.91 billion.
But in the 2018 fiscal year–which would have been the first full year of the corporate tax adjustment announced in the 2017 budget—taxes on income and profits collected from non-oil companies totaled $8.85 billion, which was $1.93 billion more than was collected in the 2017 fiscal year.
And non-oil companies paid $8.69 billion in taxes on income and profits in the 2019 fiscal year, which was $1.77 billion, or 25.6 per cent more than was collected in the 2017 fiscal year.
Does that mean that all of the additional revenue generated in 2018 and 2019 was as a result of the increase in the corporate tax rate in 2017 and the harmonisation of the corporate tax rate and the increase in the taxation of commercial banks in 2018?
No it does not, because other things happened in the years after the initial announcement that may have contributed to the higher tax revenue from non-oil companies.
But should the Ministry of Finance have conducted an analysis of the data from the Board of Inland Revenue to determine exactly how much additional revenue was generated from the tax hikes? Most certainly.
Should corporate tax
hikes be reversed?
On a Guardian Media television programme following Mr Imbert’s mid-year budget review—which was more a contribution on the supplementation of the 2023 budget expenditure by an additional $3.85 billion—I made the point that the rate of corporate tax should be reduced to 15 per cent as a means of incentivising the non-energy, foreign-exchange earning sector to reinvest in the domestic economy.
Providing tax, and other incentives, to the non-energy, foreign-exchange earning sector to reinvest in T&T is the ONLY hope that this country has in breaking the cycle of dependence on the energy sector as the primary source of income and foreign exchange.
Without meaningful incentives, as well as a dramatic improvement in the ease of doing business–which includes, by the way, seriously addressing the availability of foreign exchange—the T&T economy is going to remain at the whim of the volatile global energy markets, with predictable consequences for Government revenue and the standard of living of the population.
A reduction in corporate taxes would result in T&T companies, both large and small being able to retain more of their pre-tax profits to invest in their companies for growth. That growth would result in more employment, more revenue and more taxes down the road.
For publicly-listed companies, a reduction in the corporate tax is likely to result in increases in after-tax profits and more dividends to be distributed to their shareholders.
In retrospect, the suggestion of reducing the corporate tax rate to 15 per cent from 30 per cent (and 35 per cent for commercial banks) may have been a bit ambitious, but it is certainly a medium-term goal that the Government should seriously consider.
Corporate tax evolution
It is also important to note that when he announced the increase in the tax rate for high-income individuals and companies in the 2017 budget, Mr Imbert moved away from the flat-tax policy that the then Prime Minister Patrick Manning introduced in the 2006 budget. In that budget, Mr Manning, who was also the Minister of Finance, reduced both the rates of personal income tax and the corporate tax rate to 25 per cent from 30 per cent.
And both the personal and the corporate tax rates remained at 25 per cent until Mr Imbert intervened in the 2017 budget.
So perhaps as a first step, the Government can reduce the corporate tax rate back to 25 per cent.
Finally, in an important 2012 working paper, Joseph Cotton, a Central Bank economist in their research department, analysed the bouyancy and elasticity of non-oil tax revenues in T&T 1990 to 2009, and concluded: “The main finding of the paper is the non-oil taxation system is relatively responsive to changes in non-oil GDP and as such when growth recurs, revenue would increase and help to improve the fiscal position.
“Despite this, revenue collections suffered during the review period because of poor or a slackening in administration or an increase in evasion. This may have been responsible for the decline in the non-oil tax buoyancy coefficient when compared with earlier studies.
“Additionally, efforts to increase non-oil tax revenue in Trinidad and Tobago should focus on indirect taxes. In particular, the coefficients for property tax, excise duties and international trade tax were lower than one which is an indication of weak performance and a slower growth in tax revenue than non-oil GDP.”