New EPZ regime
The Ministry of Trade and Industry has commissioned a study that will recommend changes to the current Export Processing Zone (EPZ) regime that has seen the country foregoing potential tax revenue.
The Minister of Trade and Industry, Calle Schlettwein told the Economist this week that a draft report has already been released by a consultant that was appointed by his ministry. He said the ministry is now waiting for the final report which incorporates some of the concerns that the ministry had, before consultations can take place between his ministry and other government ministries, agencies and the private sector.
The minister said although some of the companies which currently enjoy the EPZ status did well, the overall finding of the draft study is that the fiscal incentives enjoyed by the companies created a net loss to the country.
He said: “The regime was designed for manufacturing entities to add value to raw materials. That value addition was supposed to translate into jobs and wealth creation because companies would set up business here. These companies would also generate a multiplier effect by sourcing services and materials locally in their manufacturing process.
“It is for that type of entities that the EPZ regime was originally designed , but if you look at which entities received this status the most, they are those in the extraction industry. Now the extraction industry is typically one that is mechanised so it doesn’t create jobs, it doesn’t add value, it exports raw materials and it exports wealth so the economic gains that were targeted did not happen and I think will not happen in future with the extraction type of industries that have benefited from the regime.”
Schlettwein said the current EPZ regime benefitted a sector that it was not designed for and the consequences are pretty obvious, adding that the legal framework was very general in nature as it does not clearly define which sector should benefit from the tax incentives resulting in everyone legitimately applying.
“The reason for that was the overall want to have an investor friendly environment conducive for foreign direct investment which was successful. That part did work, we received very significant foreign direct investment in the extraction sector so it was not all in vain.
“There were quite significant benefits, but the fact remains that we did not manage to create and reap all the multiplier effects, and most importantly, our economic growth and our foreign direct investment did not translate that growth into growth on the job market or into the creation and redistribution of wealth in a more equitable way to the extent that it could have happened.”
The minister, however, assured investors that all existing EPZ status agreements will be respected and honoured as failure to do so will create uncertainty amongst foreign investors.
“We are very much aware that certainty in the regulatory framework is crucial for investors when they consider investment. So we want to give them that assurance.”
“We have agreed that all the existing EPZ agreements, we will honour those and there will be no change, but we want to engage those companies to see whether we can not renegotiate these things.”
The minister argued that if companies that currently enjoy EPZ status are willing to renegotiate them, they will benefit more from the new EPZ regime because there will be other non-fiscal incentives which will be thrown into the basket.
He said under the envisaged new EPZ regime, incentives will be retained and even added if the economic gains agreed upon have been realised while failure to achieve the anticipated gains will result in their reversal.
“As an argument, if the incentive is targeting employment creation, but the employment is not happening, then we must have the ability, legally, to withdraw that incentive or if a company has employed more people than envisaged then we should reward more. That is the principle we are looking at to move away from this very generous approach where companies get complete tax holiday regardless of performance,” the minister said.
He added that some of the incentives must be aimed at bringing about the development of skills as the skills gap in the country has become worrisome.
Consultations are expected to begin before the end of this year, although no concrete date has been given for the new EPZ regime to kick in as various laws such as the EPZ Act and the Investment Act need to be amended first.