The ZOLITUR Effect
[private] While many contemplate whether ZOLITUR (Free Tourist Zone of Bay Islands) will attract a further boom in business coming to the archipelago, the pressing question is whether Bay Island’s reefs, forests and water tables will survive the boom already underway. While many business people and ZOLITUR officials are focusing on the duty free aspect of the Tourist Zone, the security and environmental aspects of this legislature may actually prove to be the most crucial determinant to the Bay Island’s future.
The tax-free status of Bay Islands was hailed by local politicians as the way to attract investment, bring in more tourists and improve security. The ZOLITUR law was signed on December 13, 2005 and officially began functioning a year later.
ZOLITUR, conceived by congressman Jerry Hynds at the time when he was still a Mayor of Roatan (1998-2006), is a compromise between Bay Islands politicians and mainland congressmen who required that the tax-free benefits be given only to Bay Island businesses instead of to the islanders. The idea of making Bay Islands into an entity that would control its own taxes and security needed a compromise of both the Liberal and National parties. Compromise was reached and both parties supported a common vision of developing a system of laws that would allow for a more autonomous, self-regulating Bay Islands.
According to Nicole Brady, a ZOLITUR sub-director, the idea was conceived four-five years ago. Initially the concept was to simply pass tax benefits to all Bay Islands residents; yet with the mainland congressmen not looking to lose out, a compromise was reached: tax benefits for Bay Islands registered companies. “We need to insure that the tourist will keep on coming here and investors will keep investing,” said Brady. “This is the closest to independence we are going to get.”
ZOLITUR offices are located in a nondescript building in French Harbour, next to a furniture store. Just from the number of Toyota Prados, Hummers and Escalades parked in front, you know it’s an important place, arguably the most important office in the Bay Islands.
For many, ZOLITUR has become a bureaucratic machine worthy of a Kafka novel. Behind a dozen doors a dozen bureaucrats sift through piles of papers, staple Xerox copies and answer calls. An open, empty hall with patiently awaiting petitioners. “All bureaucratic structures’ primary goal is justification of itself,” goes a saying. It is ironic that with all the documentation and preoccupation with law and legal detail, ZOLITUR rents a space in a building which never received a building permit. It shouldn’t even be there.
ZOLITUR applicants have been struggling with a seemingly endless list of prerequisites and unprepared customs officials. “ZOLITUR has a public relations problem,” said Dan Laylands, an American business owner on Roatan.
ZOLITUR officials see obstacles in different places. “The most difficult part of this project has been money, but we are getting over the hump now,” says Glen Solomon. According to Solomon, a loan from Congressman Jerry Hynds and eventually a loan from the Central Government funded the upstart of the ZOLITUR offices. “We’re still paying them back,” says Solomon.
Until mid May ZOLITUR collected Lps. 5 million in fees and payments. It took until July for the first quarter installment to arrive from the central government, a four month delay. “There was a glitch in the code,” explained Cynthia about the delay. Solomon says that the bulk of the money has come from the capital gains fees, but over time more will be generated from the visitor environmental tariff of $1 from domestic visitors, $2 from cruise ship visitors and $6 from international flight arrivals.
“Galaxy and Utila [Princess] have been cooperating. We haven’t received cooperation from the airport, but we will see about that,” said Congressman Hynds in April about the $1 and $6 impact fees charged to all visitors arriving via water and air in the archipelago. In August InterAirports was still not collecting the fees. Since February InterAirports could have collected $180,000 from international passengers arriving in the Bay Islands and a further $50,000 from domestic passengers. That’s $230,000 that didn’t make it into ZOLITUR coffers.
With 240,000 yearly cruise ship passengers in 2007, 60,000 international flight passengers and 300,000 domestic air and maritime passengers ZOLITUR should expect an annual income of $780,000 a year.
Currently the biggest ZOLITUR collections come from the 4% capital gains taxes that must be paid within three days of closing on all property sold since December 13, 2006. But since the sale is counted from the date of filing with registry of property and many new owners don’t file the sale promptly, developers are ending up paying capital gains taxes for properties they sold years ago. “For an importer it [ZOLITUR] is excellent. For a developer it is not so much,” says Hyde, who is also developing an affordable housing development Coxen Hole.
And where will the money go? While in the last decade different Bay Islands municipalities have relied on the skill of their Mayors to raise funds for public works projects, ZOLITUR is expected to fund municipalities more evenly. “Now, unlike before, Santos Guardiola will get funds from the cruise ship visitors,” said Julio Galindo, president of the Chamber of Tourism and ZOLITUR board member.
Each municipality has to present projects for funding and the ZOLITUR commission votes on the approval of projects for funding. According to Solomon, so far only Guanaja Municipality has presented an infrastructure project for ZOLITUR funding and at least 30% and possibly 40%-45% of the first quarter Lps. 5 million budget will go towards infrastructure projects.
The projects arriving from ZOLITUR will take place over time and some are getting frustrated at the slow tempo of change. “I paid a lot of money and we don’t see any changes,” said Michel Rodgers, owner of Roatan Realty.
The amount of time spent by companies trying to get all the paperwork together is a general concern. “We had two people on this full time for three weeks,” says Al Johnson, Parrot Tree Plantation sales manager, about the ZOLITUR application procedure. Both Parrot Tree Plantation and its sister company Century 21-BI have received ZOLITUR licenses. “It doesn’t seem like a feasible idea for smaller businesses though,” said Johnson.
Items to be imported must be placed on import lists one year in advance. Customs have introduced late penalties for not taking an item through customs within 20 working days. In one example, an American who imported a $1,700 bed found himself paying Lps. 8,000 ($420) in import duties and Lps. 13,700 ($720) in customs penalties. “It is just not feasible. This is a secondary effect of ZOLITUR,” says Elmer Cruz, owner of the Del Caribe, an import agency in Cozen Hole.
“They make you jump through hoops like you wouldn’t believe,” said Johnson. ZOLITUR has made the company look for original receipts from 12 years ago when construction on the Parrot Tree Plantation began. “They don’t accept internet banking. Where’s the modern world?” says Johnson.
“The first licenses we originally issued were a legal nightmare,” said Brady. “It has been a journey. Let me just put it this way: if anything can save us it is that [ZOLITUR].” By August 20, 106 business have received their ZOLITUR license: 30% sole proprietor and 70% corporations. “The requirements haven’t changed. We made it quite clear,” says Solomon. While application requirements might be clear to ZOLITUR officials, the application process was both confusing and costly to many applicants.
One of the small businesses that applied for ZOLITUR was American Dian Lynn’s furniture import business, “Dian’s Garden of Eat’n.” Lynn says that initially she was required to join CANATUR-BI and pay $2,000 in membership fees. “They even set up a desk in the ZOLITUR office,” said Lynn, who refused to pay. Finally Lynn received her ZOLITUR license (no. 12) in February, but didn’t even try to clear her container through. “I’m not a paperwork type of a girl, more of a do it girl,” says Lynn, who presumed it would be a chaotic ordeal. She was right.
“For the first three weeks it was a disaster,” says Boyd Svoboda, an American owner of GS Industries, a concrete and construction business on Roatan, remembering the early part of 2008. “The one guy in the country who could put the codes into the customs system went on vacation.” Now Svoboda imports concrete materials tax free and without much problem.
Lynn however still has issues with ZOLITUR importation. In August, on her first shipment of furniture Lynn had to pay a $940 customs fine because in the long list of authorized import items, “wood furniture” was mentioned, but not “wooden chairs.” Since Lynn can no longer deduct her sales tax from the $3,200 annual duties her business typically paid each year, “I still don’t know if I’ll be winning or losing, but it will be close,” says Lynn. Many small businesses are in a situation where ZOLITUR is unlikely to improve their bottom line.
Even for ZOLITUR-licensed companies not everything is easy to import. ZOLITUR companies wishing to import cars, motorcycles, boats, planes and helicopters still have to go through Ministry of Finances and can expect to pay the 46% duties on the cost of items, shipping and insurance.
ZOLITUR isn’t prospective good news for everyone. Honduran building materials manufacturers producing tiles, doors, windows and roofing are likely to suffer, as cheaper, more competitive products will arrive tax free from China. In addition, ZOLITUR is likely to discourage Honduran and Central American craftspeople from producing souvenir items for Bay Islands. Businesses that before relied on local and Honduran-made crafts will likely focus on imports of cheap Chinese goods.
With all this importing one clear winner will be the shipping companies. After Jackson Shipping suspends its US to Roatan cargo transport, the island will be left with three international maritime transport companies: Island Shipping, Caribbean Shipping and Hyde Shipping. “It will take three years to see the full benefits of ZOLITUR. It has kinks to work out,” says GM Shawn Hyde, whose Hyde Shipping company is likely to grow in leaps and bounds as imports to the Bay Islands increase. Hyde Shipping is already building a new warehouse and office facility to prepare for the expansion in business.
According to Dennis Amaya, one of six customs officials stationed in the Bay Islands, around 80% of the cargo arriving in the Bay Islands is cleared to ZOLITUR-licensed companies. CAFTA, the Central American Free Trade Agreement that since 2005 includes Honduras, has few beneficiaries on Bay Islands. “[In the Bay Islands] it’s mostly ‘used clothes merchants’ that bring in items tax free,” says Amaya about CAFTA.
Ordinary Bay Islanders should benefit from lower prices in stores. Eldon’s and Plaza Mar stores are already ZOLITUR members and have been able to save around 15% on import duties. With rising food prices, the price changes have not been visible. Vegas Electric, importing electrical materials under ZOLITUR license, has been able to pass the savings on to its customers.
The preoccupation with ZOLITUR fees and customs regulation has sidelined the most important aspects for why ZOLITUR was designed in the first place. After the regulation of Customs and Security, regulations concerning Education, Health, Culture and History will be implemented. “Most people thought that they could do their shopping duty free. That is not the idea. ZOLITUR is here to stimulate the economy and attract investment,” said Solomon. “The concept is to make Bay Islands a better place, to make social growth equal to economic growth.”
Until now the issues of security that ZOLITUR was meant to improve haven’t changed at all, and part of the security issues are related to a neglected government health system on the island. “ZOLITUR has done nothing for Roatan Hospital,” says Dr. Lastenia Cruz, director of the Roatan Hospital. Dr. Cruz is aware of the needs and hopes that ZOLITUR will eventually step up to the plate and help. [/private]