A dilemma over duty

The collection of import duty – taxes on goods brought into Cayman – remains the single largest source of revenue within the government’s budget. In tough times, local businesses are trying to come up with palatable ways to reduce the tax burden.

Although overall import duty rates weren’t raised within the latest government budget, import charges on cigarettes and alcohol were increased significantly.

Cigarette duty was doubled, from $2.10 to $4.20 per pack. Compared to the cigarette duty hike, the increase in duty on alcohol is relatively modest. The import duty on ale, beer and cider increases from $1.65 per litre to $1.95 per litre.

Those increases came following a 25-cents per gallon duty increase for petrol imports approved in 2010 and an across-the-board increase on most dutiable items of two per cent that took effect in January 2010.

According to budget documents for the current 2012/13 government fiscal year, nearly $198 million in coercive revenues from import duties are expected. Those include duty for alcohol and cigarettes, petrol, vehicles, stamp duty and other product import duty.

Overall, the government adopted some $90 million in additional revenue measures for the budget year, including increases to cigarette and alcohol imports.

“The fundamental issue is the reason revenues are having to be raised…is because something is consuming those revenues, in this case the government,” Chamber President David Kirkaldy says.

“At the end of the day the business is going to transfer the costs to its clients. Nothing else can be expected. A business pays for it, but this business is made up of three Caymanian owners, a number of great Caymanian staff and work permit holders. All of those people are consumers and will pay more.”

The vast majority of government fee increases approved as part of the 2012/13 budget will land most heavily on what Kirkaldy calls “external-facing businesses”; higher work permit and licensing fees. However, even if some of those businesses don’t do the majority of their trading locally, Kirkaldy says higher fees will still have an effect.

“They may decide to have more of their staff based out of another location to trim expenses. They may decide to forego a cost of living increase or bonus to their staff. That again has a knock on effect; the staff do not consume as much within the community and those local businesses don’t get their customers.”

In such an environment, organisations like the Chamber try to look for ways to reduce operating costs, including looking at whether import duties are levied equitably.

“Duty is paid by everyone, individual or business, so therefore it’s equitable,” Kirkaldy says. “But it’s a regressive tax where the ones who can afford it the most feel it the least, and the ones who afford it the least feel it the most. I pay the same tax no matter the income, not matter what I’m bringing in, no matter the size of the business.”

The trade-off in Cayman occurs in that residents don’t pay income taxes or property taxes, Kirkaldy says.

“The danger is that the expense of government…and finding ways of funding an increase budget exceeds the ability to collect the indirect taxes.”  

Solutions

The chairman of the Chamber’s small business committee, Len Jackson, who also owns a small IT company in the Islands, believes a number of things might be done to reduce duties for local business.

“As…more and more small businesses start losing their market share, the first thing that happens is that they must cut overhead, people lose their jobs and there is less money to spend,” Jackson says.

“This also causes another big problem as people start looking for ways to earn money to provide for their family. This leads to an underground economy and non-compliance businesses.”

By that, Jackson means individuals start importing items for sale on the own or “on-selling” purposes – which can put additional pressures on smaller businesses that also pay trade and business licenses, rent at their premises, staff costs, insurance and the like.

Jackson says discussions within groups like the Chamber, Department of Commerce and Investment and the Trade and Business Licensing Board have focused on new business classifications to perhaps reduce the burden of paying duty on smaller operations. He says they’re looking for suggestions on the topic.

One category would be what’s termed a ‘micro-business’; meaning three employees or fewer, excluding the owner. The suggestion is that the ‘micro-business’ would pay only five per cent duty on the first $250,000 of goods imported in any given year and receive a 50 per cent discount on licensing fees.

“This would do two things,” Jackson says. “First, it would make non-compliant micro-businesses become compliant in order to save up to $42,500 per year as, without a trade and business licence, they would still pay a 22 per cent duty. Second, a micro-business would have a 17 per cent duty advantage to help them compete with big business.”

Another category would be for ‘small business’; that’s 10 people or less excluding the owner. Those operations, Jackson suggests, would pay a 10 per cent duty on the first $750,000 of imports and receive a 25 per cent discount on license fees. Similar benefits would accrue to the small businesses as the ‘micro-business’, Jackson says. 

“If you are a small business of under 10 employees and want to import a widget, chances are freight and duty [are] the same for you as it is for the consumer, provided of course that the consumer ordered it from the Internet instead of going to Miami to get it and bring it back duty free,” Jackson says.

“The question is: Why have a licensed retail store here?”

Duty allowances

In summary, Jackson’s concern is that people will buy products overseas – directly or online – because of costs.

“Therefore, either local businesses reduce prices and become more competitive (rather difficult in a small economy) or we limit the amount of personal goods coming into the country duty free,” he says.

There will be some need to cut costs to “cut out blatant profiteering” on the part of local businesses, Jackson states.

However, he also suggests one duty free allowance per person, per calendar year of $400. Any goods above this amount would then be charged the prevailing rates. 

First Regents Bank & Trust Chief Executive Paul Byles agrees there is a bit of an unfair advantage, particularly if individuals are really operating a “business” without registering for a trade and business licence.

However, Byles says having a higher duty rate for individuals would also penalise people who bring in products for personal use.

“A possible solution may be that the standard rates apply if you are importing a small number of items while a higher import duty would apply to individuals if they are importing above that number or dollar value,” Byles suggests.

Whether a business chooses a “reasonable” retail mark-up on the product will be determined by the market, he says.

“If a business is charging a customer essentially the same price as if that customer purchased from overseas, there is no true incentive to buy from that business aside from the local convenience factor,” Byles says. “So businesses will have to be smart about their markups to remain sustainable.”

A potential side benefit of lowering duty rates for businesses is that they can use that money to expand and hire staff, Byles adds.

“Prices are high at the moment and disposable incomes are low so I am not sure that this would be the right time to make such a change but I do agree that it should be implemented as part of a long term strategy to realign the revenue base while finding ways to give incentives to local businesses,” he says.

 

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