Finance Minister: State may collect $7b less from salvaging CL Financial

Finance Minister Larry Howai has introduced the possibility that the Government could consider the introduction of a supertax on the wealthy as a means of equalising T&T’s tax system which sees high-income taxpayers benefitting about six times more than the poor from subsidies on gasoline, electricity and water.

 

While stating he did not want to suggest that T&T would implement a supertax on the rich, Howai said that there were “conditions under which one could consider” such a tax.

 

Tax reform efforts, starting in the 1990s, were aimed at simplifying T&T’s tax system, according to an April 2012 research paper by Central Bank economist Joseph Cotton. Those reforms led to numerous personal allowances and credits being replaced by a basic personal allowance, the number of tax bands being reduced from 11 to two, and the top marginal tax rate being reduced on a phased basis from 50 per cent in 1988 to 25 per cent in 2006, which was the flat tax rate that is currently paid by all individuals earning more than $5,000 a month.

 

Answering a question about the current tax system, Howai said T&T’s flat and simplified tax system has “worked well,” as it was part of reforms that led to the introduction of value-added tax (VAT) and the lowering of the marginal tax rate.

 

Noting that high marginal tax rates were a “disincentive to work,” Howai pointed out that right now in the United States, there is talk about a supertax on the rich.

 

He then said: “There is no reason why, from time to time, those things can’t be considered and introduced. For example, in our case, the rich benefit more from the fuel subsidy than the poor,” adding that rich T&T residents also benefit from subsidies on electricity and water.

 

“On average, the wealthy benefit about six times more than the poor from subsidies, according to the numbers I saw. And, therefore, it’s something that you need to say how do we equalise it. That kind of tax helps to offset things like this.”

 

The Minister of Finance was quick to add: “I don’t want to suggest that we are doing that (implementing a supertax on the rich), but there are conditions under which one could consider—which is why the US in the current situation is considering doing something like that. There are issues that we need to consider as far as the entire tax system is concerned.”

 

In a wide-ranging interview at the Ministry of Finance on March 8, Howai said he has received a first report on the comprehensive tax reform proposal that he signalled in the 2013 budget, which needs to be discussed with the technocrats before he “comes out to the wider community.”

 

Property taxes…

 

Asked about his current thinking on the issue of property taxes, Howai said the land and building tax “is definitely something that we have to attend to.” He noted that such taxes are commonplace around the world and that the revamping of the tax was being held up by the need to ensure that all property owners are assessed in the same way.

 

He admitted the process of updating the property valuations had got “a bit derailed,” but said part of the problem that he has is “bringing a tax where I don’t have the underlying systems and information in place to introduce the tax on an equitable basis.”

 

The lack of valuation information and the systems to assess and collect taxes on property led the Government to waive the collection of land and building taxes for 2010, 2011, 2012 and 2013.

 

“We will now look at the options available to us to do something by next year to help deal with the revenue situation that we now face,” Howai said.

 

The minister said he has not seen the growth in revenue during the current fiscal year.

 

“There are some challenges that we need to face there. I expected that this year would have shown a better revenue outturn because once the economy starts to grow, the tax take increases. I am hopeful that that would give us a bit of a bump this year.”

 

Not in crisis mode…

 

On the issue of T&T’s fiscal situation and the fact that the Government has reported budget deficits for the last four years, Howai said the brunt of any adjustment tends to fall on the more disadvantaged groups in the society, which means the administration has to be mindful how such a process is implemented.

 

Howai said: “The thing is that one can do it (adjustment) very quickly and try to get to a balanced budget in the shortest possible time. But that approach presupposes that you are in some kind of crisis mode. In other words, this thing is urgent, necessary and must be done right away.

 

“T&T, fortunately, is not in that position and the objective measures of that include that S&P gives the country a pretty good rating for an emerging economy. That’s a recognition that we are not in a crisis mode and there is room for us to proceed in a gradual manner to get to a balanced budget.”

 

At different phases of an economy, a government has different things to do and right now, said Howai, and the T&T Government is looking to diversify the economy through its reform agenda, which includes incentives for the services and manufacturing sectors.

 

The goal, according to the minister, is “a new structure for the economy for the future,” which he believes the Government “has some time to put in place,” subject to global reversals.

 

He said the process of diversification takes time.

 

“Over the medium term, there is need for us to effect these adjustments and therefore, at this stage, given the state of the economy and our expectations for the global economy, the urgency to try to get to a balanced budget is not there.”

 

Howai said he does not envisage that the adjustments will need to be made under financial stress, “unless something dramatic happens all of a sudden, such as the price of oil suddenly drops to US$50 a barrel next week in which case you are in a situation where you have to look at your options right away.”

 

 

 

Best outcome for State to own CL Financial…

 

The best outcome for the State in seeking to recover the billions of dollars that the State has spent, and will spend, on salvaging the CL Financial empire would be for the Government to own the conglomerate, Howai said.

 

“It seems to me that the best outcome would be where we own the entire thing. Whether we can get to that position is something we still need to finalise,” said Howai.

 

The Finance Minister said while his best outcome would be for the Government to own CL Financial, “I don’t know that I want us to own all of these things. The important thing is to make sure that we get back our money. The ownership is simply a means to an end, which is for us to get back the money we put into the Group.”

 

Strategically, he said, the Government may decide in certain cases it may not make sense to monetise the asset because it adds certain kinds of synergies to what we want to do. He cited CL Marine, the dry-docking business owned by the Group, which could “potentially add to a whole new sector of the economy.”

 

He noted the Government was working on the basis that it may recover $7 billion less than the billions of dollars the State has disbursed to salvage the CL Financial collapse.

 

Outlining State expenditure, which he estimated would reach nearly $24 billion, Howai said the amount recovered could be plus or minus $7 billion.

 

“That $7 billion could be on either side because I could end up with the $7 billion being $12 billion or it being zero. It really depends on a number of things, like the premium on Republic Bank shares, for example, the value we give to the control premium because we have more than 50 per cent.”

 

The amount of money the State recovers also depends on the Methanol Holdings Trinidad Ltd (MHTL) arbitration and the valuation placed on Clico’s 56 per cent stake in the company.

 

Asked about the value of the State’s 49 per cent stake in Clico, Howai said the insurance company does not have “any real value” other than its shares in Republic Bank, MHTL, Angostura “and so on.” 

Q: Will you keep Clico or will it go back to CL Financial?

 

A: Clico is under the control of the Central Bank, not under the Government’s control.

 

Q: But in terms of ownership?

 

A: The ownership of Clico will come out of the negotiations I am having now, which are not complete. We are talking with the United Shareholders’ Group (of CL Financial shareholders) and we are looking to see how best we can deal with that whole issue, depending on what comes out of that will determine how we proceed.

 

A lot of it, at this stage, is difficult for me to say as I still need to go back to Cabinet for some aspects of the way forward. When I get that, I will then be in a position to make a more holistic and comprehensive statement. 

 

At this stage, the expectation is that we, the Government, can own the new Clico and, ideally, list it on the local stock exchange. That, ideally, is where I would like to get to, subject to arriving at the appropriate agreement with all of the parties concerned. I did say that one of the problems I faced is that I don’t have a debenture over the company. Apart from the option for the 49 per cent shares, I don’t really have ownership of the group, per se. 

 

It is more of a negotiated position that I am trying to finalise where, perhaps, the Government owns everything for having put this money in and we can then determine how best we go about realising the value inside there.”

 

Howai said he was “still optimistic” that the negotiations could be completed by the May deadline, which was established following the second extension of the shareholders’ agreement between the Government and CL Financial.

 

“Yes, we can get to a position where we can come to an agreement that everybody could live with as far as the realisation of the money owed to the State out of this process.”

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