Rules of the Game

Trinidad and Tobago has established itself as the most industrialized nation in the Commonwealth Caribbean. Although the country depends heavily on energy-related industries as a contributor to its GDP, the government has implemented policies to diversify the economy from these traditional industries that rely on finite resources to industries such as manufacturing and tourism. Additionally, successive governments have aimed to develop Trinidad and Tobago into the financial center of the Caribbean, linking the Caribbean states to the country’s Latin American neighbors. Trinidad and Tobago’s location as the southernmost island in the Caribbean and just northeast of South America is a definite advantage in achieving this objective.

With these goals in mind and in a desire to increase investment in the country, the government has liberalized the economy in accordance with global trends and adopted policies that make Trinidad and Tobago attractive to a wide variety of foreign investors. The fiscal, regulatory and legal environment developed over the years facilitates and encourages foreign investment. The government has made a commitment to actively encourage foreign investment by enacting legislation, which broadly speaking, removes restrictions on foreign investment and on foreign exchange controls and provides a regime of incentives. Following is a short summary of some of these regulations.

Foreign Investment Act

The Foreign Investment Act of 1990 allows a foreign investor to acquire an interest in land, acquire shares in a local private or public company and incorporate companies. These rights are subject to certain restrictions, including notifying the Minister of Finance of the acquisition and applying for a license from the minister prior to the acquisition or investment. It is a well-regulated system and allows for efficient management of foreign investment and strikes an even balance between freedom of investment and protection of the local industry. For example, a foreign investor is permitted to own up to 30% of the share capital of a local public company without a license. However, any acquisition above this amount requires a license. Similarly a foreign investor is permitted to own five acres of land for the purpose of a trade or business without a license but larger acquisitions require a license.

Fiscal Incentives Act

The Fiscal Incentives Act of 1979 (Ch. 85:01) provides a number of incentives for companies operating in Trinidad and Tobago that are involved in the manufacture of approved products. Under this act a company must apply to the Minister of Finance for approved enterprise status and the incentives that may be granted include: total or partial relief from corporate taxes for a maximum period up to 10 years; total or partial relief from customs duties; loss-offset without limitation (during the five year period immediately following the tax holiday period); total or partial relief from income tax on dividends or other distributions, other than interest, out of profits or gains derived from the manufacture of the approved products during the tax holiday period; import duty concessions on certain plant, equipment and machinery; and exemption from value-added taxes for highly capitalized industries These comprehensive and effective incentives can affect profitability of a new company and should be taken into consideration by potential foreign investors.

Taxation

The Income Tax Act Ch. (75:01) and the Corporation Tax Act (Ch. 75:02) regulate the direct taxation regime for a foreign investor. Following are their basic features. The tax rate for individuals is 25% on chargeable income up to $50,000.00 and 30% thereafter. The government recently implemented these new reduced rates in the 2003 budget. Tax rates for corporations not operating in the petrochemical sector are 30% on profits. For corporations operating in the petrochemical sector, the rate is 35% on profits.

A foreign investor would also be subject to the following taxes: business levy tax, which is a tax on gross revenue at .2% payable quarterly; Green Fund levy, which is an environmental tax at the rate of .1% on gross revenue; value added tax, which is an indirect tax on imports and on the commercial supply of goods and prescribed services at the rate of 15% of the value of the supply; and custom and excise duties, which vary according to the product.

There is a range of concessions available to a company incorporated by a foreign investor. Under the Income Tax Act, an annual wear-and-tear allowance of 10% of the capital expenditure on construction of a building or structure or in respect of capital improvements made on or after January 1, 1995 is available. Additionally, a company can claim wear-and-tear allowances on plant and machinery. With respect to plant and machinery acquired after January 1, 1995, there is the introduction of the pooling of such assets for the granting of wear-and-tear allowances. The allowance will be calculated at the applicable rate to aggregate expenditure incurred on assets within a particular group on a declining basis.

The Income Tax Act (Ch.85:04) also provides a number of concessions. These include an initial allowance of 10% on the expenditure incurred in the construction of buildings and structures as well as an initial allowance of 60% on the purchase of plant and machinery for a company carrying on a trade as defined under the Act. The latter initial allowance was increased in 2003 from 50%.

Philip Hamel-Smith

The Corporation Tax Act also provides a number of tax credits for special classes of companies that include an approved small company, a company carrying on business in a regional development area, an approved activity company and an approved property development company.

Trinidad and Tobago also has specific legislation for the petroleum sector. The Petroleum Taxes Act (Ch. 75:04) provides that the tax rates for companies operating in the petroleum sector is 50% on profits. It also provides a number of incentives to companies operating in this industry which include: initial allowance on tangible expenditure of 20%; firstyear allowance on tangible expenditure of 20%; annual allowance on tangible expenditure of 20%; workover allowances of 100%; and heavy oil allowance of 100% of capital expenditure on drilling wells.

Trinidad and Tobago has signed double taxation treaties with a number of countries including Canada, France, Denmark, Germany, India, Italy, Norway, Sweden, Switzerland, United Kingdom, the United States and Venezuela. These treaties eliminate double taxation either by taxing the income only in one country or providing a tax credit in the country of residence where the income has been taxed at source. The existence of these treaties reduces uncertainties relating to taxation that a foreign investors must consider.

Apart from these tax incentives, the government plans to revolutionize the existing tax system, which has the reputation of being bureaucratic and burdensome. Plans include the creation of an entirely new organizational structure, improving the existing infrastructure, the construction of a new complex designed to house all the taxing authorities in order to create a ‘one-stop-shop’ and the enactment of legislation to reduce the bureaucracy and red tape in the present system. This commitment demonstrates a tangible step by the government to encourage investment by improving a system that too often has acted as a disincentive.

Tourism

To fulfill of its desire to diversify the economy, the government has the Tourism Development Act 2000 to stimulate and encourage investment in the relatively untapped industry of tourism. These acts provide a number of incentives to an investor/operator that include: tax exemption not exceeding seven years; carry over of losses incurred during the tax exemption period; customs and excise duty exemption; tax exemption to financial institutions in respect of interest received on an approved loan; and tax exemption on dividends accruing to the owner.

Free Zone Acts

The Free Zones Act 1988 established the Trinidad and Tobago Free Zones Company, which has the objective of promoting export development and foreign investment projects. These projects are entitled to a number of incentives that allow for a dutyfree and tax-free environment. A free zone enterprise can be developed in areas such as the manufacturing sector or the provision of services for export such as information technology. An investor who wishes to set up a free zone enterprise may benefit from the following (100%) exemptions: customs duties on capital goods, parts and raw material for use in the construction and equipping of premises in connection with the approved activity; import and export duties; land and building taxes; fees for work permits; and corporate, capital gains, withholding and value added taxes.

Philip Hamel-Smith is the managing partner at M. Hamel-Smith & Co., a law firm in Port of Spain, Trinidad. Philip Hamel-Smith