BPOs Argue Tax Changes in Belize Violate Incentive Promises

In order to comply with WTO rules, Belize must make changes to its tax laws before the end of the year.

Belize

The Belize government’s move to eliminate a set of business tax benefits has sparked a fierce dispute with the business process outsourcer community which claims the maneuver is a blindsided attempt to claw back incentives that were already ‘written in stone.’

The government, and Prime Minister Dean Barrow, have been under intense pressure from the World Trade Organization (WTO) to overcome compliance violations in its Export Processing Zone (EPZ) rules. The WTO has threatened to dismiss Belize from the organization if the violations persist.

As a result, Belize has been focused on implementing a new law, the Designated Processing Areas (DPA) Act, in order to bring in the country into compliance.

Observers expect the new law to be passed before the end of the year. The new act will “gut” many of the benefits BPO companies enjoyed under previous legislation, including tax exemptions of up to 20 years.

Abrupt Change

During the 1990s the EPZ Act was introduced to increase foreign investment in exports, create new employment opportunities and contribute to overall economic prosperity.  BPOs in the country made investment under that program, which assured investors that their benefits would extend for a duration of 20 years.

BPOs were also able to claim back 12.5% in tax on local purchases such as telecom costs, electricity and local supplies. In March of 2018, the government amended the GST, causing BPO companies to become a final consumer with respect to the GST and no longer claim reimbursement for those expenditures.  All local purchases are now subject to the tax, including rent.

The news has not gone down well with BPOs, who argue the change itself is not only unfair, but that they were left in the dark as the government considered its options.

“We had protested against it, and still are. We feel we are moving away from the concept under which these investments were made. We feel the government is looking at BPOs as a source of tax,” said Kevin Herrera, the CEO at Protel BPO, one of a handful of outsourcing companies operating in the country of 375,000 citizens.

“One of the big things when you are looking at investment is legal certainty and this is created by legislation. When legislation is changed mid-game it certainly causes some degree of concern,” he added.

Kevin Herrera, CEO of Protel BPO

Herrera said that BPO companies do not believe this change was a “smart move”, and most believe that future expansion will be negatively impacted.

“It certainly is very concerning and may slow down the additional investment these companies make,” said Herrera, who noted that, for the first time, a group of outsourcing companies joined in unison to protest to the government.

“We had actually come together as BPOs and made some representations but it became obvious that the government was not about to listen to us at that point,” he added.

“I think they were looking at a certain amount of revenues they could pull from the BPO sector,” said Herrera. “ They said ‘hey we can look at it again next year’ which we knew was just a push off.”

From an operation perspective, the added expenses were not expected, and therefore operators are struggling to determine what their margins will look like when all is said and done

“When you are competing internationally you aren’t able to adjust your pricing because of internal considerations, which is one of the things we have told the government.”

Herrera stressed that when companies are exporting services or a product, it is extremely difficult to adjust pricing without seeing an immediate blow back from customers.

“Those market prices are set externally. Especially for a small jurisdiction like Belize, it has no influence on market price,” he said.

Nearshore Americas made several efforts to engage Beltraide, the country’s investment promotions agency, to discuss the changes. However, the agency declined to comment, noting they would be willing to make comments in the New Year – when the “dust settles”.

BPO Cries Foul

An additional source surfaced while Nearshore Americas was conducting its reporting for this story to express how frustrated they are at the change.

When the source’s company came to Belize, it was granted EPZ status for 20 years and allowed to import goods without the General Sales Tax (GST). “It has allowed us to bring in cubicles, computers, headsets, all the furniture, anything we need to furnish out our contact centers high end equipment that we need to position ourselves properly,” said the source.

The goods are substantially cheaper coming in from the US and allows the company to stand up new seats with less capital exposure.

The investment was brought into the country under this understanding.

“Their term for compliance [with the WTO] expires on December 31st so they’ve literally decided to wait until the middle of November to try to resolve this,” said the source.

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The source added that there was no formal notice out to any of the providers. In fact, Prime Minister Barrow declared in a speech earlier this year that, effective April 1st of this year, contact centers would no longer be able to reclaim GST, and the government would start charging it on local inputs.

“We fought it tooth and nail without success. As of April 1st, we stopped receiving reimbursements and they instituted 12.5% GST on all local inputs we were previously exempt from such as telephony,” said the source.

Local BPOs have since filed formal complaints with the Prime Minister’s office, Beltraide and the Minister of Trade, Investment and Commerce. The government held a roundtable with contact centers after the change and said they would revisit it but there would be no changes on the horizon.

“We’ve had to change the operation a little bit since April but that was the first domino to fall. The second domino was about 60 days ago when they announced they were going to get rid of EPZ status altogether and they are drafting a new bill called the DPA that guts all the benefits of the EPZ,” said the source.

Uncertain Future

Although the bill has not been finalized, there have been four or five meetings with various officials that contact centers have attended. “The other thing they did under the DPA is that they changed the benefit from 20 years to 10. Anybody who has an EPZ today has to refile for a DPA,” said the source.

The source believes the government does not understand the gravity of the change or the company’s ability to scale within the country.

“I understand that the country needs to get in compliance with WTO. My major issue is the lack of transparency and involvement the government has had with a major industry that is employing 3500 Belizeans today. I know it is a small number, but when you look at it in comparison to the population it is a huge portion of the jobs in Belize City.”

The source went on to say that his firm’s ability to compete “could seriously be in jeopardy in the next year or two.”

Despite this, the source believes that the country has thousands of seats of expansion capability and “there is still quite a bit of room to grow”.

The sourced added:  “The reason I love Belize is the people, it is such a phenomenal place and has so much opportunity. I hope that there is never a point that we can’t make this right,” said the source.

Meanwhile, the larger business community is calling on the government to be responsible in enacting changes more gradually.

“There is a need for us to be compliant, but in being compliant we must also never forget that there is a need to strike a balance. We can’t go from one end of the pendulum to the other end. We have to take this in strides. We must also ensure that we have economic growth in the whole of this being done,” said Nikita Usher, President  Belize Chamber of Commerce and Industry (BCCI),  in a November interview with local media.

“You don’t want to lose predictability. You’re attracted a number of investors into Belize, you’re now changing the rules of the game on them. How do we do that in such a manner that would not affect their day to day, but also not affect the perception of Belize, that we are this big bad wolf that would want to make changes as we so see it fit.”

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