By Michel Morgan
With recent first quarter 2019 reports showing that Jamaica is the first Caribbean island to welcome 1 million visitors and reach approximately $800 million in foreign exchange earnings within the first 9 weeks of 2019, hospitality industry interests like real estate developers and investors can be assured that Jamaica is maintaining its status as one of the best islands for developing resorts. Indeed, back in 2017 Jamaica’s Minister of Tourism, The Honorable Edmund Bartlett, confirmed a 5-year, 5 percent target growth per year goal, which would require bringing 5 million visitors to the island and earning $5 billion from visitor spending. This goal, which Minister Bartlett referred to as the “5x5x5” growth strategy, is expected to result in an increase of 15,000 additional hotel rooms on the island by 2022, well beyond the 32,000 rooms already in existence. The recent 2019 growth reports confirm that the Minister’s goals are on track, and he has been clear that direct foreign investment is a necessary element of the island’s projections to reach optimal room capacity.
Therefore, it is an opportune time to evaluate some of the legislatively guaranteed investment incentives that the Government of Jamaica (“GOJ”) provides to foreign tourism industry interests, all geared toward stimulating investment and growth in the tourism industry. Indeed, several “mega projects” are already underway and taking advantage of these incentives or have already been completed in recent years. The RIU Hotel and Resorts, Hyatt Ziva Rose, Hilton, Marriott Courtyard, and the locally owned Sandals Resorts, are just a few of the island’s resorts that are thriving under the GOJ incentives. Further, whether a foreign tourism interest presents as a mere investor, or as an owner, developer or operator, there are local operational issues especially related to labor and employment concerns that should be considered.
1. Tourism Product Opportunities and Investment Incentives.
With a population of about 2.7 million, Jamaica is the second largest market in the Caribbean. Tourism is one of the fastest growing sectors of the Jamaican economy and the island’s strategic location on shipping routes to tourism destinations makes it a leading cruise tourism destination. Several opportunities exist for the development of attractions, and for the development of both large and small boutique accommodations. In fact, the GOJ reports that guesthouses, villas and apartments represent a large under-utilized asset for the industry, and notes that now is an ideal time for investors to develop timeshare operations. To that end, the GOJ enacted The Timeshare Vacation Act within the last 3 years to support timeshare investments where owners can buy future vacations at current prices. There is also an emerging market for health, wellness and eco-tourism.
The GOJ has undertaken significant and impressive tax and economy legislative reform to support its intention of becoming an attractive destination to foreign tourism interests. These reforms have resulted in the island setting new trends as one of the best places for doing business in the Caribbean and Latin America. A foreign-owned company is regarded the same as its Jamaican counterpart once established in the island. This means that there are no formal nationality requirements for foreign owners, directors or shareholders.
Incentives for tourism sector investors is primarily supported by the 2014 implemented Omnibus Tax Incentives Act (“Omnibus Act”), which includes provisions to ease financial and operation burdens on tourism projects. For example, hotels licensed with the Jamaica Tourist Board (“JTB”) ranging in size from 10 rooms and upward, will realize incentives such as: employment tax credits (ETC”) with a maximum value of 30%, corporate income tax rates as low as 17% after application of the ETC, reduced general consumption tax (“GCT”) of 10%, capital allowances, and duty-free imports of equipment and machinery. Relief from income tax to certain overseas lenders who fund licensed hotel and resort cottage operations is also provided, and there are new customs tariff rates ranging from 0% to a limit of 20% for industry-related “consumer goods”, which are those that have been produced for direct consumer consumption, versus non-consumer goods, like equipment and raw material. In addition, there is a Productive Input Relief (“PIR”) system in place which provides for the duty-free importation of items for “productive use” and provides a set list of items for hotels & resort cottages and tourism attractions.
Importantly, there is no formal application required to access any of these Omnibus Act benefits, as the incentives are automatically accessed at the time of filing annual returns. Investors also realize relief from tax burdens given that Jamaica is a party to several double taxation treaties with countries like Canada, the United States, France, and the United Kingdom, to name a few. In general, these treaties allow investors to avoid double taxation on income; however, they are also designed to prevent tax evasion. In fact, due to tax evasion concerns, Jamaica and the United States signed an inter-government agreement for reciprocal sharing of financial information as part of the United States Foreign Account Tax Compliance Act. (FATCA).
In order to identify and fast track the development approval process of public and private properties that are ideal for tourism development, the GOJ created what is known as the Shovel Ready Investment Program. The transactional acquisition options for properties identified in this program include full outright sale, joint ventures, partial divestment, and leasing. A tourism business transaction can take on several corporate forms in Jamaica, most of which are internationally recognized and familiar. For example, there are public and private companies limited by shares, sole proprietorships, general and limited partnerships, and joint ventures. Joint ventures are a particularly popular and beneficial corporate form in the tourism industry under which property ownership remains local, but owners can still leverage the funding and resort development expertise and resources of foreign contractors and developers. A joint venture of this sort might also be attractive foreign investors who want to avoid the transactional costs and burdens of land sales and title transfers. Specifically, current real estate transactions for the transfer of property attract a Stamp Duty of about 4% and a Registration fee of .5% of the purchase price, payable by the purchaser and seller. The seller also usually bears a Transfer tax of 2% of the market value of the property. It should be noted, however, that proposed changes will soon go into effect which will reduce the Stamp Duty to a flat fee of $5000 on transactions above $500,000 and a fee of $1000 on transactions below that threshold amount.
An investor’s corporate structure will be governed by The Companies Act of 2004. Once a legal form is determined, routine procedures apply for registration and incorporation with the Companies Office of Jamaica (“COJ”), and to secure business insurance, obtain taxpayer identification, work permits, building approval, tourism licenses, and appoint a resident agent for service of legal process. Prudent investors will engage counsel having familiarity and experience working with local GOJ agencies on complying with these routine requirements.
2. Tourism Product Licensing Management and Operation
Tourism investors, developers, and operators should note that the Jamaican legal system operates under British Common Law. Therefore, these laws and corollary regulations govern day-to-day operation issues such as labor and employment disputes amongst employees and persons or entities having ownership interest in tourism operations. Other daily operational concerns include ensuring licensing and regulatory compliance with the requirements of government organizations such as the Tourism Product and Development Company (TPDCO).
The TPDCO is mandated by the GOJ to oversee the maintenance, development and enhancement of the tourism product for the island by requiring the licensing of all tourism entities. Multiple categories of licenses are available for issuance, ranging from accommodations, car rentals, tour operations and attraction sites. Once the requisite license application documents are submitted, then arrangements are made for a TPDCO site inspection and assessment. The process for approval of a license takes anywhere between 2 weeks to 1 month. Both visitor safety and compliance with the GOJ company registration procedures are at the forefront of licensing requirements. For example, general license requirements include submitting proof of insurance, letter of good standing from the COJ, proof of tax registration and proof of public health and fire certificates.
The TPDCO will accept proof of Public Liability Insurance from overseas insurers. Notably, while operators must maintain Public Liability Insurance, the TPDCO does not mandate the limits of coverage. However, operators should be sensitive to careful evaluation and assessment of the risks and potential liability associated with their respective activities when choosing insurance limits. Further, it is advisable to obtain insurance that includes jurisdiction coverage for lawsuits brought against the operator in the United States, because over 60% of visitors to the island are from this jurisdiction. In addition, tourism operators should likewise require business affiliate partners and licensees to include the operator as an “additional insured” under the affiliate/licensees’ insurance policy. This is because prospective lawsuits are usually brought against all corporations involved in offering a product or service, and not only the company directly involved with the alleged wrongdoing. Of course, other transactional methods of protection should be considered such as including indemnity terms in the contract that governs the business relationship.
Accommodations such as Hotels and “Resort Cottage”, which is defined as an apartment, guest house, or villa, are issued indefinite licenses, ie. no expiration date, at no cost. However, other tourism products like car rental, attractions and tour operation companies, are subject to an annual license expiration and incur an annual license renewal fee. Operators of water sports and contract carriage products can expect to pay an annual license fee as an operator, plus an additional fee for each driver or employee.
Labor laws are not waived in Jamaica to keep or attract foreign investment; however, investors can expect to find a competent tourism workforce, as thousands of graduates trained in tourism enter the labor market each year from local universities and government training agencies. To that end, Minister Bartlett recently introduced a Human Capital Development Strategy to train and certify all workers through the Jamaica Centre of Tourism Innovation. The goal of this strategy is to build a professional cadre of hospitality practitioners who can be classified and salaried in relation to qualifications and competences. Therefore, while there is no law in Jamaica that requires foreign investors to hire locals, it is expected that they would do so, especially for lower-skilled jobs.
Jamaica’s tourism industry has thrived year-round, especially in recent years. However, given that tourism products can occasionally be subject to seasonal changes, tourism operators may want to make business decisions to adjust labor resources according to market conditions. It should be noted, however, that these types of decisions may trigger requirements to make severance payments. As such, operators should consider whether to layoff an employee or make the employee redundant, because redundancy triggers severance payments. Jamaican law recognizes a layoff as a period of unemployment for up for 4 months. However, the Employment (Termination and Redundancy) Payments Act requires redundancy pay to employees who are released after at least 2 years of continuous employment. Specifically, employees with up to 10 years of employment are entitled to 2 weeks payment for every year worked, and employees with over 10 years of employment are entitled to 3 weeks payment for each year worked, unless the employee is fired for cause. Contract workers are exempted from these redundancy benefits.
Tourism labor is not unionized in Jamaica, and most labor disputes are subject to the Labor Relations and Industrial Disputes Act, pursuant to which an aggrieved employee can file their labor complaint directly with the Industrial Disputes Tribunal (IDT) where a politically appointed type of arbitrator makes final decisions. The IDT is an arm of the GOJ’s Ministry of Labor and was established to settle industrial disputes. Most tourism labor disputes are resolved by the IDT, which has discretion to award compensation or order reinstatement of an employee. Prior to these employee-friendly IDT revisions in 2010, labor disputes would fall under the jurisdiction of the Supreme Court. There is now much local discontent over the constitutionality of essentially putting original jurisdiction of labor disputes in the IDT, which is not bound by prior decisions, has compensation powers that are not limited by statute, and is made up of members who are not subject to term limits and are not required to have any legal training.
Currently, the GOJ Ministry of Tourism is dutifully working on legislation to enact a Pension Act, which is designed to cover tourism workers ages 18-59, whether permanent, contract or self-employed. Benefits under the Pension Act are to be payable by age 65. This is part of the Ministry of Tourism’s Human Capital Development Strategy, and is viewed as an important milestone for the industry considering that the tourism industry directly employs about 117,000 workers and is projected to have 29,000 more workers added by the year 2021. Initial investment in the Scheme is expected to come from a tourism investment fund, but long-term survival will depend on mandatory buy-in from hotels, the largest employer of hospitality workers.
Overall, Jamaica’s tourism product presents sustainable competitive opportunities and incentives worth exploring by prospective investors looking to develop and/or operate hotel projects. The Ministry of Tourism’s specifically defined capacity for growth, combined with industry-specific legislative overhaul and streamlined regulatory oversight, suggests that the island will maintain its high rank as one of the best places to invest in the Caribbean. Of course, investments come with liabilities, especially related to human resource management and project operations. However, in the case of foreign tourism industries, these liabilities can be carefully managed and effectively limited by engaging counsel familiar with the laws of both local and foreign jurisdictions.