Government agencies in Latin America often offer a range of incentives in order to secure foreign direct investment, but in many cases the investors never receive all of the incentives that they were offered.
Globally, companies only receive around 44 percent of incentives awarded to them, according to a recent survey by Hickey & Associates, a global site selection and public incentive management company. This is supported by tax consultancy firm WTP Advisors, which notes that “approximately 50 percent of all incentives available are overlooked or unclaimed.”
“That’s leaving quite a bit of money on the table,” said Hickey & Associates Principal Ann Harts, who noted that this can have a major impact on performance at a given site, as most companies count on the incentives when putting together their business plans.
How Does This Happen?
In return for a certain level of financial investment or job creation, promotion investment agencies and national or local authorities across Latin America typically offer anything from tax credits and cash grants to offsets on capital expenditures and infrastructure requirements. Of the available incentives, “the two that I see that are most often overlooked are cash grants and training cost offsets,” said Harts, who specializes in Shared Services, BPO and IT and does much of her work in Latin America.
“I do believe that investment promotion agencies and economic developers want the companies to get the incentive that has been awarded. There’s no question, they want them to be successful,” Harts emphasized. “But when money’s left on the table, I’m not so certain they’re going to go and knock on the door and say ‘Hey, you left some incentives on the table.’”
But how is it that so many companies leave these incentives unclaimed? “A typical reason that incentives are not received by a company is that, for example, someone is responsible in either the real estate, finance, tax or operations department for collecting incentives and all the information and data is in a file or a spreadsheet. If this person leaves the company, many times these files are not turned over to another employee, and the incentives are either forgotten about or deadlines are missed,” Harts explained.
“Another common reason is that the person responsible has numerous other work responsibilities and this reporting (which can be cumbersome) is often put to the bottom of the pile in order of importance,” she added. “In our over 30 years of working on incentives and incentive compliance, we have seen many, many reasons why incentives may not have been collected. And why we strive to make the process easier for our clients.”
It is frequently “when they’re having performance issues at the site and they’re trying to find out why” that most companies realize that they have not received all of their incentives, she told Nearshore Americas. “They can go back and try (to ask for reimbursement) but most of the time they’re already out of the compliance period and there’s no going back.”
This is common across all of Latin America and beyond. “It happens anywhere and everywhere that incentives are available,” Harts said, although “there are some cities and countries that are not aggressive with incentives and companies will invest there regardless due to there being a good business case, be it a sustainable labor force, skill sets, etc.”
Impact of Unclaimed Incentives
While incentives can help persuade interested parties to invest in a certain city or region, they are rarely a decisive factor. “A company isn’t going to make a decision based on incentives. That’s shortsighted. They’re going to make a decision on those things with the highest costs… labor, training and real estate … along with other factors such as security, natural disasters, political stability, taxation,” Harts said. “Incentives are what assist the company in making the final decision to locate a facility to a particular location – especially if certain expenses can be offset by the incentives offered.”
However, once companies factor the incentives that they are offered into their business plan, failure to collect them can have a negative impact on performance. “That’s why the compliance aspect of this is so incredibly important,” Harts said. “In most cases, companies apply incentives to the analysis that they’ve created that breaks down why Guadalajara is a better place than say Aguascalientes, for example.”
Harts continued: “However, if they’ve been awarded substantial incentives that they’ve utilized in their location decision and growth analysis, this could hamper the ability of the facility to perform to expectations and projections. This is why we say ‘Don’t leave money on the table.’ Make certain there is a really good compliance protocol in place or utilize our services where we provide compliance along with a real time Cloud-based reporting system for the company.”
Hickey & Associates has been in business for over 30 years, providing site location analysis, labor analytics and incentives compliance. It has collected well over US$1.5 billion in incentives for its clients, who include many Fortune 500 companies. “The goal for us is to ensure that the clients get every penny that they have been promised and that they’re entitled to if they’ve met their commitment,” Harts said.
To meet that aim, about five years ago the company created a Public Incentive Management (PIM) system. “It’s a patented, Cloud-based system where our clients can have real-time reporting on all of their incentives … they can automatically bring up records and reports in a Microsoft-based format on incentives that they have been awarded,” Harts explained.
While the incentives on offer always vary by city, region and country, Hickey & Associates has a database of all of the incentives from different government entities so that they can advise clients in advance on what they should expect to be offered.
“We also have a compliance division that helps our clients do all of the reporting and the compilation of information for the reporting,” Harts added. “We alert them that there are reports due to claim the incentives and work with them to compile the information as well as file the reports to the government agencies.”