Trade License Reform: Balancing Public-Private Sector Needs

Every business that operates in any of the nine municipalities in Belize must acquire a Trade License, after having paid whatever applicable trade-license fee. As things currently stand, it is Belize’s Trade Licensing Act that empowers local authorities to charge businesses this fee, which Section 24 of the Act sets at twenty-five percent of their rental value. To be more precise, the current law reads:

“The annual licence fee payable in respect of the carrying on of any trade shall be an amount equal to one-fourth of the annual value of the premises in which the business is carried on.”
Based on this law, a business—let us say a Restaurant—that has an annual rent of $60,000, would be expected to pay $15,000 per year. Now, industry benchmarks suggest that for businesses of this type, rent should only be about 7 percent of total sales. However, that extra fee (that behaves like a tax of an expense) of $15,000 adds an additional 1.75% to this cost, for an almost 9% of total sales revenue cost.
Those same international industry benchmarks would tell a restaurateur that, on average, his net profit—after accounting for costs, including government taxes— should be about 5.92% of sales.

Under those assumptions, when that trade license fee is compared to the assumed net profit, it easily is shown to be almost 30% of the firm’s net income. But, at this juncture, it is necessary to underscore one important fact: these are industry benchmarks that are based on foreign markets (that are likely more efficient) and this scenario assumes that there are optimal efficiency and productivity levels.
It becomes evident that should the business environment lead to productivity and efficiency losses, it becomes valid to assume that these costs are higher, and by extension, net profits are lower.

Based on the Statistical Institute of Belize (SIB)’s Business Establishment Survey (BES, 2016), “Accommodation and Food Services” account for almost 17% of businesses in this country, second only to Wholesale and Retail—an industry whose industry benchmarks suggest even lower net profit margins relative to total sales.

Nonetheless, the point being underscored here is that, even in a perfect world, the trade license regime that has existed in Belize for decades is no small matter; it adds to the cost of doing business, which directly or indirectly affects competitiveness levels.
It is for this reason that development professionals have consistently advised that licensing (business or trade licenses) should be kept as small as possible. In theory, these fees should reflect only the administrative cost of regulating business activity. Said differently, the fees should not be revenue-centric, but designed to be only as low or high as the regulatory function requires.

Speaking of such regulatory functions, the World Bank, in its 2006 Business License Reform guide, had highlighted, in a general sense, the two “appropriate” rationales for regulatory licensing. The first is to “safeguard the public interest” (be it for environmental protection; public safety, including the health of consumers; and national security) and, second, for the management of limited natural resources.

That same World Bank document proceeded to outline two primary “inappropriate” uses of any business license: to limit competition and to generate revenue. In explaining the distinctions between a “Business” and a “Trade License”, they also stated the following: “The trade license is granted or denied on the sole basis of having acquired the prerequisite documents; thus, it is a bureaucratic hurdle that serves no regulatory purpose. In such circumstances, trade licenses are redundant and should be eliminated”.

The World Bank is not alone in its view, as other development agencies have echoed similar sentiments. However, the point being made here is simple: there is a cost being borne by businesses that stems from an archaic regime that may be at least 40 years old, with its initial incarnations predating Belize’s independence. And, in line with the World Bank’s definition, it serves very little to no regulatory function; and it has been predominantly utilized to generate “needed” revenue for local authorities.

It is for these reasons that the Belize Chamber of Commerce and Industry (BCCI) has not only applauded the work of the Economic Development Council (EDC)—an advisory body that’s a partnership between private and public sector—for championing trade licensing reform over the last three to four years; but BCCI had initiated and actively supported the effort. As the reader may be aware, amendments to the Trade Licensing Act have been presented to the National Assembly earlier this year, and it is scheduled to have its second and third readings sometime in the near future.

While the ultimate goal should be to eliminate any “inappropriate” costs to businesses, the BCCI is also aware of the developing status of our small country. Consequently, we recognize that fully eliminating the Trade License is currently impractical, especially given current realities—one of which includes the local authorities’ need for revenue. It is far more feasible for there to be a more “gradual” process that does not immediately strip away 100 percent of a key source of revenue for municipalities, while simultaneously providing relief to businesses. In short, there needs be a balance between both private and public sectors’ needs.

To this end, the process has adopted five guiding principles, which will be discussed further in later installments of “The Business Perspective”. The first guiding principle is that whatever is agreed to has to be able to help improve businesses’ “efficiency” levels as much as possible. That is, we should, in the very near future, start to see the trade license begin to represent less than that 30% of net profits, even in utopian scenarios like that discussed earlier. This “efficiency” principle also speaks to the need to ensure that the system is predictable, and that the current uncertainties associated with the Trade Licensing regime are eradicated. Second, it should be based on horizontal and vertical “equity”. Whether it is “horizontal” or “vertical”, this “ability to pay” consideration essentially demands that businesses in the same economic situation pay roughly the same.

The third principle speaks to the need to ensure “Administrative Ease”, as making any tax or fee system too difficult to implement would undoubtedly lead to its ultimate failure. It must also be “politically acceptable” to ensure continuity, again, to avoid its failure in the future. And, lastly, considering the stage of development of Belize, it could speak to preserving “revenue” for the local authorities; but, again, not at the expense of business competitiveness.

The complexities of balancing those five principles have not been lost on the BCCI. But, in a struggling business environment, where there’s a correlation between low profitability and the limited levels of domestic private-sector investments, every little bit helps. Therefore, there is need to ensure that both the needs of the private and public sectors are being met in this reform.

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