Budget Memo 2006 - PwC2005/09/28 · 2006 Budget Memorandum PricewaterhouseCoopers Trinidad &...

2006 Budget Memorandum

PricewaterhouseCoopers Trinidad & Tobago Firm

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People First Sharing the Means National Budget 2006 We are pleased to set out in this Memorandum our commentary on the National Budget 2006 with particular reference to the Fiscal Measures contained therein which was presented by the Honourable Prime Minister and Minister of Finance, Mr Patrick Manning on Wednesday, September 28, 2005.



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Table of Contents • Executive Overview - 2006 • Summary of 2006 Fiscal Measures

• Detailed Budgetary Measures

Income Tax Corporation Tax Green Fund Levy Road Improvement Tax Petroleum Product Prices Value Added Tax Withholding Tax

• Sectoral Analysis & Commentary

Energy and Energy Industries Financial Services Manufacturing Construction Agriculture Tourism

• Appendices

1 2005 Budget Deliverables – Delivered or Not? 2 Estimated 2006 Fiscal Revenue and Expenditures 3 2005/2006 Budgeted Expenditure 4 Tax Facts 2006 5 Table of Annual Revenues and Expenditures 6 Computations 7 Snapshot of GORTT Fiscal Performance - 2005



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Executive Overview – 2006 “Addressing Basic Needs” The Honourable Prime Minister and Minister of Finance in a budget presentation lasting precisely three (3) hours delivered the much awaited 2006 Budget presentation and announced record levels of projected revenue and expenditure. He also proceeded to identify among other things the achievements in fiscal year 2005, the priorities for 2005/2006 and the fiscal measures for the coming year. In identifying the 2005 achievements he noted that this country has evolved to become: - • ‘a global leader in the gas and petrochemical markets’;

• ‘the centre for financial services, business and manufacturing in the Caribbean’;

• a preferred destination for investment in the Western Hemisphere;

• one of the fastest growing economies in Latin America and the Caribbean; He also noted that the country’s international credit rating had been increased to A- and Baa2 by Standards and Poors and Moodys respectively in recognition of the quality of the macro-economic management.

Specifically the Minister also noted the following very positive achievements: -

• Real GDP increased by 6.5%; • Unemployment Rate reduced to average of 8.3%; • External reserves of US$3.8 billion; • Budget Surplus of US$299.7 million; • Total Tax Revenue of $23,845.4 million; • Total Expenditure of $27,901.3 million; • Transfer to Revenue Stabilisation Fund of $2,593.0 million.

Somewhat unusually but perhaps with the expectation that the expenditure side of the Budget would be most critically analysed the Honourable Minister dealt extensively with how his Government had spent the $27 billion. Whether these funds were properly accounted for and we got the expected value for such expenditure is yet to be determined but our concern remains that despite spending programmes of $22 billion in 2004 and $27 billion in 2005 there has been no material improvement in a wide range of areas including basic living standards.



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Executive Overview – 2006 (Continued) There is no doubting the fact that in formulating his Budget for 2006 the Honourable Minister was in the very fortunate position that he was dealing with an economy in which his problems are likely to stem from an abundance of riches and how to allocate these rather than a lack of revenue. It was therefore not unduly surprising that he proceeded to announce programmes, projects and initiatives throughout the length and breadth of Trinidad & Tobago. (Some might consider this a typical ‘pre-election budget’). Included therein were measures and programmes intended to: -

• Strengthen the platform for achieving the goals of Vision 2020; • Give priority to issues affecting the family; and • Address security, education, health care, housing and poverty reduction. The Budget presentation was thus extremely wide ranging and one would find it difficult not to commend the Honourable Minister for focusing on his stated priorities which included: - • The family unit; • Effective education and training; • Quality health care and wellness; • Affordable housing; and • Effective social support for the poor and needy. Extensive programmes and construction projects were identified all aimed at addressing/improving the quality of life of the people of Trinidad and Tobago. The success of those programmes will however depend to a large extent on the level and quality of the resources available to successfully implement and manage them less they become nothing more than ‘wishful thinking’. The Honourable Minister already noted that we are nearing full employment and we therefore wonder what resources will be available to: - • Carry out the many construction projects; • Staff the new/expanded schools; • Staff the mobile health clinics; • Construct new roads; bridges and drainage systems. The proposed restructuring of the URP and CEPEP programmes which have been the focus of much concern for an extended period of time will no doubt be met with general approval, so also will the proposals to revitalize/develop the main production sectors which the Honourable Minister identified as: -



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Executive Overview – 2006 (Continued) • Energy and Energy Industries • Construction • Manufacturing • Small and micro-enterprise Sector • Agriculture • Tourism A detailed review and commentary on the measures/initiatives announced in respect of each of the above mentioned sectors is set out later in this Report. Notably however the Honourable Minister has announced his Government’s intention to bring about a significant expansion of activity in each of the above-mentioned areas whether it be “to exploit investment opportunities along the entire LNG value chain”; bring about “the development of the agricultural sector” or “to exploit fully our enormous tourism potential”. Whether we have the resources to successfully drive the initiatives needed to successfully achieve these objectives remains the question. The Honourable Minister also provided an update on the public sector reforms that are underway. Of particular note are the ongoing reform of the Financial Sector and the Special Purpose Companies. The reforms in the Financial Sector have been ongoing for some time and Government is to be commended for the progress that has been made to date. However much remains to be done in this area if we are truly to be regarded as the centre for financial services in the Caribbean including ensuring that the new regulatory bodies are appropriately staffed and trained to carry out their mandate. The announcement that 15 Special Purpose State Enterprise companies are to be established will send a shiver down the backs of many of our citizens who will have concerns about the financial accountability of those entities. The Honourable Minister has however pointed out that they will “report to the respective line Ministers” and would be “subject to the highest standards of good governance, transparency and accountability”. While this has not always been the case in the past we must take the Honourable Minister at his word but also suggest perhaps that they should all be subject to annual audit by independent accounting firms so as to provide some further level of comfort to the shareholders i.e. the citizens of Trinidad and Tobago. And on to the 2006 Budgetary Measures which the Honourable Minister proceeded to announce and which includes: -



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Executive Overview – 2006 (Continued) Total Revenue - $34,129 million Total Expenditure - $34,119 million Projected Surplus - $10 million The Government has continued its practice of budgeting its revenue projections on a US$45 per barrel while basing its expenditure programme on an oil price of US$35 per barrel. This prudent approach is certainly to be commended. Notwithstanding this conservative approach it is noted that a significant increase in Oil Revenue is projected of approximately $7.0 billion which we assume is substantially as a result of the LNG Train 4 coming on stream later this year. The long awaited reform of the energy tax regime for natural gas of which only a very sketchy outline was provided, is expected to generate approximately $2.0 billion in additional tax revenue. Disappointingly the Honourable Minister made no mention of the anomalies created by the recent Finance Act 2005 particularly as regards the impact on the non-petroleum producers. Addressing these issues is important to Trinidad & Tobago retaining its status as an attractive destination for foreign investors, and we therefore hope that these issues are addressed in the Finance Act 2006. The Honourable Minister also provided a brief outline of the measures to be introduced to reform the non-energy sector tax regime which included changes to Personal Income Tax, Corporation Tax and Gambling. There are however an extensive range of amendments proposed which the Minister mentioned were not covered in his presentation and readers will find out that the Minister gave them the good news but the bad was left unsaid. Details of the ‘bad’ are set out in the following sections of the Report together with our comments thereon. This budget reflects record levels of revenue and expenditures and the effort made by the Honourable Minister to address the many needs and deficiencies within the country are to be commended. There is however a real concern that the economy is in danger of overheating and Government is ‘biting off’ more than it can digest. The Honourable Minister notes that “No budget and sums of money can replace these challenges” and the same must be said for the ability of his Government to effectively manage this level of expenditure. Finally it would be remiss not to mention the measures announced with regard to the improvements in security or lack thereof. The Honourable Minister opened his presentation by noting that “the escalation of violent crime……constitute the most fundamental threat to the economic and social development…..and well-being of our people”.



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Executive Overview – 2006 (Continued) However contrary we suspect, to what the majority of the law abiding citizens wanted, he announced no new initiatives that would bring about a radical improvement in the situation in the short term. The move to bolster our police service with support from Scotland Yard and the FBI are unquestionably welcomed but the population requires a firm ‘demonstrated’ commitment from Government that it is actually moving to address their fear for their lives and the safety of their loved ones. In the absence thereof Trinidad & Tobago will not become the Paradise that it can be and which it once was.



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Summary of 2006 Fiscal Measures Personal Income Tax • Increase the personal allowance from the current level of $25,000 to $60,000 per

annum; • Remove the existing personal allowance of $40,000 for individuals 60 years and over; • Remove the child allowance of $1,200 per child made to a spouse or former spouse

regarding the maintenance of a child; • Eliminate the deduction of up to $18,000 for mortgage interest payments; • Eliminate the $10,000 deduction for first time home owners who acquire a home on or

after January 1, 2006; • Remove the deduction of up to $10,000 in respect of shares purchased in a registered

credit union; • Replace the current personal income tax rates of 25% and 30% with a flat tax rate of

25% for all income levels. These measures will come into effect from January 1, 2006. Corporation Tax • Reduce the corporate tax rate to 25% excluding the following corporations: -

Petro-chemical companies will continue to be taxed at a rate of 35%; Energy (oil and gas) companies will continue to be taxed at 55% (of which 5%

represent the Unemployment Levy); These measures will come into effect from January 1, 2006. Approved Small Companies, Approved companies carrying on business in a regional development area and Approved Activity Companies: • Remove the tax credit of 25% of the chargeable profits currently available to these

approved companies; • Remove the seven (7) year limit on the application of the 25% tax credit given to

approved companies carrying on business in a regional development area and to approved activity companies;



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Summary of 2006 Fiscal Measures (Continued) • Reduce the tax on the profits of these approved companies from 5% to 0% for a period

of five (5) years; • Exempt the gross sales of these approved companies from the Business Levy for a

period of five (5) years. These measurers will take effect from January 1, 2006. Road Improvement Tax • Incorporate the 5% Road Improvement Tax into the petroleum excise tax and abolish

the Road Improvement Tax with immediate effect; Petroleum Product Prices • Reduce with immediate effect, excise duties on petroleum products as follows: -

Unleaded gasoline (including 95, 92 and 83 RON) from 99.696 cents per litre to 10 cents per litre;

Kerosene from 7 cents per litre to 5 cents per litre;

Auto Diesel from 19.6 cents per litre to 5 cents per litre;

• Remove the refinery margin to 2 cents used in arriving at the postal price of petroleum

products; • Increase the retailer’s margin by 2 cents as follows: -

95 RON Unleaded Gasoline from 15 cents to 17 cents per litre; 92 RON Unleaded Gasoline from 15 cents to 17 cents per litre;

83 RON Unleaded Gasoline from 12.5 cents to 14.5 cents per litre;

Kerosene from 8 cents to 10 cents per litre; and

Auto Diesel from 10 cents to 12 cents per litre;

• As a result of the change in the excise duty and ex-refinery margin, the wholesale price

will be adjusted as follows: -



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Summary of 2006 Fiscal Measures (Continued)

95 RON Unleaded Gasoline from $2.37 to $2.43 per litre; 92 RON Unleaded Gasoline from $2.11 to $2.17 per litre;

83 RON Unleaded Gasoline from $2.05 to $2.11 per litre;

Kerosene from $1.22 to $1.20 per litre, and

Auto Diesel from $1.16 to $1.18 per litre.

These measures will: - • Improve the cash flow of wholesalers who bear the burden of subsidy payments in the

first instance; • Significantly reduce the level of subsidy payments by the Government; and • Enhance the viability of the operations of retailers. Investments in Hotels • Eliminate the 25% equity investment deduction currently granted to hotel investors.

This measure will take effect from January 1, 2006. Pensions and Annuities • Tax the refunds of pension plan contributions and surrender of annuities at 25%; • Eliminate the tax on transfers of contributions or premiums to another approved plan; • Extend tax exemptions in respect of the proceeds of an annuity or other periodic sum

payable to all residents regardless of age; • Increase the contribution an employer can make to an annuity on behalf of an

employee, to 20% of the gross income of the employee; • Eliminate the tax-free withdrawal from pension funds and deferred annuity plans for

the purchase of a first home; • Increase the maximum monthly value of a pension fund or deferred annuity plan

commuted as a lump sum from $65 to $500 per month.



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Summary of 2006 Fiscal Measures (Continued) Employee Share Option Plans • Remove the reduced rates of tax on the transfer of shares (under Employees Share

Option Plans) from the Trust to the employee. Include the benefits under the ESOP in the assessable income of the employee and tax accordingly with effect from January 1, 2006.

Benefits In Kind • Tax loans to employees on the difference between the interest rate charged and the

arm’s length commercial rate of interest (as advised by the BIR and Central Bank); tax written-off loans as cash payments;

• Tax motor vehicles provided for the use of employees at their full market value.

Increase the $100,000 limit on the depreciation of motor vehicles to 100% of the value of the vehicles and charge 50% of the annual Wear & Tear on the asset as In-Kind Benefits to the employee. Charge 50% of the annual rental value of the motor vehicle as In-Kind Benefits to the employee;

• Tax housing accommodation provided to directors and employees to the fair rental

value of the property. These measures will take effect from January 1, 2006. Investments, Incentives and Depreciation • Terminate tax holidays for new investors for regions and approved activities under the

Corporation Tax Act and for approved enterprises under the Fiscal Incentives Act; tax holidays for tourism projects under the Tourism Development Act will not be removed at this time;

• Terminate tax holidays for small enterprises; • Terminate the corporation tax holiday for Free Zones, but retain the indirect tax

privileges such as import duty exemptions and VAT exemptions; • Terminate tax exemptions for new investments on interest on lending to tourism,

agriculture, small business and housing; • Remove the deduction for financial institutions of 10% of the increase in loans for

approved small companies;



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Summary of 2006 Fiscal Measures (Continued) • Remove the 15% deduction for capital expenditure incurred by an approved property

company in the construction of commercial buildings; • Transfer of the written down value of all pre-1995assets to their respective classes

under the Seventh Schedule of the Income Tax Act; on disposal of an asset within the Seventh Schedule of the Income Tax Act, the full proceeds of the assets disposed shall be credited to the pool;

• Include all industrial buildings that qualify under the Income Tax (In Aid of Industry)

Act in the depreciation pool under the Seventh Schedule of the Income Tax Act. These buildings will be depreciated at a rate of 10% of the declining balance.

These measures will take effect from January 1, 2006. Other Reform Measures • Remove the tax exemption from the trading income of local authorities; • Remove the tax exemption for future issues of public debt; • Expenditure incurred in the production of exempt income will not be treated as a

deductible expense; clearly defined provisions for the apportionment of expenditure will be introduced in the taxation legislation;

• Remove the 50% uplift for other expenditures including sponsorship of the arts, sports

and culture (up to a maximum of $1M); • Remove the 100% uplift for marginal additions in employment including

apprenticeship and employment allowances; • Calculate relief for bad debts by reference to the Central Bank’s provisioning

requirements for specific bad debts, consistent with the prudential criteria of the Central Bank. This policy will be applicable to all companies;

• Abolish close company legislation subject to a review of the control provisions in the

legislation and their impact on other parts of the tax code; • In the case of the related party debt, apply thin capitalisation rules to deny tax relief for

debt interest where the debt: equity ratio exceeds 3:1; • Include patents and scientific research to the Seventh Schedule of the Corporation Tax

Act.



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Summary of 2006 Fiscal Measures (Continued) These measures will take effect from January 1, 2006. Value Added Tax and Import Duties • Remove the customs duty and VAT on the following educational tools: -

Geometry Sets, under the heading number 9017.20.00; Notebooks, under the heading number 4820.10.00;

Puzzles, under the heading number 9503.60.00;

Magazines, not otherwise prohibited to be imported or exported or carried

coastwise, under heading number 4902.90.00;

Uncoated paper and paperboard, of any kind used for writing, printing or other graphic exposed, in rectangular sheets, under heading numbers 4802.56.00 and 4802.62.00.

These measures will take effect immediately. Subject to the approval of the Caricom Secretariat, the import duties on the following food items will be reduced as follows: - Frozen meat of bovine: carcasses and half-carcasses – from 15% to 10%;

Frozen meat of swine: carcasses and half-carcasses – from 40% to 30%;

Frozen lamb: carcasses and half-carcasses – from 15% to 10%;

Goat meat – from 15% to 10%;

Edible offal of bovine animals, swine, sheep, goats, horses, asses, mules or hinnies,

fresh, chilled or frozen – from 5% to 0%; Pickled pigtails – from 20% to 10%;

Meat of bovine animals (salted or in brine) – from 5% to 0%;

Cod – from 30% to 0%;

Milk and cream, not containing added sugar or other sweetening matter – from 25% to

15%;



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Summary of 2006 Fiscal Measures (Continued) Condensed milk – from 25% to 15%;

Prunes – from 15% to 0%;

All other dried fruits – from 40% to 20%;

Instant coffee powder – from 20% to 10%;

Roasted coffee (not decaffeinated) – from 40% to 20%;

Wholly milled parboiled rice (in packages of no more than 10 kgs) – from 25% to

15%; Wheat or meslin flour – from 25% to 15%;

Shelled peanuts – from 40% to 25%;

Cooking oil – from 40% to 30%;

Cocoa powder, not containing added sugar or sweetening matter – from 20% to 10%;

Macaroni only – from 20% to 10%;

Cereal – from 20% to 10%;

Mixed Vegetables – from 20% to 10%;

Peas – from 20% to 10%

Beans – from 20% to 10%;

Orange Juice – from 40% to 30%;

Grapefruit Juice – from 40% to 30%;

Orange juice for infant use – from 10% to 0%;

Grapefruit juice for infant use – from 10% to 0%;

Grape juice – from 20% to 15%;

Preparations for infant use – from 10% to 0%.

These measures will take effect immediately.



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Detailed Budgetary Measures For the first time in recent history, the Budget Statement signaled the Government’s intention to introduce significant and far-reaching tax measures. Although the Honourable Prime Minister stated in his speech that he would mention the more important of the measures, some of those in respect of which he remained silent seem to be at least as important. We have outlined below the proposed measures with a commentary of the impact which they may have on taxpayers, but readers should note that this will be dependent on the actual legislative amendment. We have also mentioned some areas that in our view warranted attention. Income Tax Measure - Changes in the Allowances The Income Tax Act is to be amended with effect from January 1, 2006 to • Increase the personal allowance from $25,000 to $60,000. For persons 60 years and

over, the increase will be from $40,000 to $60,000; and • To remove the following: -

The $1,200 child allowance in respect of maintenance payments made to a spouse or former spouse;

The $18,000 mortgage interest deduction;

The $10,000 per annum deduction for first time home owners for the first five

years from acquisition; The $10,000 deduction in respect of the net increase in credit union shares;

Commentary At first blush the increase of the personal allowance seems generous and likely to produce a significant benefit to taxpayers in general. However, one must juxtapose that against the removal of all other major allowances and deductions. The combined effect of these measures is that many taxpayers will not realize a net benefit from the increase in the personal allowance, and the impact may well be negative for any persons over 60 who took advantage of those claims since they will receive a $20,000 increase in the allowance, but at the expense of potentially much more in deductions and other allowances.



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Detailed Budgetary Measures (Continued) Of particular concern is the removal of the $10,000 credit union deduction which is one of the few incentives to promote savings. Its removal is likely to have a negative impact on the levels of deposits with credit unions which our preliminary review has revealed increased significantly since this measure was reintroduced in 2002. It appears that the $12,000 deduction in respect of contributions to approved pension plans, deferred annuities and national insurance, as well as the $18,000 deduction in respect of tertiary education, will continue to be available. Measure - Decrease in Income Tax Rate With effect from January 1, 2006 the income tax rate is to be changed from a two-tiered rate of 25% on the first $50,000 and 30% thereafter, to a flat rate of 25% on all chargeable income. Commentary This will produce an increase in disposable income for persons whose chargeable income exceeds $50,000. It is hoped that in this time of plenty that the individuals who will enjoy the benefit of this measure will also seek to exercise some of the fiscal responsibility to which the Honourable Prime Minister referred and seek to save and invest the net gain, or at least some of it, for the lean times ahead. Measure – Removal of Tourism Project Allowance The 25% allowance in respect of equity investments in tourism projects is to be removed with effect from January 1, 2006. Commentary While it is unclear how many people actually took advantage of this measure, its removal seems to be contrary to the Government’s stated intention to increase T&T’s profile as a conference centre for the region and a tourism destination, which will require, among other things, a significant increase in the room capacity. Measure – Pensions and Annuities The tax provisions in respect of pensions and annuities are to be amended to achieve the following: -



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Detailed Budgetary Measures (Continued) • An increase in the rate of tax on the refund of pension contributions and annuity

premiums from 10% to 25%; • An elimination of taxes on transfers of contributions/premiums from one approved

plan to another; • An extension of the tax exemption on the proceeds of an annuity to all residents,

regardless of age; • An increase in the contributions payable by an employer under an approved

corporate annuity plan for the benefit of his employee from 1/3rd chargeable income (with some adjustments) to 20% of gross income;

• A removal of the tax-free withdrawal from pension funds and deferred annuity

plans for first time home acquisition; • An increase in the maximum monthly value of a pension or annuity that can be

commuted to a tax free lump sum from $65 to $500. Commentary One of the items of Government’s package of reforms highlighted in its 2005 Budget Presentation is comprehensive pension reform. There is no indication that this will materialize in the near future, yet piecemeal amendments are being made to the tax provisions regarding pensions and annuities. It would seem that these amendments should have been considered and introduced, if appropriate, as part of the more holistic approach that one expects is to be taken under the reform process. However, with respect to the specific measures to be introduced our views are as follows: - • While it is hoped that the proposed increase in the tax on refunds of pension

contributions and annuity premiums will deter persons from frivolously terminating their retirement funding arrangements, it will produce significant hardship for those persons forced by economic circumstances brought on for example by a loss of employment to take such a step.



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Detailed Budgetary Measures (Continued)

With the change in the tax rate to 25%, all pension/annuity benefits, other than the commuted lump sum which remains exempt from tax, will suffer the same tax result, i.e. tax at 25%.

• The elimination of tax on transfers from one approved plan to another will enable

greater portability and will be a welcome measure to many insurance companies which have been advocating such a move for some time. It will also be welcomed by the now highly mobile workforce since its members can take their retirement benefits with them as they move from one employment to the next. This is likely to encourage them to retain a single plan rather than hold a series of plans from different employments or surrender as they go.

• The tax exemptions currently available in respect of annuities relate only to

immediate annuities taken out by persons sixty years and over. It would appear that the intention is to allow any person who takes out an immediate annuity to receive the periodic payments free of tax.

While this move makes sense since it merely allows a resident individual to avoid tax on the spread of his capital over a period of years, along with some small interest thereon, it is doubtful that many persons will take advantage of, or benefit from, this provision.

• An employer may currently contribute up to 1/3rd of his employee’s salary to a

corporate sponsored deferred annuity without the employee being deemed to have received a taxable benefit in kind. The limit of contribution is to be “increased” to 20% of gross. However, it should be noted that this measure is more often than not used to provide retirement benefits to persons in the middle to upper income brackets and once the employee is earning a salary, inclusive of benefits, at or above $200,000, 1/3rd of net begins to exceed 20% of gross.

• The removal of the tax-free withdrawal of pension contributions for the purchase of

first time homes is not expected to have much of an impact since all indications are that it has not been widely used.

• We applaud the intention to allow persons to commute (convert) a monthly pension

of up to $500 to a tax free lump sum.



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Detailed Budgetary Measures (Continued) Measure – Removal of ESOP Benefits With effect from January 1, 2006, withdrawals from approved employee share ownership plans will cease to attract a beneficial treatment and will be assessable to tax as part of the employee’s taxable income. Commentary ESOPs are intended to encourage deeper employee involvement in, and commitment to, the companies by which they are employed through providing those employees with an equity stake in the Company. This participation is currently encouraged through the grant of certain tax concessions, such as tax deferral, reduced rates and exemptions in respect of the benefits received under the plans. While it appears that the deferral will continue, in that it seems that benefits will continue to be taxed as they are withdrawn from, rather than contributed into the approved plans, the reduced rates and tax exemptions on withdrawals are to be removed. Since this now imposes tax at the full rate not only on the contributions made to the plans by the employer out of the employee’s bonus, but also on any capital gains realized in respect of the shares acquired under the plan, this will render this benefit a lot less attractive than it currently is and may lead to the demise of such plans. It is surprising to say the least that such plans, which benefit a wider cross section of employees, have been targeted while stock options which are largely enjoyed by top executives only have not been touched. Measure – Employee Loans Employees who receive a loan from their employers at a rate of interest below what the Central Bank and the Board of Inland Revenue determine to be an armslength commercial rate of interest, will be charged to tax on the difference between the rate charged and the commercial rate. Commentary This will be seen as a significant blow to employees of financial institutions who have long enjoyed the benefit of reduced interest rate loans and may create hardship for employees who are locked into long term facilities with their employers.



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Detailed Budgetary Measures (Continued) While one may argue that it evens the playing field for the rest of the employed masses who do not enjoy such a benefit, it leaves one to wonder what impact it will have, for example on salary advances and why other employees who are allowed to enjoy their employers’ stock in trade at reduced prices or free of charge are not also targeted. Measure – Motor Vehicle Benefit and Allowance The $100,000 limit applied to the value of private motor vehicles for the purposes of calculating the wear and tear allowance will be removed, allowing persons engaged in trade or business to recover the full cost of the expense incurred in respect of the acquisition of such vehicles. At the same time the basis of the tax borne by employees who are allowed to use vehicles for their private benefit will be increased as follows: - • Where the vehicle is owned by the employer the benefit will be changed from 1%

of the cost of acquisition to 50% of the annual wear and tear. • Where the vehicle is leased by the employer, the benefit will be increased from 1/3

to ½ of the rental value of the vehicle. Commentary While the removal of the limit on the value of vehicles for wear and tear purposes is welcome in this market of escalating car prices, the significant increase in the taxable benefit for the employee seems unduly harsh, especially where such vehicles are often used significantly by the employee for the purposes of the job. Employers and employees will want to consider the relative merits of accounting for tax on a benefit in kind based on a fixed rental charge versus a diminishing wear and tear allowance. Measure – Housing Benefit Residential accommodation provided to employees is to be assessed on the basis of the fair rental value of the property.



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Detailed Budgetary Measures (Continued) Commentary There is currently a significant discrepancy between the taxable benefit that an employee who is provided with housing is required to report if he is occupying a property owned, as opposed to property rented, by his employer. In the former instance he accounts for tax on the basis of the annual rateable value of the property, which in practice tends to be significantly below current rental values, while in the latter he accounts for tax based on the rent paid by the employer. The proposed amendment will even the playing field which is not a bad idea. However, it is our view, given the astronomical rise in property prices and rents, that a cap should be placed on the benefit that an employee is seen to receive in respect of the provision of housing as has been done in Barbados where property prices are also high. Corporation Tax Measure - Decrease in Corporation Tax Rate The rate of corporation tax is to be reduced with effect from January 1, 2006 from 30% to 25%. Commentary This measure will undoubtedly be received positively by the business sector and ought to enable companies to reinvest a greater proportion of their profits. However, the measure must be weighed against the removal of many allowances and reliefs to which these companies were entitled. The net effect of the measures will have to be assessed on an individual basis. Measure - Relief for Approved Companies With effect from January 1, 2006 approved small companies, approved regional development companies and approved activity companies will be entitled to full corporation tax exemption for five (5) years rather than a 25% tax credit to which they are currently entitled.



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Detailed Budgetary Measures (Continued) Commentary While this appears to be a noteworthy measure, there is no evidence to suggest that much advantage has been taken of the existing measure, so it is unclear whether this increase in the benefit will have much if any impact. It may be an opportune time to review the criteria for relief to ensure that the measures are targeting the right types of enterprises and continue to be meaningful ten (10) years following their introduction. Measure – Removal of Tax Holidays With effect from January 1, 2006 tax holidays will no longer be available to: • New investors for regions • New investors for approved activities • Companies approved under the Fiscal Incentives Act • Free Zone Companies. Free Zone companies, and presumably fiscal incentive companies, will continue to enjoy relief from customs duty and value added tax. Commentary It is unclear as to which companies are caught within the first two categories identified above. In circumstances where the Government has stated its intention to pursue and encourage greater downstream activity and value added production, it is surprising to see the removal of the only remaining incentive legislation, especially where there is a strict approval process in place which restricts the persons allowed to enjoy the privileges offered under the relevant Acts. With the targeted projects likely to require significant capital investment, one can only wonder what incentives will be offered to attract the required capital injections. By these actions Government has sent a very clear message to the investor population and we can only wait to see what impact it has on this country’s long standing attraction as a favoured location for such investors.



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Detailed Budgetary Measures (Continued) Measure – Removal of Tax Exemption on Interest on Tourism Project Loans etc Interest on loans given to approved hotel and tourism projects currently enjoy an exemption from corporation and withholding tax. This exemption is to be removed effective January 1, 2006 in respect of new investments. Similar reliefs available in respect of approved small companies, approved agricultural holdings and housing are also to be removed.

Commentary Since it is unclear whether the benefit of the exemption trickled down to the hotel developers, small businesses or farmers in the form of lower interest rates as was intended, it is difficult to predict what, if any, effect this will have on the industries which the Government has targeted as requiring attention. However, the benefit in respect of housing did contribute to keeping mortgage interest rates down and as such its removal is expected to negatively impact on this, and adversely impact the already spiraling cost of housing. Measure – Removal of 10% deduction re increase in loans to approved small companies Financial institutions are currently allowed a deduction of 10% of any increase in loans granted to approved small companies. This relief is to be removed. Commentary As with the exemption on interest granted to such companies, it is unclear whether this measure had much impact on the ability of these entities to access funding or on the cost of the funding they managed to access. As such it is not expected that the removal of the measure will produce any significant repercussions. Measure – Removal of the APDC Allowance Approved Property Development Companies are currently entitled to claim as an allowance 15% of the cost of construction of commercial buildings. This claim is available over and above the wear and tear allowance that would be available in respect of the property and provides a significant benefit to those companies that secured approval under the relevant section of the Corporation Tax Act.



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Detailed Budgetary Measures (Continued) Its removal will significantly impact the tax profile of these companies but in the broader scheme of things is unlikely to have a material impact on the investment decision given the very positive returns currently enjoyed in the commercial property rental market. Measure – Introduction of Universal Pooling of Assets Currently persons engaged in a trade or business are required to separate their assets into pre- and post-1995 acquisitions, with the former attracting balancing allowances/charges on disposal, while the latter would merely be removed from the pool on disposal and the issue of balancing allowance/charge deferred until the pool was in debit or no longer contained any assets. With effect from 2006 all assets will be treated as pooled assets. Commentary We applaud this long-overdue move to remove this two-tiered system which merely created complications without any tangible benefit. Measure – 10% allowance for all Industrial Buildings As with wear and tear allowances on plant and machinery, a two-tiered system currently exists in respect of capital allowances on industrial buildings by virtue of which pre-1995 buildings attract a 2% wear and tear on a straight-line basis while post-1995 buildings attract a 10% wear and tear on a reducing balance basis. Effective January 1, 2006, the 10% allowance is to be applied to all buildings. Commentary Again we applaud this measure. Measure – Taxation of Trading Income of local authorities Local authorities currently enjoy full exemption from corporation tax, including in respect of any income generated from the conduct of a trade or business. While, such bodies will continue to enjoy exemption from tax on profits realized from the conduct of their activities as local authorities, any profits realized from the conduct of a trade or business will be taxable with effect from January 1, 2006.



25

Detailed Budgetary Measures (Continued) Commentary We are of the view that it is right that a local authority should not bear tax on income generated from its activities as a local authority, but that where it ventures into the arena of trade or business and thereby potentially provides competition to other trades, it should be taxed on the profits generated from this activity in the same manner as approved charities are taxable on such profits. Measure – Taxation of Interest on Public Debt At present, the President of the Republic has the power to exempt from tax interest earned on a loan charged on the public revenue. This power is apparently to be removed. Commentary It is unclear why this amendment is to be effected. The exemption, as it currently stands is not automatic and only applies as and when the President exercises his authority, presumably on the advice of the Government. Measure – Expenses Related to Exempt Income In a relatively recent decision before the local courts it was held that subject to certain conditions, a person earning income that is exempt from tax may, in arriving at his chargeable profits, deduct expenses incurred in producing that exempt income. The legislation is to be amended to prevent such a deduction and to prescribe a method of apportionment of expenses where a person earns both exempt and taxable income. Commentary In the past the BIR has applied a fairly arbitrary method of apportioning such expenses and it is hoped that dialogue will be held with the stakeholders before the passage of any such measure. Measure – Removal of 50% Uplift for Art and Culture etc Companies are currently allowed to claim a deduction of 150% of expenditure incurred in respect of local art and culture, training of employees, video production, and sports. It appears that while the uplift is to be removed, companies may be allowed to continue to deduct the actual expense. We will have to await the actual provision to determine if that is in fact the intention.



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Detailed Budgetary Measures (Continued) Commentary This is likely to negatively impact on the level of support which will be given in future to the beneficiaries of these measures, such as sporting bodies, cultural groups and the like. It also remains unclear as to what if anything will be done regarding the deduction which companies are allowed to claim in respect of covenanted donations to approved charities. While this relief previously stood on its own and allowed for the deduction of up to 15% of the contributing company’s taxable profits, it was recently tied to the other benefits mentioned above and limited to $1M. If that relief is further reduced, removed, or even left at its recently restricted limit, we anticipate a significant negative impact on contributions to approved charities and NGOs at a time when the crumbling social fabric is crying out for greater involvement and action from these bodies. Measure – Removal of Employment and Apprenticeship Allowances Employers are currently allowed to claim 200% of the wages/salaries paid to qualifying employees and apprentices. This benefit is to be removed effective January 1, 2006. Commentary Having regard to the fact that these measures were introduced to promote fuller employment, it is understandable that they would be removed now that according to the Honourable Prime Minister full employment is within reach. Measure – Bad Debt Relief to be Based on Central Bank Requirements Effective January 1, 2006, persons engaged in a trade or business will be allowed to claim bad debt relief on the basis of Central Bank’s provisioning requirements. Commentary While such a move will promote greater certainty for financial institutions who are required to calculate their provisions in accordance with Central Bank criteria and instructions, and who will probably be relieved that the BIR will no longer be able to promote what often seems likely arbitrary criteria long after the fact, it is unclear how such an approach will be applied to companies that do not fall within the Central Bank’s purview. Measure – Abolition of Close Company legislation Close company rules, which disallow or limit certain deductions such as interest and rent to related parties and fees to directors where the company is controlled by five or fewer persons, are to be removed from the Act.



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Detailed Budgetary Measures (Continued) Commentary Since the legislation was amended in 1996 to exempt local dividends from income tax, the close company legislation has become a lot less meaningful than it previously was and is ignored by many companies that qualify as close companies in T&T. In the circumstances, its removal seems long overdue. Measure – Thin Capitalisation Rules Where the debt to equity ratio exceeds 3:1 in a company, the thin capitalisation rules will be applied and the deduction allowed in respect of interest paid on debt due to related parties will restricted. Measure Such an approach has long been the practice in more developed countries. We will have to await the specifics of the provisions to be introduced locally to properly opine on the impact that this will have in T&T. Measure – Capital Allowances on Patents and Scientific Research With effect from January 1, 2006, persons engaged in trade or business will be allowed to claim wear and tear allowances, at a rate(s) to be disclosed, on patents and scientific research. Commentary We have long advocated the introduction of measures to provide some relief in respect of intangible assets and we are pleased to see that it is finally on the horizon. We would recommend that consideration be given to extending this relief to other intangible assets such as software. Business Levy Measure – Exemption for approved companies The gross sales of approved small companies, approved regional development companies and approved activity companies are to be exempted from business levy for a period of five years. Commentary As with the Corporation Tax measures in respect of these companies it is unclear what benefit if any this measure will produce.



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Detailed Budgetary Measures (Continued) Road Improvement Tax Measure – Removal of Road Improvement Tax The 5 percent Road Improvement Tax is to be merged into the petroleum excise tax and the Road Improvement Tax is to be abolished with immediate effect.

Petroleum Product Prices Measure – Fuel Price Adjustments Certain amendments are to be introduced to – • Reduce with immediate effect, excise duties on petroleum products as follows: -

Unleaded Gasoline (including 95, 92 and 83 RON) from 99.696 cents per litre to

10 cents per litre; Kerosene from 7 cents per litre to 5 cents per litre;

Auto Diesel from 19.6 cents per litre to 5 cents per litre.

• Remove the refinery margin of 2 cents used in arriving at the postal price of

petroleum products; • Increase the retailer’s margin by 2 cents as follows:

95 RON Unleaded Gasolene from 15 cents to 17 cents per litre; 92 RON Unleaded Gasolene from 15 cents to 17 cents per litre;

83 RON Unleaded Gasolene from 12.5 cents to 14.5 cents per litre;

Kerosene from 8 cents to 10 cents per litre, and

Auto Diesel from 10 cents to 12 cents per litre.



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Detailed Budgetary Measures (Continued)

• As a result of the change in the excise duty and ex-refinery margin, the Wholesale Price will be adjusted as follows:

95 RON Unleaded Gasolene from $2.37 to $2.43 per litre;



Kerosene from $1.22 to $1.20 per litre, and

Auto Diesel from $1.16 to $1.18 per litre.

Commentary These measures will: • Improve the cash flow of wholesalers who bear the burden of subsidy payments in

the first instance; • Significantly reduce the level of subsidy payments by the government; and • Enhance the viability of the operations of retailers. The Minister noted in the course of the presentation the very significant subsidy ($1.4billion) that his Government provided in order to keep the price of unleaded gasoline at $2.70 per litre. It would appear that the above mentioned adjustment will lead to an increase in the retail price thereby “fuelling” an increase in the cost of transport with a potential spiraling effect on other costs. Value Added Tax Measure – Zero Rating The list of zero-rated items is to be amended to include items that seem to fit within the category of school supplies such as geometry sets, notebooks, puzzles and the like. This is to take effect immediately.



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Detailed Budgetary Measures (Continued) Commentary While we accept the need to give relief in various areas, including in respect of school supplies, this measure further erodes the VAT base and compromises the integrity of the tax. The original principle of a broad-based tax with few exceptions/exclusions, coupled with more direct relief or aid rather than through the tax system is in our view the preferred route. Withholding Tax Although no mention was made of this tax, it would seem that a reduction in the existing rates of up to 20% on gross payments is warranted having regard to the fact that the corporation tax rate on net profits is to be reduced to 25%.



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Sectoral Analysis & Commentary Energy and Energy Industries The Energy Sector continued to be the mainstay of the Trinidad and Tobago economy in the past year contributing approximately 40.5% to the country’s Gross Domestic Product, 85.5% to exports and 37% to Government’s revenues. Continued growth in the international economy which for 2005 is expected to be in the region of 3.5% along with the continued violence in Iraq, strikes and consequent supply disruptions, weather patterns and a shortage of refining capacity contributed to the record breaking crude oil, product and natural gas prices both globally and domestically. Overall policy objectives which derive from the Government’s Green Paper on Energy Policy continue to be:- • To enhance oil and gas reserves; • To ensure that downstream industries are adequately served with gas; • To bolster oil production at current levels or above; • To ensure sustainability in the energy sector; • To stimulate oil exploration onshore while seeking to redress the exploration

omissions of the past. Despite the recent and proposed fiscal reforms within the sector interest continues to be high with an estimated US$8-10 billion worth of investment. Within the last decade we have moved from an oil economy to a gas economy. This trend is expected to continue despite the coming on-stream of BHP’s crude. In addition to this “lateral” move, the sector is now poised to go deeper into the energy value chain. The Prime Minister predicted that the country would experience a period of “accelerated development” arising out of the oil and natural gas windfall. Other commentators with the sector have been more cautious in their characterisation of the increased revenues. The key question which remains is whether the Government and we as a nation learn from past mistakes and handle such wealth prudently.



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Sectoral Analysis & Commentary (Continued) Focus on Projects As noted earlier the Energy Sector continues to lead the way in terms of the contribution to national growth and development of the national economy. This has led to a number of strategic decisions one of which relates to the issue of local value whereby new project proposals in the downstream natural gas sector should include a value added element. This component should take the primary product of manufacture into another process thereby creating a value added product. In this regard plans are being progressed to establish plants to produce melamine, urea-ammonia, nitrate and acetic acid. The Minister also indicated that a three fold upgrade of the Petrotrin refinery is being pursued including a Gasoline Optimisation Programme, an ultra Low Sulphur Diesel programme and a Bottom of the barrel optimisation. The Government has agreed to a proposal for the Gasoline Optimisation Programme and upgrade of ancillary utilities to be implemented over the next four years at Petrotrin, to improve the quality of gasoline production to high end market specifications. The scope of works include inter-alia:- • An FCCU upgrade • A new Alkylation Unit/Acid Plant • A new Pre-fabrication Unit/Isomerisation Unit; and • A new Continuous Catalytic Regeneration Reforming Unit. Upon completion of the programmes, Petrotrin will be well placed to be the premier supplier in the region of high quality, environmentally friendly gasolines. Some of the main benefits will be:- • An increase in the gasoline yield • Improvement of the gasoline pool quality • Improvement in energy efficiency and environmental compliance; and • Maintenance of refinery throughput at 168,000 barrels per calendar day.



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Sectoral Analysis & Commentary (Continued) Further, the Minister indicated that discussions are currently underway with respect to the feasibility of establishing a world scale polypropylene plant for this country. The estimated cost will be US$1.4 billion and will be the first in Trinidad and Tobago. The Minister anticipates start up for year 2010, and will be yet another building block towards making Trinidad and Tobago a modernised industrial estate. This should create opportunities for downstream businesses in the consumer products, film for packaging food, toys, automotive parts and appliances etc. It is also expected to create additional jobs, as well as reduce the capital and operating costs of both refineries. The Minister referred to this as being a good investment opportunity for citizens of Trinidad and Tobago. The ALNG Train IV is expected to be commissioned in November 2005. A strategic decision has now been taken to explore investment opportunities along the entire LNG value chain. The Minister indicated that a Committee has been set up to select strategic partners for possible joint venture arrangements with the Government in the areas of new LNG investments including a new LNG train, LNG shipping, re-gasification facilities, distribution and marketing to the final consumer. The Minister also indicated that The National Gas Company is nearing completion of two major pipeline projects that will significantly increase the company’s capability to deliver increased volumes of natural gas to new projects as and when needed. The Government has also received proposals for the construction of two aluminium smelter plants at the new industrial estates which are currently under development. As noted earlier, Government has advised of its overarching policy regarding downstream projects to include a value added element. To this end we understand that one of the proposals has outlined utilisation of 100% of the produced aluminium in downstream facilities in varied locations in Trinidad and Tobago. The Minister also advised that consideration is being given to the revitalisation of the iron and steel industry. In one instance Nucor has expressed an interest in setting up a Mega-Module Midrex plant to produce 1.5 million tones per annum of Hot Briquette Iron (HBI) at the company’s original site in Point Lisas.



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Sectoral Analysis & Commentary (Continued) The International Steel Group (ISG) purchased the assets Cleveland Cliffs and Associates (CAL) and now intends to restart the plant and bring it to commercial levels of production. It is expected that these initiatives and commitments would lead to opportunities for the establishment of plants producing downstream products based on either cast steel or cast iron. It was further noted from the Minister’s presentation that another investor (Essar) has agreed to construct an Integrated Iron and Steel Complex representing an investment of US$1.2 billion which will include several downstream steel plants. This investment will involve, among other things the manufacture of steel plates that can be used to make tubes and will represent a significant new development the domestic steel industry. There is now an urgent need to advance the process of providing additional capacity for T&TEC to meet the rapidly growing electricity demand in the country. The steadily increasing domestic demand coupled with the rapidly growing industrial demand are two (2) of the key drivers. In addition to the above, the potential for additional steel production and the possibility of an aluminium smelter project have added impetus for the Government to seek an expansion in the country’s power generation capacity. To this end we understand that based on requests for proposals, T&TEC is in negotiations with a selected provider to have additional generation capacity installed and operational by year 2006. Changes in the Legislation The Minister had in previous budget presentations indicated that a new fiscal regime framework for oil and gas was of pressing importance as the exploration and production sector of the industry had shifted towards greater production of gas than oil. The Minister advised that the Government had recently completed its review exercise with respect to the taxation issues on crude oil production. The Bill to amend the relevant legislation (Finance Bill 2005) was recently laid in the House of Representatives and was enacted and assented to in July 2005. This Act included measures to correct anomalies in the legislation that governs the taxation of crude income.



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Sectoral Analysis & Commentary (Continued) Investment incentives and discounts will no longer be used in the computation of the Supplemental Petroleum Taxes, the only exception being that of the deduction of royalty. To compensate for the increase in the taxable base, the rate of tax has been lowered marginally. The rate reduction is somewhat larger at oil prices below US$21 per barrel than at higher oil prices. The trigger price at which Supplemental Petroleum Tax becomes payable has been reduced slightly. The amendments to the Petroleum Profits Tax regime include:- (a) The removal of the first year allowance for both tangible and intangible

expenditure and the postponement of annual allowances to year two or until commencement of commercial production whichever is the earlier;

(b) The shift to quarterly tax payments calculated on a current year basis; (c) Non-deferral of capital allowances; (d) Allowing decommissioning and abandonment costs only when incurred; and (e) Limiting deductible management charges to 2% of expenditure. We also understand that Cabinet has approved a new fiscal framework for deepwater and natural gas operations. With respect to the deepwater operations, we understand that the following are being considered given that drilling and development in deepwater is more costly than drilling in shallow water:- (a) Introduction of a capital uplift of 40% for exploration well expenditure; (b) Application of Supplemental Petroleum Tax Class D for both land and

deepwater blocks; (c) Introduction of a new model Production Sharing Contracts (PSCs), with tax

being paid by the contractor;



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Sectoral Analysis & Commentary (Continued) (d) Government’s share of profit splits would be in lieu of Supplemental Petroleum

Tax, royalty and other taxes except for Petroleum Profits Tax and Unemployment Levy;

(e) Contractor would be responsible for payment of taxes; (f) Allow consolidation of exploration well expenditure for Petroleum Profits Tax

computation. We understand that the Government’s perception of the advantages of the new PSCs for the deepwater operations will be that the contractor will be responsible for the payment of Petroleum Profits Tax, and this should solve the problems associated with the gross up method of tax calculation. On the issue of natural gas one of the plans outlined in last year’s national Budget for Fiscal 2005 was the leveraging of the energy sector to create conditions for sustainable growth and development by increasing the revenue take through the introduction of a new tax regime for oil and gas. In his 2005 presentation the Minister of Finance indicated that his government did not take the amendment of the legislation lightly and therefore “took the prudent step to engage in deep enquiry” involving extensive research using world class energy consultants and wide ranging consultation with all stakeholders. He also noted that the Government sought to ensure that the levels of taxation were equitable across all the industry players. The amendment to the natural gas legislation has as its objectives:- • Continued provision of incentives for further exploration and development via

accelerated capital allowances; • Creating balance in the allocation of future gas sales between LNG and the local

downstream energy sector; • The use of fair market value principles for all contracts along the LNG value chain; • Provision of incentives to stimulate oil production;



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Sectoral Analysis & Commentary (Continued) • Review of the relevance of the continuation of concessions provided to facilitate

development of the LNG industry. In furtherance of this reform process Government secured the approval of BPTT for the accelerated implementation of the 10% gas royalty which was due to commence in 2017. This will now be implemented on a phased basis over the period 2005 to 2008. The details of this phased implementation were however not outlined. Impact While Government’s objectives for the fiscal regime are laudable there exists concern that the measures do not create levels of taxation that are equitable and as such they may be seen to be counter productive. Concerns over the proportion of the value that remains offshore as a result of differences between net back prices and fair market value must be viewed in the context of the related risk. The retroactive enactment of the measures introduced under the Finance Act 2005 has already shaken the credibility of the Trinidad and Tobago investment climate. The perception of T&T being and remaining “internationally competitive” must therefore be carefully considered and Government must ensure that any measures introduced are supportive of that status. The measures must therefore be carefully evaluated to ensure that they do not serve to be a disincentive to investment. The introduction of amendments must not simply be driven by a desire to cash in and obtain a “fair share” of the proceeds from the sale of natural gas. The question to be answered is whether these measures allow for continued sustainable development for the Trinidad and Tobago oil and gas industry.



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Sectoral Analysis & Commentary (Continued) Financial Services The Trinidad and Tobago Financial Services Industry is considered to be one of the most advanced within the region. Its role is to allocate at minimum transaction cost, financial resources to productive business with the highest returns given the related risk. Additionally, the financial services sector plays a pivotal role in processing information provided by the market resulting in securities quoted on the market at fair prices. Banking The Trinidad and Tobago Banking Sector will from December 2006 have to consider the degree to which it will implement the new requirements of the Basel II Accord. Basel II replaces Basel I issued in 1998 and subjects banks worldwide to a broad but progressively more stringent and scientific approach to setting its minimum capital requirements. The Honourable Prime Minister, in his Budget presentation, while introducing a host of measures to simplify and modernise the tax system for many Trinidad and Tobago businesses has not generally addressed financial instruments in the Government’s tax policy agenda. In many developing and developed countries the taxation of derivatives, financial instruments and other structured banking arrangements are subject to specific schemes of tax legislation to reduce the prospect of mispricing these contracts. The uncertainty surrounding the tax implications of banks and other businesses using these products is a source of added risk of doing business in Trinidad and Tobago. The Honourable Prime Minister did announce the following general measures in his presentation: - • The calculation of the relief for bad debts for all companies including Banks will be

based on the Central Bank of Trinidad and Tobago’s requirements for specific bad debts;



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Sectoral Analysis & Commentary (Continued) • The removal of the limit on wear and tear applicable to private motor vehicles

generally will eliminate the consequential uncertainty relating to private motor vehicles subject to lease contracts.

• The following provisions while affecting all companies will most negatively impact

on Banks, Insurance and Holding Companies: -

Tax loans to employees on the difference between the interest rate charged on the arms-length commercial rate of interest (as advised by the BIR and the Central Bank) and the actual rate; Tax written off loans as cash payments;

Expenditure incurred in the production of exempt income will not be treated as a

deductible expense; clearly defined provisions for the apportionment of expenditure will be introduced in the tax legislation.

• Terminate tax exemptions for new investments from lending in tourism, agriculture, small business and housing;

• Remove the deduction for financial institutions of 10% of the increase in loans for

approved small companies. Life and General Insurance No mention was made of changes to the tax regime for Life and General Insurance companies. This is not surprising given the complexity of the issues involved. The only change mentioned relates to the limit on contributions by employers to employee annuity contracts. The Honourable Minister proposes changing the limit from one-third chargeable income to twenty percent of gross income. Pensions and Annuities The issue of pension reform did not feature to any extent in the Honourable Prime Minister’s presentation but there has been much said locally and internationally about the need to change the way pension schemes are structured as well as the number of people covered by a pension scheme. In particular much has been said about the benefits of private funded schemes over public pay as you go systems.



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Sectoral Analysis & Commentary (Continued) However a more fundamental issue which those in charge of pension policy will have to face is the view that when populations are ageing and savings rates are low neither the pay as you go nor the privately funded schemes provide a solution to this problem. Adair Turner an expert in the field, is of the view that the only solutions to the issue of an ageing population are to: - • Increase the retirement age • Increase taxes • Increase the savings rate It is hoped that when the issue of pension reform in the private and public sectors is addressed these fundamental issues will be fully analysed and policy measures put in place to effectively deal with the issues. In terms of changes to the existing system, the Honourable Prime Minister did propose the following changes:- • Tax the refunds of pension plan contributions and surrender of contributions at

25%; • Eliminate the tax on transfers of contributions or premiums to another approved

plan; • Extend tax exemptions in respect of the proceeds of an annuity or other periodic

sum payable to all residents regardless of age; • Eliminate the tax-free withdrawal from pension funds and deferred annuity plans

for the purchase of a first home; • Increase the maximum monthly value of a pension fund or deferred annuity plan

commuted as a lump sum from $65 to $500 per month. Mutual Funds No changes to the existing scheme of taxation were proposed for 2006. Under the existing system, both resident individuals and companies receiving dividends from qualifying mutual funds are exempt from tax. Registered qualifying mutual funds are themselves exempt from tax on income it receives from its investments.



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Sectoral Analysis & Commentary (Continued) Credit Unions The tax credit of $10,000 for an increase in total investment in Credit Union shares will be removed from January 1, 2006. Manufacturing Manufacturing may not be the engine that drives our current prosperity but it is central to our economic and national development from the perspective of having a diversified economy. This sector remains a key contributor in attaining developed country status and the Vision for 2020. A significant achievement recently, which is perhaps not looked at as a manufacturing achievement, was the launch in April 2005 of the second platform to be built locally, the Cannonball Platform commissioned for bpTT at a cost of US$54.5million. This platform was launched from the LABIDCO Fabrication yard in April. The first platform being the Kairi One built for BHP Billiton. In terms of contribution to revenue, the estimated tax revenue from income & profits from other companies (that is excluding oil companies) for the financial year to September 30, 2006 is $2.8 billion. This total includes the tax contributions of the manufacturing sector and represents approximately 10% of the estimated total tax revenue (oil companies approximately 57%). This is not an insignificant contribution to the coffers. Given the above, meaningful incentives for this sector were last proposed in the 2002 budget with the increase in initial allowances to 60% on the acquisition of new capital assets.

On the other hand since then our manufacturers have been faced with increases in the minimum wage; increases in employer National Insurance contributions; increases costs of raw materials, increased shipping costs along with security concerns for all and overall lack of adequate infrastructure to support them. Our manufacturers are reputedly referred to as the “Tigers of the Caribbean” and a testament to their resilience is the fire at two of our large manufacturing factories and the subsequent re-opening of new facilities within record time, in so doing preserving the employment of hundreds of wage earners. Why then have our



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Sectoral Analysis & Commentary (Continued) Policymakers continued to be indifferent to giving tangible and direct support to this sector and not considered the implications of losing our leadership in regional manufacturing. In this year’s budget presentation the Honourable Minister noted that as a result of investments and provision of generous fiscal incentives this sector has grown to be the leader in the Caribbean and that his government is committed to helping the sector maintain this dominant position through: - • Modernisation of existing Industrial parks and development of new ones; • Increase market intelligence and product development capabilities among

manufacturers; • Improve customs services, port facilities and various institutions facilitating

business; • Intensify efforts to heighten negotiations on Free Trade Agreements with

MERCOSUR, Canada and Central America; • Developing a comprehensive legislative framework that would facilitate the

expansion of trade & investment; and • Creating an environment for fair competition in the domestic market. The above are laudable, but the question is how are the recommendations going to materialize and within what implementation timeframe? Given the above intentions, there were no specific fiscal measures for this sector, however the following indirect measures should provide some positive impact:- 1 Reduction in the corporation tax rate to 25%. A most welcome measure which

would hopefully spur additional capital investment.

However, this measure will be of no benefit to those manufacturers incurring losses who would still be subject to the Business Levy and Green Fund Levy on their gross income at 0.20% and 0.10% respectively;

2 Measures and plans for improved security – a PRIORITY for sustained investment;



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Sectoral Analysis & Commentary (Continued) 3 Plans for improvements to the infrastructure on roads and drainage. 4 Reduction of tax to 0% for companies qualifying as “small” under Section 16A

of the Corporation Tax Act for a period of five years and the exemption from business levy for five years.

5 Such companies would still be subject to green fund levy at 0.10%. It is worth mentioning that not many companies within T&T qualify under Section 16A, so we question the amount of benefit that this sector would gain from this measure.

Counteracting the few positive measures mentioned above is the removal of the following the following allowances:- 1. Removal of the 50% uplift on expenditure for the sponsorship of arts and

culture and sports; 2. Removal of the 100% uplift for additional employment and apprentices. The

employment allowance was a valuable deduction for this labour intensive sector on its introduction in January 1998.

The rationale behind the allowance was of course to encourage employment of low skilled individuals;

3. Inclusion of all industrial building that qualify under the Income tax (In Aid of

Industry) Act to the pool under the provisions of the 7th schedule of the Income Tax Act which would then qualify for annual wear and tear allowances of 10%. This would mean the removal of the 2% annual allowance on a straight line basis for expenditure incurred on the acquisition of pre 1995 industrial buildings.

The requirements of this sector from the policymakers are not extravagant, they are “Basic Needs”. Some of the measures our manufacturers would have been pleased to have seen put forward include the following:-



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Sectoral Analysis & Commentary (Continued) 1. Removal of the business levy. If an entity is suffering tax losses why impute a

minimum tax? Manufacturers are high turnover type industries usually with very little mark-up, therefore this tax on gross income in periods of losses is harsh. If this proves not to be an option then perhaps the Minister could consider reducing this levy to 0.10% and extending the period of exemption for new companies to five years after commencement of business thereby allowing some measure of relief in the “teething” period of start-up.

2. Green fund levy – in his budget presentation of 2002 it was proposed to reduce

this levy to 0.075%, there was obviously merit in considering it then and this continues to be the case now;

3. Implementation of a policy that would facilitate the expediting of taxpayers

Value Added Tax refunds and corporation tax refunds failing which interest will automatically be paid;

4. Incentives for R&D and capital investments. Conclusion T&T manufacturers remain challenged. They are on the front lines of the most intense global/regional competition (FTAA, CSME) yet it is at home that they face their challenges in the form of inadequate infrastructure and debilitating “red-tape”. These challenges are not compatible with a country that expects to be classed as developed in the next 10-15 years and hopefully the mentioned recommendations on the Standing Committee on Business Development would materialize in the short to medium term. Our manufacturers work hard and are willing to take risks. They are well respected in society which is evidenced by the fact that they are often called upon to be on Committees to reform public sector enterprises. They face increased costs which unlike other sectors (banks; health etc) cannot immediately pass on to their customers. Overall the budget offered a little but took back a lot more.



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Sectoral Analysis & Commentary (Continued) Construction The Honourable Prime Minister’s budget speech was replete with references to construction projects, such that one might well believe his promise of work 24/7. Projects were identified in virtually all sectors and are meant to benefit among others:- Education • 600 Early childhood care education centres • 150 Primary Schools • 4 Secondary schools and upgraded and expended facilities for government and

assisted schools • 4 UTT Campuses • Technology centres in Chaguanas and Point Fortin Health Care • 5 Outreach centres • 8 Primary health care centres • Hospitals in Point Fortin and Scarborough • Other ongoing projects



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Sectoral Analysis & Commentary (Continued) Housing • 8,000 Units Culture • 2 Academies for the Performing Arts • a new state of the art National Carnival Centre Sport • The Tarouba Sports Complex These construction projects are in addition to that planned for the energy and manufacturing sectors, the roads and drainage programmes, and the building projects mentioned specifically in the Minister’s speech under the heading “Construction”. The sector plays and is expected to continue to play a very significant role in reducing unemployment to under 7% in 2006 but there are clear signs that the economy is in danger of “over-heating” and the scarcity of skilled labour is evident. The extensive programme that is planned will only exacerbate this situation over the short term. The prospect of training recruits in construction skills, under the Unemployment Relief Programme may reduce the imbalance but not in the short term. Other initiatives to increase the pool of skilled workers particularly within the private must therefore be developed.



47

Sectoral Analysis & Commentary (Continued) Agriculture Agriculture will be transformed. In this budget the Honorable Minister of Finance points out that in the medium-term the Government’s strategy will be to - • Improve food security and food sovereignty by the development of strategic

agricultural sub-sectors; • Pursue a sustainable rural development agenda; • Encourage youth involvement in agricultural activity; and • Increase competitiveness in export and domestic markets. “The main drivers of success” he says, will include:- • the quality of our roads; • drainage, irrigation and water management systems; • land use rationalization; • the availability of finance and credit; • effective marketing and the policy and regulatory framework; • fisheries management and infrastructure; and • The quality of human capital. The Honourable Minister boasts that 2 acre plots of agricultural land have been allocated to 7,247 former Caroni employees and an additional 18,338 acres of land has been brought into productive use.



48

Sectoral Analysis & Commentary (Continued) He says the Ministry of Agriculture Land and Marine Resources will register the new land owners as farmers which will entitle them to benefit from subsidies such as:- • 50% of the purchase price of machinery and equipment; • 50% of the cost of irrigation equipment including water pumps; • 25% of the cost tillage of land; and • 15% of the purchase price of agricultural vehicles. In addition the Agricultural Development Bank is to promote business development, growth and competitiveness in the agricultural sector. It has developed 3 new products in support of business development thrust:- • The ‘Cocoa Revitaliser” to support the revitalization of the cocoa industry; • The “Grow Safe Loan” to promote the use of good agricultural practice; and • The “Youth Window” which offers the lowest interest rates to attract our young

people to the sector. The Honourable Minister reminds us that over the years family farms have declined from approximately 30,000 units to 20,000 units. Therefore in implementing the rural development policy, focus will be on;- • Providing infrastructure to facilitate increased production and productivity by

family farms;

• Increasing the production of local foods through the Growbox and Community Aquaculture projects;

• Expanding youth-oriented programmes such as YAPA and the 4H and Young

Farmers’ Programmes; • Establishing agricultural settlements in rural areas; and



49

Sectoral Analysis & Commentary (Continued) • Providing training and facilitating the transfer of appropriate technology to

farmers, fisher folk and agri-businesses. These initiatives are laudable indeed but there have been many instances in the past where Government has declared its intention to revitalise this important sector but has failed to do so. There can be no doubting the need to bring this about so as to achieve a greater level of self sufficiency and to arrest the rise in food prices. We hope that the renewed committment to this sector by Government will be sustained and thus give rise to a vibrant sustainable industry. Tourism Sector The Minister in his Budget speech acknowledged that a siginificant amount of work is required to bring our tourism product to internationally competitive levels. His planned thrust for this sector is to:- • Upgrade the existing room stock to international standards and establish a

critical mass of new rooms led by the 5-star end of the market; • Position POS as the Meetings & Conventions capital of the Southern Caribbean

and the Business centre of the sub-region; • Upgrade selected sites and attractions and develop various facets of the product; • Increase airlift to both islands; • Enhance industry standards and quality service through human resource

development and on-going industry training; • Generate a higher level of tourism awareness among the population These intentions are commendable, but there are challenges aplenty which must be addressed including:- • Formulating and implementing a policy as some of the intentions outlined are

vague; • Crime and the reputation that T&T is gaining worldwide;



50

Sectoral Analysis & Commentary (Continued) • Poor infrastructure; • The Tourism Development Act provides for specific incentives to this sector but

to qualify investors face cumbersome qualifying criteria and tedious approval processes. It is acknowledged that the Act is poorly drafted and way past due for amendment which we understand is currently in progress and until such time no further approvals are being granted;

• The termination of tax exemptions for new investments on interest on lending to

tourism with the resultant effect of increased interest costs to the sector; • Elimination of the 25% equity investment deduction for investors in the equity

capital of approved hotel or development projects. Of concern also is the fact that the Minister in his speech referred to the termination of tax holidays for new investors in approved activities under the Corporation Tax Act and for approved enterprises under the Fiscal Incentives Act but indicated that tax holidays for tourism projects under the Tourism Development Act will not be removed at this time. Does this mean that in the very near future no such incentives will be available to qualifying tourism projects and further that those in receipt of incentives would find that they no longer apply? What would be the impact for persons considering investing in the sector ? How can this sector continue to grow and attain the thrust the Minister has outlined with the proposed removal of concessions currently being granted ? Can the Special Purpose State Enterprises undertake the development projects in tourism by assisting the Ministry? These are some of the pertinent questions to be addressed. The Tourism Ministry must put its house in order to proceed successfully with tangible encouragement for this sector, which was not evident in the 2006 budget statement. The sector is growing and continues to have significant potential for long term growth in spite of the reputation that T&T has gained as a haven for crime and drugs.



51

Appendices (Continued) APPENDIX 1 2005 Budget Deliverables - Delivered or Not?

2005 Budget Deliverables

We have provided below a summary of the projects as outlined in the 2005 Budget that were scheduled to be undertaken during the last fiscal year. We have identified the status of these projects using the following key: - Y = Project completed IP = Project in progress; P = Pending approval, procedural or otherwise; N = Project has not commenced

Summary of Total Projects (100)

Sector Y IP P N

Agriculture 1 3 3 1 Education 4 6 2 1 Energy 2 2 4 1 Health 2 4 3 1 Housing - 5 2 - Infrastructure - 5 2 - Manufacturing - 3 4 1 National Security 6 8 1 1

Social Development 1 2 2 2 Tourism - 3 - - Tobago - 4 1 - Reform 1 2 - 1

New Development – Industrial Sector - 1 - - New Development – Telecommunications 1 - - 1

TOTAL 18 48 24 10



52

Appendices (Continued) APPENDIX 1 Projects Status

Agriculture

Upgrading agriculture infrastructure by constructing access bridges, roads, establishing water management and flood control systems, constructing fishing centres in Toco and San Fernando;

IP

Training 1,500 individuals in the agricultural sector; Y

Distribution of state lands for agriculture in Caroni and other state lands; IP

Launching of the national agriculture information databases; P

Strengthen agricultural incentives programme by making it more production based; P Developing and enforcing grades and standards, enhancing veterinary diagnostic

laboratory facilities and expanding and strengthening sanitary and phyto-sanitary and food safety capabilities;

P

Promoting fish production and establishing the fisheries monitoring and surveillance unit and putting sustainable management techniques in place for renewable marine and inland fisheries;

IP

Introducing the Sugar Industry Authority to implement a quality based payment system for sugar cane.

N

Education and Training

Construct forty three (43) early Childhood Care and Education Centres ; IP

Distribution of 3,000 computers at the primary level through the “school net” project;

Y

Distribute 400,000 textbooks under the Textbook Rental programme; Y

Distribution of lunches and breakfast meals under the school Nutrition programme; Y Restructuring and decentralizing Ministry of Education; Y

Expand local school boards pilot project to include thirty six (36) selected Government secondary schools for a period of two (2) years;

IP

Doubling ‘A’ level places in secondary schools; P

Provide sixteen (16) new secondary schools and upgrade 100 others, this includes thirteen (13) replacement primary schools and upgrade ten (10) schools for special children;

IP

Continue expansion of the University of Trinidad and Tobago; IP



53

Appendices (Continued) APPENDIX 1 Improve access to tertiary level education through the GATE programme and also

increase access to GATE by widening scope and quantum of the grant; IP

Increase the number of approved programmes and approved private institutions; P Launching the Higher Education Loan Fund; N Expand medical faculty at the University of the West Indies and expand GATE

programme to increase number of Doctors and Pharmacists being trained. IP

Energy

Signing of agreements in respect of four (4) of the ten (10) blocks offered for exploration;

Y

Completion of construction of methanol plant by Methanol Holdings Limited; IP Construction of an ethylene petrochemical complex with a minimum of four (4)

plants and a gas refinery complex of at least five (5) plants; N

Increase production of ammonia and urea plants as well as diversification into the production of melamine;

P

Construction of aluminium smelter plant and construction of power plant to supply smelter and provide for normal increases in electricity demand;

P

Facilitate an integrated automotive wheel development and production centre; P Expansion of iron and steel facilities; P

Completion of LNG IV train; Y

Introduce gasoline optimisation programme including producing environmentally friendly gasoline by constructing five (5) plants and establish gas to liquids facility;

IP

Health

Commission of the San Fernando General Hospital which will include an Intensive Care Unit and a Burns Unit;

Y

Continue expansion of the National Oncology Centre; IP Upgrade Sangre Grande Hospital and construction of a health centre in Sangre

Grande; P

Construction of Point Fortin Hospital P

Expansion of free medication under the free health care system by removing age restrictions;

IP

Continue training of radiation oncologists, pathologists and nurses; IP



54

Appendices (Continued) APPENDIX 1 Introducing two (2) renal dialysis treatment centres and the renal transplant surgery

programme; P

Expansion of eye surgery programmes including treating cataract and Glaucoma as well as Heart Surgery programme;

IP

Free medical facilities to all nationals at the Mount Hope Hospital and Eric Williams Medical Science Complex;

Y

Research and development of new tropical medicine at the University of Trinidad and Tobago laboratory.

N

Housing

Facilitate the construction of 100,000 homes over ten (10) years, that is constructing 10,000 homes for the year in St Augustine, Corinth, Morvant, Arima, Castara, Roxborough and Blenhiem;

IP

Constructing 1,000 housing units in the Infill programme by the end of 2004, Construction of 6,336 units at 14 sites during the year, 120 units in Laventille and 120 bedroom units in San Fernando;

IP

Revitalization of Port of Spain, San Fernando and Chaguanas under the urban renewal programme;

P

Completion of infrastructure works on 107 lots including Valencia as well as contracts for design layout and infrastructure work for 811 lots under the Sites and Services Programme;

IP

Regularizing of squatters at twelve (12) sites with 2,150 lots of land to be regularized during the year;

IP

To provide home improvement grants to 3,000 beneficiaries for new housing and 1,400 beneficiaries to receive up to a maximum of $15,000 towards home improvements;

IP

Introducing the “Rent to Own” programme and renewal of the approved mortgage companies programme to provide home owner financing to middle and lower income earners at reduced interest rates.

P

Infrastructure

Completion of National Transportation Study and completion of Feasibility Study to develop light rail mass transit system from Arima to Diego Martin and from Port of Spain to San Fernando;

IP

Introduce a Roads Concessionaire system for developers to build and maintain roads;

P

Extend Solomon Hochoy Highway to Point Fortin and from San Fernando to Mayaro via Princes town and Rio Claro, a highway from Port of Spain to Chaguaramas Peninsula and an Eco Roadway from Matlot to Blanchisseuse ;

P



55

Appendices (Continued) APPENDIX 1 Extend Churchill Roosevelt Highway and Uriah Butler Highway; IP

National Drainage programme to provide adequate drainage and irrigation infrastructure to alleviate flooding throughout the Country;

IP

Construction of Mamoral dam and reservoir; IP Upgrade of port in Port of Spain by building new terminal. IP

Manufacturing

Completion of implementation of the Trade Sector Support programme; IP

Commercial expansion of yachting, fish and fish processing, merchant marine, music and entertainment, the Film industry and printing and packaging and Food and beverages;

IP

Continue development of Wallerfield Industrial Park; IP Development of investment policy and a services trade policy; P

A new Foreign Investments Act and amendment to Venture Capital Act; N

Establishment of a Trinidad and Tobago Trade Facilitation Company in Cuba to promote trade and investment activities between the two (2) countries;

P

Establishment of a research and development fund to finance the development of unique products from Trinidad and Tobago to the global market;

P

Execution of an outreach programme to small and medium businesses. P

National Security

Construct twelve (12) new police stations and continue refurbishment to existing stations;

IP

Expansion and modernisation of the vehicular fleet; IP Facilitate the application of a greater measure of technology in the conduct of police

work, provide computers to all police stations and introduce an integrated information technology platform and communications systems

IP

Establish a Police Training Academy; P

Improving the Trinidad and Tobago Defence Force by providing the following assets: - 1 Three (3) offshore Patrol Vehicles and three (3) fast inceptor vessels; 2 Armed helicopters for surveillance and drug interdiction; 3 Armoured personnel carriers for force protection; 4 Communications systems; and 5 Weapons Systems

Y Y IP Y N



56

Appendices (Continued) APPENDIX 1 Expansion of forensic division facilities and capabilities; Y

Introducing modern machine-readable passports and the supporting infrastructure to contain electronic photos and biometric data (finger and Iris prints);

IP

Implementation of a new radar system over the entire coastline; Y

Upgrading information technology infrastructure of the Police Service and expansion of the automated fingerprint identification system;

Y

Refurbishing of Maximum Security Prison to house 2,400 prisoners; IP

Enhancement of capabilities of Fire Service; IP Removing national emergency management agency to a new office of disaster

preparedness and management; IP

Social Development

Introduction of seventeen (17) developmental, remedial and preventative programmes and raising awareness of these programmes to increase accessibility to them, including: - • Helping you prepare for employment programme (HYPE) programme; • The Military Led Academic Training programme (MILAT); • The Military led Youth Programme of Apprenticeship re-orientation training

(MY PART) programme; • The Civilian Conservation Corps (CCC); • The Youth Training and Employment Partnership Programme (YTEPP); • The Youth apprenticeship programme; • The Youth apprenticeship programme;

IP

Reviewing policy of persons with disabilities with the aim of ensuring conformity with international human rights standards by drafting a national policy on aging;

P

Reviewing legislation for Homes for Older Persons Act 2000, licensing, regulation and control regarding senior citizens home;

N

Establishment of the Older Persons Care Board;

N



57

Appendices (Continued) APPENDIX 1 Decentralization of social services to community by establishing regional offices in

fourteen (14) regions within Trinidad and Tobago and each region will be sub-divided into community grids;

IP

Development and implementation of a policy to monitor and evaluate the social sector to address issues regarding the family institution;

Y

Establishment of the Children’s Authority and Finalization of Children’s Home Survey;

P



58

Appendices (Continued) APPENDIX 2 Estimated 2006 Fiscal Revenues and Expenditures

$m $m $m

Estimate 2005 Revised Estimate

2005 Estimate 2006 Revenue Tax Revenue 20,123.7 23,845.4 28,688.7 Income and profits 14,105.7 17,639.3 22,482.8 Goods and services 4,542.4 4,476.9 4,324.6 International trade 1,200.4 1,431.1 1,576.9 Other 275.2 296.1 241.4 Non-tax revenue 2,969.0 3,331.8 3,909.7 Property 2,264.7 2,461.0 3,025.4 Other 438.2 584.6 569.4 Repayment of Past Lending 266.1 286.2 314.9 Capital Receipts 345.1 19.1 24.2 TOTAL REVENUE 23,437.8 27,196.3 32,622.6 Financing 3,553.4 1,134.2 2,841.3 TOTAL RECEIPTS 26,991.2 28,330.5 35,463.9 Expenditure Recurrent Expenditure 22,660.6 24,129.5 31,656.7 Charges on the Public Debt 2,832.2 2,663.7 2,760.3 Capital Expenditure 2,075.0 3,101.5 1,500.0 TOTAL EXPENDITURE 27,567.9 29,894.7 35,917 NET SURPLUS/(DEFICIT) (576.6) (1,564.2) (453.1)* Excluded are the Unemploment Fund, Road Improvement Fund, and the Infrstructure Development Fund Source: Draft estimates of Revenue and Expenditure for 2006 * Note: The figures above were extracted from the Draft Estimates of Revenue and xpenditure which was produced some time before the budget document and may vary from the figures quoted in the budget speech which the Ministry of Finance has confirmed are the most up to date



59

Appendices (Continued) APPENDIX 3

2005/2006 BUDGETED EXPENDITURE

Expenditure Head Personnel Other Development Programme 2006 Estimates

President 1,442,341 11,009,827 12,452,168 Auditor General 20,265,405 5,140,655 25,406,060 Judiciary 94,538,096 125,932,204 20,290,000 240,760,300 Industrial Court 14,401,241 15,358,082 2,300,000 32,059,323 Parliament 17,132,603 38,759,182 2,550,000 58,441,785 Service Commissions 23,413,504 20,237,047 1,500,000 45,150,551 Statutory Authorities' Service Commissions 2,751,780 1,758,802 4,510,582 Election & Boundaries Commission 23,204,897 37,809,519 2,000,000 63,014,416 Tax Appeal Board 2,631,471 3,311,371 5,942,842 Registration, Recognition & Certification Board 2,387,682 480,573 2,868,255 Public Service Appeal Board 1,167,924 895,042 2,062,966 Office of the Prime Minister 19,902,289 93,991,639 30,700,000 144,593,928 Tobago House of Assembly 1,075,377,352 160,134,000 1,235,511,352 Central Administrative Services, Tobago 9,934,978 6,053,203 15,988,181 Personnel Department 14,818,398 10,029,461 7,250,000 32,097,859 Ministry of Finance 261,626,536 7,652,820,350 83,562,000 7,998,008,886 Charges on Account of Public Debt 3,499,135,890 3,499,135,890 Pensions and Gratuities 1,254,161,200 1,254,161,200 Ministry of Planning and Development 42,426,144 31,985,577 28,795,000 103,206,721 Ministry of National Security 1,737,139,316 917,201,460 172,500,000 2,826,840,776 Ministry of the Attorney General 38,595,256 133,348,156 2,489,000 174,432,412 Ministry of Legal Affairs 26,233,555 48,206,225 18,600,000 93,039,780 Ministry of Agriculture, Land and Marine Resources 223,296,447 312,848,420 46,850,000 582,994,867 Ministry of Education 1,942,876,627 1,252,721,470 63,108,000 3,258,706,097 Ministry of Health 555,591,847 2,048,362,624 222,985,000 2,826,939,471 Ministry of Labour and Small & Micro Enterprise Deve 28,666,335 88,502,440 12,855,000 130,023,775 Ministry of Public Administration and Information 65,845,880 345,451,624 92,303,000 503,600,504 Ministry of Culture and Tourism 25,361,877 122,556,443 22,210,000 170,128,320 Ministry of Housing 7,713,201 154,571,683 104,010,000 266,294,884 Integrity Commission 1,641,173 10,882,165 12,000,000 24,523,338 Environmental Commission 2,364,560 3,550,627 5,915,187 Ministry of Public Utilities & the Environment 91,479,899 1,927,197,488 81,978,000 2,100,655,387 Ministry of Energy and Energy Industries 25,658,631 1,138,224,861 1,163,883,492 Ministry of Local Government 66,899,645 1,066,056,405 21,312,000 1,154,268,050 Ministry of Works & Transport 504,598,867 1,282,704,213 154,380,000 1,941,683,080 Ministry of Sport & Youth Affairs 39,569,939 193,823,273 18,820,000 252,213,212 Ministry of Foreign Affairs 112,882,066 215,202,685 328,084,751 Ministry of Trade & Industry 17,837,806 82,614,315 31,000,000 131,452,121 Ministry of Science, Technology & Tertiary Education 50,292,644 1,172,440,082 53,108,000 1,275,840,726 Ministry of Community Development & Gender Affairs 22,550,858 193,146,682 16,450,000 232,147,540 Ministry of Social Development 37,593,879 1,646,259,800 13,961,000 1,697,814,679 GRAND TOTAL $6,176,735,597 $28,240,120,117 $1,500,000,000 $35,916,855,714

2005/2006 17% 79% 4% 100%



60

Appendices (Continued) APPENDIX 4 Tax Facts 2006

% Cumulative Tax

2006 %

Cumulative Tax 2005

%

Cumulative Tax 2004

1 PERSONAL INCOME TAX TAX RATES 0- 50,000 25 All Income 25 $12,500 25 $12,500 Over 50,000 25 30 30 ALLOWANCES/DEDUCTIONS

Severance Pay $100,000 $100,000 $300,000 Alimony paid No limit No limit No limit Alimony (per child) NIL $1,200 $1,200 Personal allowance:

Gross Income not exceeding $30,000 Gross income $30,001-$34,999 Gross income $35,000 and above Persons over 60 years: a/ Gross income <$30,000 b/ Gross income > $30,000 or = $35,000 c/ Gross income > $35,000

$60,000 - - -

$60,000 - -

$60,000

- $30,000

$25,001-$29,999 $25,000

$40,000

$30,000 less $1 for every dollar over

$25,000

- $25,000 $25,000 $25,000

$40,000 $40,000

$40,000 Mortgage interest (owner occupied)

Tertiary education allowance

$18,000 for Tertiary education allowance

$18,000

$18,000

Pension/Deferred Annuity National Insurance $12,000 $12,000 $12,000 Credit Union Deduction NIL $10,000 $10,000 Housing Allowance NIL $10,000 $10,000 2 COMPANY TAX Corporation Tax Rate (Petrochemical ) 35% 35.0 % 35.0 % Corporation Tax Rate (non-petroleum) 25 % 30.0 % 30.0 % Business Levy (on gross sales) 0.20 % 0.20 % 0.20 % Green Fund Levy (on gross sales) 0.10 % 0.10 % 0.10 % Small Business Tax Credit 0 % 25.0 % 25.0 % 3 PETROLEUM TAXES Petroleum Profits Tax 50 % 50 % 50 % Unemployment Levy 5 % 5 % 5 % 4 INVESTMENT INCOME Dividends received exempt exempt exempt Interest received (individuals) exempt exempt exempt Interest received (over 60’s) exempt exempt exempt 5 WITHHOLDING TAXES Standard Rate 20 % 20 % 20 % Dividend - Parent 10 % 10 % 10 % - Other 15 % 15 % 15 %



61

Appendices (Continued) APPENDIX 5 Table of Annual Revenue and Expenditure (1970 – 2005)

Year Total Revenue TT$M

Total Expenditure TT$M

Oil Price US$ Average

1970 317.5 390.1 3.391971 351.9 465.1 3.601972 403.0 538.3 3.601973 481.1 556.2 4.751974 1,300.8 957.9 9.351975 1,715.1 1,201.1 7.671976 2,131.5 1,870.9 13.101977 2,755.1 2,256.9 14.401978 2,772.2 2,892.6 14.951979 3,643.8 4,190.8 25.101980 6,226.4 5,466.3 37.421981 6,850.7 6,674.9 35.751982 6,824.7 9,477.1 31.831983 6,438.8 8,782.9 29.081984 6,551.7 8,307.9 28.751985 6,361.2 7,723.0 26.921986 5,234.9 6,614.6 14.441987 5,232.7 6,480.7 17.751988 4,946.7 6,060.1 14.871989 5,012.2 5,776.0 18.331990 5,621.0 5,893.9 23.191991 6,752.1 6,805.3 20.201992 6,101.1 6,728.8 19.251993 6,743.5 6,783.3 16.751994 7,564.8 7,571.0 15.661995 8,511.8 8,458.5 16.751996 9,542.4 9,371.4 20.461997 9,953.7 9,912.3 18.641998 9,658.4 10,399.4 11.911999 9,714.0 11,069.3 16.562000 13,036.5 12,217.5 27.392001 13,415.5 13,456.1 23.002002 14,555.9 14,369.1 22.812003 17,858.4 16,023.4 27.692004 22,026.2 20,093.5 37.662005* 13,711.9 10,739.1 46.47

*January-June



62

Appendices (Continued) APPENDIX 6 Retiree - Over 60 years 2006 2005 Income ($12,000 per month) 144,000 144,000 Less: Personal Allowance 60,000 40,000 Mortage Interest & Tertiary Education Allowance - - Credit Union Deduction - - Child Maintenance ($1,200 per child) - - First Time HomeOwner - - Pension/ Annuity & NIS Contributions - - 60,000 40,000 Taxable Income 84,000 104,000 Income Tax Thereon 84,000 / 50,000 @ 25% 21,000 12,500 54,000 @ 30% 16,200 21,000 28,700 Effective Tax Rate 14.6% 19.9%

Higher Income Person 2006 2005 Income (Basic salary $25,000 per month) 300,000 300,000 Benefit In Kind (50%/33 1/3) 36,000 24,000 Total Income $336,000.00 $324,000.00 Less: Personal Allowance 60,000 25,000 Mortage Interest & Tertiary Education Allowance - 18,000 Credit Union Deduction - 10,000 Child Maintenance ($1,200 per child) - 1,200 First Time HomeOwner - - Pension/ Annuity & NIS Contributions 12,000 12,000 72,000 66,200 Taxable Income 264,000 257,800 Income Tax Thereon 264,000 / 50000 @ 25% 66,000 12,500 207,800@ 30% 62,340 66,000 74,840 Effective Tax Rate 22.0% 24.9%



63

Appendices (Continued) APPENDIX 6 Middle Income Person 2006 2005 Income ($11,000 per month) $132,000.00 $132,000.00Less: Personal Allowance 60,000 25,000 Mortage Interest & Tertiary Education Allowance - 18,000 Credit Union Deduction - 10,000 Child Maintenance ($1,200 per child) - - First Time HomeOwner - 10,000 Pension/ Annuity & NIS Contributions 12,000 12,000 72,000 75,000 Taxable Income 60,000 57,000 Income Tax Thereon 60,000 / 50000 @ 25% 15,000 12,500 7,000 @ 30% 2,100 15,000 14,600 Effective Tax Rate 11.4% 11.1%

Lower Income Person 2006 2005 Income ($4,000 per month) $48,000.00 $48,000.00Less: Personal Allowance 60,000 25,000 Mortage Interest & Tertiary Education Allowance - 4,500 Credit Union Deduction - 1,200 Child Maintenance ($1,200 per child) - - First Time HomeOwner - - Pension/ Annuity & NIS Contributions 1,083 1,083 61,083 31,783 Taxable Income NIL 16,217 Income Tax Thereon (25% & 25%) - 4,054 - 4,054 Effective Tax Rate - 8.4%



64


Corporation Tax Computations - Approved Small Company 2006 2005 Profit as per financial statements 1,000,000 1,000,000 Add: Depreciation 250,000 250,000 Donations not under Deed of Covenant 5,000 5,000 Salary Expenses - 22,000 Non-Compliant Central Bank Bad Debt Provsion 50,000 - Training Expenses - 100,000 305,000 377,000 Less: Wear & Tear Allowance 50,000 50,000 Initial Allowance Gain on Disposal of Assets 5,000 5,000 Training Expenses Uplift - 150,000 Employment Allowance - 44,000 55,000 249,000 Chargeable Profits 1,250,000 1,128,000 Corporation Tax @ 0% / 30% $0.00 $338,400 Net Corporation Tax Liability - assuming no reliefs - 338,400 Relief @ 0% / 25% - 282,000 CORPORATION TAX Corporation Tax - 338,400 Less Reliefs under Section 16A (Limited) - 282,000 Corporation Tax Liability - 56,400



65

Appendices (Continued) APPENDIX 6 BUSINESS LEVY Gross Sales/Receipts 2,500,000 2,500,000 Business Levy @ 0% / 0.2% EXEMPT 5,000 GREEN FUND LEVY Gross Sales/Receipts 2,500,000 2,500,000 Green Fund Levy @ 0.1% 2,500 2,500 Effective Tax Rates 0.3% 5.9%



66


Corporation Tax Computations - Non Energy Company 2006 2005 Profit as per financial statements 15,000,000 15,000,000 Add: Depreciation 1,000,000 1,000,000 Donations not under Deed of Covenant 25,000 25,000 Salary od additional employees - 50,000 Expenses relating to exempt income 25,000 - Non-Compliant Central Bank Bad Debt Provisioning 100,000 - Apprenticeship Expense - 25,000 Contributions to Sporting Activities - Contributions to Art & Culture - 666,667 Training Expenses Contributions to Audio Visual Production Contributions to Production Company 1,150,000 1,766,667 Less: Wear & Tear Allowance 1,750,000 1,750,000 Gain on Disposal of Assets 7,500 7,500 Exempt Income 100,000 100,000 Apprenticeship Allowance - 50,000 Contributions to Sporting Activities Uplift Contributions to Art & Culture Uplift Training Expenses Uplift - 1,000,000 Scholarships Contributions to Audio Visual Production Uplift Contributions to Production Company Uplift Employment Allowance - 100,000 1,857,500 3,007,500 Chargeable Profits 14,292,500 13,759,167 CORPORATION TAX Corporation Tax @ 25% / 30% $3,573,125.00 $4,127,750



67

Appendices (Continued) APPENDIX 6 BUSINESS LEVY Gross Sales/Receipts 25,000,000 25,000,000 Business Levy @ 0.2% 50,000 50,000 GREEN FUND LEVY Gross Sales/Receipts 25,000,000 25,000,000 Green Fund Levy @ 0.1% 25,000 25,000 Effective Tax Rates 24.0% 27.7%



68


Corporation Tax Computations - Petrochemical Company 2006 2005 Profit as per financial statements 27,000,000 27,000,000 Add: Depreciation 3,650,000 3,650,000 Donations not under Deed of Covenant 1,000,000 1,000,000 Expenses relating to exempt income 100,000 - Non-Compliant Central Bank Debt Provisioning 250,000 - Apprenticeship Expense - 100,000 Contributions to Sporting Activities Contributions to Art & Culture - 666,667 Training Expenses Contributions to Audio Visual Production Contributions to Production Company 5,000,000 5,416,667 Less: Wear and Tear Allowance 4,500,000 4,500,000 Wear and Tear Allowance –Scientific Research –Class B 150,000 Initial Allowance 1,000,000 1,000,000 Gain on Disposal of Assets 75,000 75,000 Exempt Income 500,000 500,000 Apprenticeship Allowance - 200,000 Contributions to Sporting Activities Uplift Contributions to Art & Culture Uplift Training Expenses Uplift - 1,000,000 Scholarships Contributions to Audio Visual Production Uplift Contributions to Production Company Uplift 6,225,000 7,275,000 Chargeable Profits 25,775,000 25,141,667 CORPORATION TAX Corporation Tax @ 35% / 35% $9,021,250 $8,799,583



69

Appendices (Continued) APPENDIX 6 BUSINESS LEVY Gross Sales/Receipts 125,000,000 125,000,000 Business Levy @ 0.2% 250,000 250,000 GREEN FUND LEVY Gross Sales/Receipts 125,000,000 125,000,000 Green Fund Levy @ 0.1% 125,000 125,000 Effective Tax Rates 33.9% 33.1%



70

Appendices (Continued) APPENDIX 7 Snapshot of GORTT Fiscal Performance - 2005 $bn $bn $bn

Estimate 2005

Revised Estimate

2005

Variance +/-

Revenue Tax on Income/Profits Petroleum Companies 7,993 9,775 1,782Corporation Tax 2,068 2,979 911Income Tax 3,392 4,028 636Value Added Tax 3,045 2,948 (97)Taxes on International Trade 1,200 1,433 233 Expenditure Recurrent Expenditure 22,261 25,085 3,824 Personnel Expenditure 5,372 5,107 (265)Goods and Services 2,920 2,910 (10)Minor Equipment 221 200 (21)Interest and Other Debt Charges 2,832 2,664 (168)Current Transfers and Subsidies 7,661 9,811 2,150Transfers to Statutory Bodies 2,576 2,581 5 Development Program 2,075 3,101 1,026Capital Repayment & Sinking Fund Contributions 3,910 3,519 (391) Allocation Ministry of Education 2,846 2,592 (254)Ministry of Health 1,581 1,996 415Ministry of National Security 2,190 2,187 (3)



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Caveat This Memorandum contains a summary of the main features of the proposed budgetary measures and is intended to provide readers with a general guide thereto. It is not intended to be a comprehensive statement of the law and should therefore not be acted upon without professional advice. While every effort has been made to ensure the accuracy of information contained in this document, no responsibility is accepted for any errors or omissions. No part of this publication may be reprinted without our prior permission.

Contacts for PricewaterhouseCoopers Limited Should you need further information, please contact: - Peter R Inglefield

Managing Director Telephone: - 1-868-623-1361, Ext 172 Email: [email protected]

Allyson M West

Director – Tax Services FSIP Telephone: 1-868-623-1361, Ext 173 Email: [email protected]

Susan R Morgan

Director Energy – Downstream Tax Services Telephone: 1-868-623-1361, Ext 174 Email: [email protected]

Deborah Ragoonath-Rajkumar

Director Energy – Upstream Tax Services Telephone: 1-868-623-1361, Ext 145 Email: [email protected]



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