Tax exemptions or other concessions are often given to developers of luxury resorts by governments in the Caribbean.
During the meeting of the Legislative Assembly last month, Financial Secretary Kenneth Jefferson was asked by George Town MLA Alfonso Wright about the Cayman Islands Government’s import duty concession to the developer of The Ritz-Carlton, Grand Cayman.
Mr. Jefferson responded by saying that on 5 October, 2004, Cabinet made a decision to permit the developer of the Ritz-Carlton to defer payment on duty on certain classes of imports, not exceeding CI$14.63 million.
The interest-free deferral must be repaid by quarterly payments no later than 31 March, 2012.
In asking a supplementary question, Leader of the Opposition McKeeva Bush – who was Leader of Government Business at the time the deferral agreement was made – attempted to establish that such concessions from government were normal here by asking which other hotels might have received duty waivers.
While Mr. Jefferson did not have that information at the time of the question in the House, he has since provided the Caymanian Compass with information concerning the Westin Casuarina Resort.
The Westin did not get a duty waiver, however it was given a preferential duty rate of five per cent of the cost, insurance and freight value of certain goods. Those goods included building materials, hotel equipment, furniture, fixtures and appliances.
In Cayman, concessions to hotels are provided for under the Hotel Aid Law, which dates back to the early 1970s.
Thomas Evans, the president of the Washington, D.C.-based EastWest Financial Services Ltd. said concessions are often offered by Caribbean governments for the development of five-star hotels.
‘It is absolutely the norm to offer incentives, particularly in instances where governments are trying to spur development in areas that are remote and that offer very little economic opportunity to the local workers,’ he said.
‘Even where there is current hotel development, governments are trying to encourage more socially responsible tourism development that is more reflective of the indigenous culture and environmentally responsible. They understand that their best opportunity to effect changes is at the higher end of the market where people are willing to pay for this type of development.’
EastWest is a private investment banking firm that has financed some 25 projects in the Caribbean and another dozen in Central and Latin America.
‘All [of the projects] have received concessions in one form or another,’ he said.
Citing examples, Mr. Evans said the Four Seasons Emerald Bay in the Bahamas received a 10-year tax exemption on all income tax, stamp tax and import duties on construction goods, provided a minimum of $100 million was invested in the project.
The Golden Anchor in Bonaire received eight years of concessions on government taxes and import duties.
‘Further, with respect to a development in St. Kitts, we received not only the standard taxes and duty exemptions for 10 years, but we also received the right to reserve the hotel sales tax as additional support for debt services up to five years.’
A decision to allow an import duty concession for The Ritz-Carlton, Grand Cayman was originally made by the Executive Council in 1998, Mr. Jefferson told the Legislative Assembly last month.
That concession was more limited in scope and was only valid for three years from the date of the first import of materials or the date of the start of construction, whichever was earlier.
The Ritz-Carlton developer has not used the entire duty deferral allocation of CI$14.63 million as of yet; to date, only CI$8 million has been used.
Mr. Jefferson said the Ritz-Carlton developer could use the remaining CI$6.63 million deferral in relation to the upcoming development on the project at any time between now and 2012.
‘If they wait and take it in 2011, they will only have one year to pay it back, while if take it earlier, they will have longer,’ Mr. Jefferson pointed out.
Since the balance is being paid back in equal payments, any additional duty deferrals used would raise the amount of the quarterly payments.
In addition to the import duty deferral, Mr. Jefferson told the House there had been a ‘small element of actual duty waiver’ for the Ritz-Carlton development. Subsequently, Mr. Jefferson told the Caymanian Compass the amount of that waiver was US$4.5 million.
Another issue raised in the Legislative Assembly was the delay in repayments of the duty deferral.
Mr. Jefferson said the Ritz developer was scheduled to start repayments of the duty deferral in June 2005, however, those payments did not commence as scheduled.
When the payments had still not been made in July 2006, Mr. Jefferson said he approached the Ritz developer to arrange a revised payment schedule.
‘It was an initiative I took on my own as Financial Secretary because I knew the amount [of duty deferral] was substantial and that it needed to be rescheduled,’ Mr. Jefferson said to the House, adding that his decision has the support of Cabinet.
Mr. Jefferson confirmed that the Ritz developer made the first rescheduled payment at the end of September. Subsequently Mr. Jefferson confirmed the second payment was made at the end of December.
Mr. Jefferson said the reason the Ritz developer’s repayments did not begin on schedule was because the hotel did not open when it was envisaged and the revenue for the repayments was therefore not what was expected.
Ritz-Carlton developer Michael Ryan said the effects of Hurricane Ivan delayed the opening of the hotel and subsequently the duty deferral repayments.
‘Hurricane Ivan put us back a year, which is exactly the period [the repayments] were delayed,’ he said.
Mr. Ryan assured that the quarterly payments due in the future would be made on time.
When asked why he asked the Parliamentary Questions in the first place, Mr. Wright said he had heard that ‘nothing had been paid or sorted out’ with regard to the repayment of the duty concessions to the Ritz-Carlton developer.
By the time Mr. Wright’s question was asked in the House, the matter had already been dealt with and the first payment made.
‘The question had been on my list of questions for quite some time,’ said Mr. Wright. ‘But sometimes questions may not reach the LA for a couple of months.’
During the supplemental questions asked in the House, Mr. Bush asked Mr. Jefferson about the study to assess the economic impact of The Ritz-Carlton, Grand Cayman on the Cayman Islands’ economy conducted by Deloitte.
That report estimated an impact of the planning and construction of all three phases of the development at more than $1 billion, with a direct impact of $568,248,775 and an indirect impact of $497,217,678.
In addition, the report estimated the on-going economic impact of The Ritz-Carlton, Grand Cayman and its various facilities at $121.5 million per year, or approximately seven per cent of Cayman’s Gross Domestic Product.
The expected annual revenue resulting from the on-going operations of the hotel, golf course and condominium management company is $9,396,000, the report estimated.
Mr. Jefferson said that in its first full year in operation, The Ritz-Carlton, Grand Cayman paid to the government CI$2.6 million in respect to hotel accommodation taxes.
‘It will go up every year,’ said Mr. Ryan.