5-year tax break for Red Stripe
Business Observer Writer
Finance minister, Dr Omar Davies ,has granted Desnoes & Geddes Limited (Red Stripe) a five-year tax break that could amount to over $2 billion over the period.
It means that beginning in June 2002, Desnoes & Geddes will pay no tax on its profit. Corporate taxes are normally calculated at 33.33 per cent of gross profit.
The company yesterday confirmed the arrangement, pointing out that it was negotiated on the basis of a $1.5-billion investment that it will undertake over the next two years.
"Investing in an uncertain economy without some kind of support from the government would have been difficult," said D&G's president, John Irving. "September the 11th would have also made things different ... Tourism (is) in big slump."
The tax break was given by Davies under Section 86 of the Income Tax Act, which states: "The minister may remit the whole or any part of the income tax payable by any person if he is satisfied that it would be just and equitable to do so."
Irving declined to say what, if any, conditions were attached to the tax break: for example, if specific sales or export targets had to be met. Those officers at the Ministry of Finance who helped to negotiate the deal flatly declined to discuss it with the Business Observer.
Desnoes and Geddes Ltd, which trades under the name Red Stripe -- the name of its premium beer -- paid out $368 million in profit tax for the year ended June 30, 2001. The company made pre-taxation profit of $1.32 billion, and net profit of $950 million.
But the company is on an upward profit path, so its pre-taxation profits are expected to rise over the next few years, increasing its potential tax liability.
Yesterday Irving declined to make profit projections, citing stock exchange rules that disallow such practice. He did say, however, that by 2005, under World Trade Organisation (WTO) rules, the 30 per cent duty that is now charged for imported brewed products will be phased out, exposing his company to unrestricted competition from imports.
The urgency, therefore, Irving said, was to make the capital investment to improve the efficiency and throughput capacity of the Jamaican brewery --not just to withstand the expected competition, but to strengthen the export potential of the local brands.
"If someone in Venezuela has a huge plant and wants to export here, with the current duty the price would be just a little too high," said Irving. "But when the duty comes down they will have a lower base cost coming in. Unless we get manufacturing costs down to compete we do not have a chance."
The $1.5 billion to be spent by Red Stripe will come from its own cash, said Irving. Some $1 billion of this amount will be spent by August next year.
"The money is from our reserves," he said. "The investment will allow us to improve our competitive position."
Irving claimed that in their negotiation with the government, Red Stripe executives never couched the request for tax break as a pre-condition for the investment, but rather noted that without its benefit, it would have been an unlikely outcome.
"We want to continue being competitive here," he said. "We came to the government with an investment proposal to make the business more competitive. It would have been a different decision without it."
Red Stripe employs 500 full-time workers directly, and 220 contractors.
Irving pointed out that though no profit tax would be paid over the period of the agreement, the company would still incur other duties, such as excise.
Last year, the company paid consumption tax and excise duty of $637 million.