Value Added Tax (VAT) and Healthcare Cost in The Bahamas

Warning on VAT healthcare implications

GEOFFREY BROWN
Guardian Business Reporter
geoffrey@nasguard.com

Value-Added Tax (VAT) Private Sector Education Task Force Co-chair Jasmine Davis said yesterday that vatable healthcare will have “huge socioeconomic implications” for the country’s workforce if not readdressed by the government.

Davis told Guardian Business that the task force continues to push physicians and healthcare facilities to register for VAT to avoid incurring penalties, but stressed that the medical community will continue to lobby for exempt status simultaneously.

“Medical services as described in the act are essential services, and it has huge socioeconomic implications. What we don’t want to see is persons opting out of getting healthcare,” said Davis.

She pointed out that the tax on healthcare would not only affect lower-income households, and anticipated that businesses would shift the additional 7.5 percent of healthcare costs onto employees.

“What would result is that we would have a sicker populace, which means that people will not be working, which means that dollars will not be moving through the economy, which means that the amount of money that is expected to be derived through taxation will not happen,” she said.

Davis could not provide a figure for the number of healthcare professionals registered for the tax to date. However, she claimed that the sector is making good progress in registering.

Davis also reasserted that healthcare and education are benefactors of the VAT system in other jurisdictions that have implemented the tax.

“Funds from taxation are normally earmarked for healthcare and not the reverse, where healthcare is taxed to reduce the deficit,” said Davis.

The Ministry of Finance recently clarified that national exams and other education services will be exempt from VAT. Given these exemptions, Davis argued that healthcare was planned to be exempt from VAT up until the last revision of the tax’s legislation tabled in July.

November 28, 2014

thenassauguardian

What are the Bahamian people saying about value-added tax (VAT)

VAT – Permanent failure for the government?

The subject of value-added tax (VAT) has stirred up quite a bit of discussion on social media and in the public sphere. In fact, the emails which I received were quite enlightening, informative and thoughtful. There were many more questions raised as a result and in this vein I propose to relate some of them today for consideration.

Has the Ministry of Finance been presented with alternatives to VAT? If so, did it do a proper evaluation of them? Will implementing VAT ensure that we improve efficiency and eliminate the potential for fraud with regard to government revenue collection? Why has the government operated with deficit spending for 18 of the past 21 years with the exceptions being 2000, 2001 and 2008? I should add that during the time I served in Parliament (2002 to 2007) this trend continued so I do accept responsibility for not speaking out and challenging my colleagues at the time on it.

To this end, we were either ill-informed or ill-prepared to understand the basic principles of running a government and derelict in our duties because we did not understand that successive governments could not go on spending binges without reaching a day of reckoning which is where we are today.

Why would the current Governor of the Central Bank of Barbados Dr. Delisle Worrell, call VAT an anti-tourism tax and the VAT system in Barbados a mess?

Are there lessons to be learned from Barbados? Merton Moore, who headed the VAT Implementation Unit in Barbados, calls it the “Rolls-Royce of taxes; treat it with intelligence, integrity, care and respect and it is likely to reciprocate”.

Will the government be bringing the VAT experts from Barbados, which is most similar in economy, culture and population to enlighten the public on VAT?

What spending cuts have been put forward as we prepare to implement VAT?

Clearly, all and sundry are aware that the government needs additional revenue. In fact, the government needs enough revenue to eliminate the deficit spending. This figure is close to half a billion dollars.

What mechanisms are in place to collect the outstanding hundreds of millions of dollars owed to the government now by taxpayers? Does anyone truly believe VAT will solve the economic issues that the country faces? Or will implementing VAT buy time with the international agencies to appear as if we are doing something to address our growing debt and deficit spending?

VAT fraud is a major concern for European countries that are well-developed and have a history of compliance. The Bahamas has a large underground economy, thousands of illegal immigrants who live outside of the law and a history of not paying taxes, and up to $400 million in uncollected taxes. How are we going to collect VAT? Further, there is the argument that every other country that has implemented VAT has used it as a slush fund to enable more spending and borrowing. What makes the Bahamas any different given our track record for running up debt?

Successive administrations have taken the easy way out and chosen to stick their heads in the sand and hope that things get better without adhering to the best financial principles for good governance. Political expedience was more likely a driving factor in the decision making and not fiscal prudence and responsibility as our current state of affairs makes the case for this argument.

The government has been lackadaisical and complacent in collecting existing taxes. Moreover, existing elected officials are setting a bad precedent by being blatantly delinquent on their own existing taxes and financial responsibilities to government agencies and corporations. This does not bode well for setting an example in a democracy nor does it help to champion an argument in support of VAT that is palatable to a majority of Bahamians. Implementing VAT without remedying the precursor is a recipe for lawlessness in the future.

Moreover, if the government is serious about tax reform, it would implement the policies of existing tax collection methods as an immediate priority.

In exploring expenditure reduction, has there been serious consideration given to public service mutuals as currently used in the United Kingdom? Also, would energy sector reform potentially raise a large revenue stream on a recurring basis for the government? How can we afford to give public servants increases in salaries when the government is operating at a deficit? In many countries around the world, governments have reduced salaries of public servants to reduce the recurrent expenditure in an effort to close the gap.

We have an indebtedness issue in the Bahamas. Eighty percent of persons with checking accounts in The Bahamas have a balance of under $1,000. Doesn’t this factor into an unsuccessful VAT system reality? Are members of Parliament visiting their constituencies to listen to what the Bahamian people are saying about VAT? If they were, there would probably be a different legislative agenda. Will it be that the $30 to $40 million coming as proceeds of VAT are used through Social Services where a debit card will be issued to persons in need, the pre-qualifier for issuance conducted through Social Services and in a way that is susceptible to politics? If such is forecasted then we know what outcomes to expect. VAT will take at least 7.5 percent out of the economy. Is there a corresponding increase in gross domestic product (GDP) of say 10 percent to compensate? I know that’s a big dream given the facts.

The harsh reality for The Bahamas of our current state of affairs is that our national debt has climbed from $1.1 billion in 1993 to approximately $5.2 billion at June 30, 2014. In the past seven years our national debt has more than doubled from $2.5 billion in 2007 to $5.2 billion in 2014. We accept that this cannot continue.

Further, from 2007 to 2014, the GDP of The Bahamas grew by only $1 billion. This means that in the last seven years we had stagnant growth along with excessive spending. Is VAT going to fix this problem? I put it to the ordinary person that VAT alone will not be enough. Moreover, we can find an alternative revenue stream to VAT, along with radical expense reduction and a real commitment to changing our reckless fiscal ways.

The Bahamian people want to see the government succeed but recognize that this means the government needs to operate with either balanced budgets or surpluses. If the current administration is not prepared to find and implement the solutions, which in my view do not have to include VAT, then it will be at their peril and further plunge this country into an abyss of failure the likes of which can be seen in many countries in the region.

• John Carey served as a member of Parliament 2002 to 2007 and can be reached at johngfcarey@hotmail.com.

August 08, 2014

thenassauguardian

The value-added tax (VAT) implementation date nears ...despite the widespread lack of understanding about it in the Bahamian society

To Be Or Not To Be - Bahamians Want Answers On Vat

Tribune 242 Editorial:


BAHAMIAN businessmen are becoming more agitated as the date for the implementation of VAT nears with only reassurances from legislators that draft legislation as to what it will mean to them is on its way.

Gowon Bowe, a Tax Coalition co-chair, has urged that the proposed legislation be brought to parliament before it takes its summer recess.

“If we don’t do a lot in the next six to eight weeks,” he said, “we would be right back in the same situation we were facing when we were looking at July 1 as the implementation date, with the business community again saying that they don’t have enough time.”

Mr Bowe said that the business community has still not had “the critical elements. There is no legislation, no regulations on what will be exempt, or what is ultimately going to happen. We need to urge the Government to be proactive.

“There is a concern,” said Mr Bowe, “that time isn’t on our side in that regard. We understand that there was a lot going on in the Budget, but now that is out of the way, this is the most critical time in terms of our fiscal course of action. We have had some casual conversations with the Financial Secretary and he had indicated that they were just waiting on Cabinet now.”

John Rolle, the Ministry of Finance’s financial secretary, recently confirmed to Tribune Business that VAT preparation/readiness efforts were being delayed because they were waiting for “final directions” from the Government.

Government brought two tax experts from New Zealand — one of the few countries that has a good word to say for VAT – to advise legislators on its merits and how to implement it.

Dr Don Brash and Mr John Shewan, both closely involved in the implementation of New Zealand’s Value Added tax in 1985-86, could not emphasise enough the importance of an extensive education programme, both for business and the general public. It was this programme that was the secret of New Zealand’s success. Such a programme would be even more important for the Bahamas, a country, unlike New Zealand, that has no income tax, but relies solely on indirect taxation and trade tariffs. In other words, Bahamians in general are not tax savvy.

“The reason our education campaign was so successful,” said Professor Shewan, “was because there was a commitment to an 18-month educational programme, six months of which was prior to the implementation date, but the most important things happened 12 months after the implementation because there were a series of detailed explanation programmes targeted at all kinds of groups.”

Government, which had planned to implement the tax on July 1 —13 days ago — was forced to delay it to January 1 next year — six months away – because, not only was legislation not ready, but there was not enough time to discuss it with the business community or to educate the public. Soon, if government continues its thumb-twiddling, another delay for implementation will have to be announced.

In their report, the New Zealanders expressed concern “at the widespread lack of understanding of how a VAT would operate in the Bahamas”. They were also “concerned at the complexity of the VAT proposal as currently envisaged (obviously government’s first draft on their arrival). This complexity would lead to high compliance costs and potentially extensive abuse of the system,” they predicted. Hopefully, this complexity has since been simplified. The state of business in the country today can certainly not absorb high compliance costs.

It was explained that VAT was urgently needed, not only to expand government’s tax base, but also for the country to be eligible to join the World Trade Organisation (WTO). Having had to reduce its original 15 per cent tax proposal to 7.5 per cent, the government maintains that it cannot afford to also reduce Customs duties. If joining the WTO is its objective, then Bahamians can count on the VAT rate being increased so that the Bahamas – a non producing country — can qualify for WTO membership. Qualification means that all Customs duties have to be abolished. Government, while explaining VAT, should also explain in detail the advantages of the Bahamas having WTO membership.

Several months ago, Social Services Minister Melanie Griffin outlined how our sluggish economy has hurt those in the lower income brackets – the group with the potential of being the most affected by VAT. With the September opening of schools, Mrs Griffin said, there was a substantial increase in demand on Social Services to feed and equip children for school. At the time, she was being interviewed she said that 1,606 out of just over 3,500 children had requested uniform assistance.

There was also more demand for food stamps, a relief system that is growing, she said.

Mrs Griffin appealed to corporate Bahamas and private citizens to partner with government to assist children in need. Recently the 58-year-old Ranfurly Home for Children appealed for financial aid. Mrs Griffin said government would assist to make certain that the Home, which has cared for so many children sent by Social Services, would not have to close. She also said that her Ministry will have to step into the breach to assist those who might be severely affected by the implementation of VAT.

A few days ago, we were discussing VAT with a businessman who said that what his company had traditionally set aside as donations for the various charitable organisations and student scholarships would now go to VAT. This shift in donations will put an even heavier strain on Mrs Griffin’s Ministry. In other words VAT will force the public sector to curb its generosity.

No matter how we look at it, VAT is going to create a vicious circle, and regardless of how it is introduced, Bahamians will not be satisfied until the government demonstrates that it too is making substantial cuts in its unnecessary spending. Bahamians are not going to pay taxes to give government a licence to spend foolishly. 

July 14, 2014

Tribune242

The new value-added tax (VAT) proposal

Budget 2014/2015: Answering the questions on VAT

Last week, the prime minister of The Bahamas delivered his budget communication to the House of Assembly. As expected, the speech and details of the aforesaid communication attracted a lot of attention from the Bahamian people as we sought information and clarity on the plans of the government for the new fiscal year. Chief among our interests in the communication was the specific details on the proposed value-added tax (VAT) regime.

There is no doubt that we now possess more information on how VAT will be implemented in The Bahamas and some level of certainty has been provided to the private sector and the Bahamian public as a whole. In this piece, we take a look at what we now know, analyze some initial commentary and responses, as well as determine the questions that ought to be answered as we move toward the implementation of VAT.

The government’s position

After over a year of extensive deliberations, engagement of myriad experts, multiple reports commissioned by the various stakeholders and sometimes emotional debates on fiscal and tax reform, the government has specified that VAT will be introduced at one single rate of 7.5 percent effective January 1, 2015.

The announced positions were driven by consultations with the private sector and other stakeholders and reflected compromises on the part of the government after having proposed a standard rate of 15 percent, a special rate of 10 percent and an implementation date of July 1, 2014.

Additionally, it is anticipated that fewer exemptions than originally proposed will be granted and the Ministry of Finance will have the necessary resources by October 1, 2014. In this regard, the government ought to be commended for keeping its promise of working with the private sector and taking their concerns into consideration in making the final decision.

The new VAT proposal also entails a VAT-inclusive pricing system to simplify price comparisons by consumers and more favorable procedures for accounting and tax credits, as well as refunds to accommodate small businesses.

Based on the lower rate at which VAT will be introduced, there will not be a wide-scale reduction in import duties and excise taxes during this budget cycle. However, the government has indicated its willingness to revisit these taxes in the next fiscal year as The Bahamas moves closer to accession to the World Trade Organization.

The impact of VAT on government finances

The acknowledgment of the importance of curbing government expenditure and the deficient nature of our current tax system in the budget communication is welcomed.

It is hoped that this will translate into a calculated and focused effort to ensure a more efficient allocation of taxpayers’ funds and the effective collection of taxes by the government going forward. This is vital as the fiscal predicament of our country cannot and should not be addressed solely from the revenue side. The government must remain resolute in the implementation of its fiscal consolidation plan.

It was noted in the budget communication that tax revenue as a percentage of gross domestic product (GDP) for The Bahamas is expected to be about 17.1 percent in 2013/14 which is significantly lower than the global average and lags behind the regional norm.

According to the Organization for Economic Co-operation and Development (OECD), the average tax to GDP ratio in OECD countries was 34.6 percent in 2012. While this suggests that we have the capacity to increase tax yield to meet the demands on government, the rise ought to be gradual and calculated to ensure sustained economic growth and to avoid a distortion of the economy.

That being said, VAT is expected to only slightly enhance revenue yield by 1.5 per cent of GDP in 2014/15 based on the date of implementation, while other revenue measures outlined in the communication are expected to increase revenue by 2.7 percent of GDP in 2014/15 with a resultant improvement in overall tax yield as a percentage of GDP from 17.1 percent to 19.8 percent.

Are there any winners or losers?

It was recently reported that the Inter-American Development Bank (IDB) in its Caribbean Region Quarterly Bulletin had suggested that The Bahamas has “further worsened its potential” to be downgraded by one or two notches by international credit rating agencies due to the postponement of the implementation of VAT.

This report highlights the potential risks to the maintenance of our investment-grade rating and further drives home the point that has been reiterated over the last two years – that we need to urgently address the fiscal challenges confronting us as a nation.

The positive side in this discussion is that as we now know that VAT will definitely be implemented at the specified rate at a specific date; this should dispel any doubts in the minds of international rating agencies as to whether we will be proceeding with tax reform. When combined with the downward trajectory of our GFS deficit evidenced by a reduction in the GFS deficit to 5.4 percent of GDP in 2013/14 compared with 6.3 percent for 2012/13, international rating agencies should be comforted that the government is committed to fiscal reform; after all S&P had indicated earlier that our overall fiscal plan will guide any decisions on revisions to The Bahamas’ rating.

Against this backdrop, it is obvious that we cannot approach the issues of fiscal and tax reform from a win or lose perspective based on the interest group we belong to. Rather, we must seek the best formula and optimum strategy to address an issue of significant implications for our commonwealth.

It is difficult sometimes to understand the rationale for certain commentaries that appear to ignore this reality. The decision of the government not to carry out any wide-scale reduction of custom duties with the implementation of VAT, while it has invoked some commentary, could be understood in the initial implementation phase of VAT. It is often said that the devil you know is better than the angel that you don’t; hence, the government must exercise prudence and conservatism so as not to further worsen the country’s fiscal position in the event that actual revenues from VAT are not in line with projections.

The other important details

Now that we have the most important details on VAT, there is other specific information that should be provided as soon as possible to enable proper preparation for the new tax system. It is important that the full list of exemptions (which are expected to be fewer than initially proposed) is released.

In this regard, the discussions with sectors that will be impacted by this new proposal should be expedited by the government. While we do not expect wide-scale reductions in custom duties, the planned reductions should be communicated to stakeholders and the general public in a timely manner to allow for the necessary internal changes.

Industry-specific guidelines on VAT would also be very helpful in simplifying the information contained in the VAT legislation and assist businesses with VAT compliance.

Concurrently and in the lead-up to the implementation date, more information should be provided on the reforms to the social welfare system aimed at minimizing the impact of VAT on lower income families.

Finally, the proposed public education campaign which will entail private sector involvement must now commence without delay. The clock is ticking and even though it seems like we have a lot of time before VAT implementation, there is much work to be done.

• Arinthia S. Komolafe is an attorney-at-law. Comments on this article can be directed to a.s.komolafe510@gmail.com 

June 03, 2014

thenassauguardian

The low rate/ few exemptions value-added tax (VAT) model

U.S. study looked at VAT with ‘attendant tax cuts’

By ALISON LOWE
Guardian Business Editor
alison@nasguard.com

A range of “attendant tax cuts” were assumed to accompany the implementation of value-added tax (VAT) when it was recommended by U.S. economists commissioned by the government to examine the best possible approach to tax reform, Guardian Business has learned.

In addition, the economists, Compass Lexecon, also supported the contention of groups such as the Coalition for Responsible Taxation and others when they recommended that the government must strengthen the existing tax system, particularly the administration of real property tax, as a key component of its overall reform plan.

In an email exchange with Guardian Business, David Kamin, an adjunct professor at New York University’s School of Law and a key participant in the formulation of the study produced by the government, discussed the objectives, assumptions and findings of the study, which the government has pointed to as further support of its plans to introduce VAT.

Kamin confirmed that the group found value-added tax (VAT) to be the preferred method of tax for The Bahamas, proposing a combination of VAT and a varying range of tax cuts in order for the government to raise a level of revenue that would not choke off economic activity.

He said: “We analyzed what revenue should be generated by the VAT in combination with related tax cuts. Here, we warned that there’s a balance between 1) the long-term revenue needs of the government and positive long-term economic impact of deficit reduction, and 2) the short-term negative impact that fiscal consolidation is likely to have on the economy.

“We then analyzed the VAT and attendant tax cuts producing 1) over two percent of GDP (like the government proposed last year); 2) 1.5 percent of GDP, and one percent of GDP.

“In striking this balance between long-term revenue needs and the short-run impact on the economy, we recommended a VAT and attendant tax cuts that would produce less revenue on net than the government had proposed last year - consistent with a VAT rate in the range of five to 10 percent (depending on the breadth of the base and size of related tax cuts). And, we further recommended that this be backed up with a fiscal rule to bolster credibility.”

On Wednesday, during the Budget Communication 2014/2015, the prime minister announced that the government is planning to implement VAT on January 1, 2015, at a rate of 7.5 percent, with “much fewer exemptions” than initially proposed, and no “wide-scale duty reductions”.

The decision to offer fewer exemptions has won applause from the business community, who felt it would make administration of the VAT more simple, as suggested by New Zealand experts Don Brash and John Shewan, but the announcement that there will be few duty reductions has been more controversial.

Coalition co-chair Gowon Bowe has argued that findings of the study commissioned by the private sector grouping suggest there will not be a “radical” price spike under a VAT with few duty reductions, while some retailers and the president of the Bahamas Contractors Association fear a major knock to consumer demand from the plan.

As to what duty reductions were assumed under a VAT with 7.5 percent if the revenue target was to be achieved, Kamin said: “We were not asked to calculate (and didn’t calculate) the duty reductions that would be consistent with our recommended net revenue target for a VAT with a 7.5 percent rate. Since both the potential breadth of the VAT tax base and the duty reductions were shifting as our report was developed, we focused our recommendations on the net revenue that we believed appropriate.”

When selecting VAT as the preferred method of taxation for The Bahamas, Kamin noted that what is involved in administering a VAT, as opposed to other taxes, was of particular relevance to the consultants. Kamin is a specialist in tax law and policy; he served as adviser, to Peter Orszag, director of the U.S. Office of Management and Budget, and helped to formulate policy for President Obama’s first two budgets.

“The study considered whether the current tax system in The Bahamas was in need of reform, concluding that it is and that a VAT should be adopted in light of The Bahamas’ significant revenue needs, the expectations of the markets and the current relatively narrow and inefficient tax base,” he said.

“In arriving at this conclusion, we looked at a number of different alternatives, including payroll taxes, corporate income taxes, individual income taxes and the VAT. Based on what is known of these different tax systems, we concluded that a VAT is superior in terms of efficiency and, especially, administrability as compared to these alternatives.

“We also recommended that The Bahamas endeavor to strengthen parts of its existing tax system, like the property tax. To be clear, this analysis considered the effects of these taxes in terms of efficiency, fairness and administrability.”

Prime Minister Perry Christie spoke of the Compass Lexecon report during his presentation on the Budget 2014/2015 last Wednesday. He noted the group’s favoring of the VAT, as well as how the study also concluded that the government implement a fiscal rule to bolster its “credibility” in the budgeting process. However, Christie said that the government determined that such a rule, which would require the government to legislate a maximum debt to GDP and minimum annual level of reduction in the debt to GDP ratio removed a level of “adaptability” that the government sees as important to its ability to make financial decisions going forward.

Meanwhile, contacted for comment on the government’s proposed tax plan, New Zealand tax expert Don Brash said that he and Shewan were “very pleased” to hear that it appears that the government may have elected to pursue the “low rate/ few exemptions” VAT model they recommended during their recent visit to The Bahamas, but declined to comment on the government’s decision to do so while largely retaining duty rates at the current levels.

June 02, 2014

thenassauguardian

Value Added Tax (VAT) exemptions result in a higher rate

New Zealand Vat Success Due To ‘Education, Almost No Exemptions’

By RASHAD ROLLE

Tribune Staff Reporter

rrolle@tribunemedia.net

NEW Zealand Value Added Tax (VAT) experts emphasised yesterday that a strong education campaign and “virtually no exemptions” are responsible for their country’s successful implementation of VAT.

John Shewan, an Adjunct Professor of Accounting at the Victoria University of Wellington and one of the experts expected to give the Bahamas government a report on implementing VAT next month, said: “The reason our education campaign was so successful was because their was a commitment to an 18-month educational programme, six months of which was prior to the implementation date, but the most important things happened 12 months after the implementation because there were a series of detailed explanation programmes targeted at all kinds of groups.”

He added that ideally, the Bahamas government, which is still seeking reports from the private sector before finalising its VAT plan, should actively promote VAT only when the tax’s design has been finalised.

He said it took six months of intense education programmes before VAT was implemented in New Zealand following the finalisation of its makeup and legislation.

Don Brash, the former governor of the Reserve Bank of New Zealand, added that the compliance cost of VAT is low in New Zealand because “everything was taxed at the same rate and virtually no exemptions were given.”

VAT exemptions are sometimes made for certain items and services in order to alleviate the burden that the “regressive” tax may have has on the poor.

However, the New Zealand tax consultants said the government should seek other ways of helping the poor.

To help the poor of New Zealand, he said the country’s government makes direct payments to low income families through tax credits.

The question of who deserves those credits, however, is controversial, he said.

“If you have a large number of exemptions your rate has to be higher. With a smaller number of exemptions the rate will be lower. We found that the one rate, no exemptions framework worked extremely well,” said Mr Brash.

The two experts said that ultimately New Zealand’s government recorded a revenue intake that far exceeded its expectations following their tax reform.

April 25, 2014

Tribune 242

The regressive nature of value added tax (VAT) ...and its corresponding effects on the purchasing power of the populace ...in particular the middle and lower classes in a society

The Fiscal Reform Series: A model VAT implementation

In the midst of the continuing debate on fiscal reform in The Bahamas, we must keep our eyes on the prize (and the price) and not forget the ultimate goal of embarking on this important venture.

The fundamental purpose of the fiscal reform exercise is to reduce the government’s recurrent deficit, curb and control expenditure, improve the efficiency and effectiveness of tax administration and restore our debt-to-GDP ratio to a more healthy position while ensuring that the country experiences economic growth and development.

It must be reiterated that if it decides to, The Bahamas will not be the first jurisdiction on the globe to implement Value Added Tax (VAT) and will probably not be the last to do so. There has been considerable discourse on the experiences of other nations that have implemented VAT, with Barbados being referenced from time to time, although the opinions on its level of success have been diverse.

It is noteworthy that Singapore and New Zealand have been touted as success stories in the introduction of VAT. This week, we conclude this series with a look at what model VAT implementation would entail and whether it is possible in the Bahamian context.

Fiscal reform and the tax component

In the case of The Bahamas, there has been a consistent call for the better administration of existing taxes and improvement of compliance with the same. Additionally, stakeholders including the private sector have called for better management of government expenditure with specific recommendations for target reduction in public spending.

The importance of economic growth in the overall equation has also been highlighted during public discourse. The vital message from opponents and commentators on VAT has been the need to focus more on a comprehensive fiscal reform program than on tax reforms aimed at increasing government revenue.

There is no doubt and we all agree at this point that reforms are mandatory and urgent action is required. The interesting point in this debate is that the aforementioned points are all elements of the government’s fiscal consolidation plan. This suggests that both sides appear to be on the same page in relation to the approaches to be taken to address the country’s fiscal imbalance.

However, the bones of contention seem to be the order in which the plan is implemented, the ability of the government to execute the plan and the selection of new taxes and measures to enhance government revenue.

The ideal VAT implementation

The general consensus among consumption tax experts is that this form of taxation works best when it has the broadest base possible and a single or common rate for all supplies. Ideally, the need for tax reform will not only be echoed in words by relevant stakeholders but also supported by their actions.

While skepticism over government initiatives aimed at raising revenue is to be expected, there will be general buy-in among the entire populace based on the financial circumstances of the country. For its part the government would also have done a decent job in explaining the reasons for the necessary reforms and the consultation as well as the education processes would be comprehensive including all stakeholders while providing ample time for feedback and rollout of the tax.

The reality however is that this is often not as easy as it seems due to the normal reaction of the private sector and the entire public to the imposition of taxes in general and the implementation of new taxes in particular. When considered in addition to the politicization of tax reforms and the fear of political backlash by the government of the day, this issue becomes even more complicated.

The Singapore experience and The Bahamas’ reality

The experiences of several countries that have implemented VAT or a similar consumption tax show that it is an efficient and effective form of taxation from the government perspective. The often referenced inbuilt compliance/self-policing feature of VAT, stability as a source of revenue and lesser susceptibility to economic cycles continue to be the main reasons for its success rate.

Like The Bahamas, discussions on tax reform in general and the goods and services tax (GST), which is identical to VAT, had been taking place prior to the implementation of the GST on April 1, 1994.

Singapore had issued a White Paper in February 1993 although their government had a draft bill by 1991. The introduction of GST in Singapore was accompanied by a reduction in other taxes including corporate and personal income taxes, among others.

The adjustment of taxes and tax rates as well as grants continued in the years after GST was introduced. It is important at this juncture to state that Singapore enjoyed fiscal surpluses as a percentage of GDP in the year prior to, and the year following the introduction of GST.

Under Singapore’s GST system, only exports are zero-rated while certain financial services as well as the sale and lease of residential properties are exempt. In essence, Singapore was able to maintain a very broad base for the GST.

The introductory registration threshold under Singapore’s GST was SGD 1,000,000 (approximately USD 800,000) and the standard rate was 3% with a commitment not to increase the same within the first five years. It should be noted that Singapore projected that its revenue would be negatively impacted during the transitional period with a return to revenue neutrality subsequently.

In comparison to The Bahamas, Singapore was enjoying economic growth and budget surpluses and was therefore in a much better financial condition when the GST was introduced. Hence, The Bahamas, stuck between a rock and a hard place, cannot afford a transitional period of revenue negativity for the government.

Additionally, the high registration threshold and low GST rate were possible due to the existence of a myriad of other taxes which were reduced to accommodate the new tax in Singapore. Unfortunately, our precarious financial condition and the composition of our economy do not allow for a similar approach. Finally, unlike The Bahamas, one single political party – the People’s Action Party has dominated Singapore’s politics since independence in 1965 gaining significant standing over this period.

The impact on standard and cost of living

Any discussion on VAT will likely include reference to its regressive nature and the corresponding effect on the purchasing power of the populace, in particular the middle and lower classes in a society.

While the government has indicated that certain items (including bread-basket items and other essential services) will be exempted either in their entirety or subject to an established threshold, the concerns remain among consumers. Representatives of the government, by their own admission, recognize that their efforts to boost the level of public awareness and the education of individual consumers have not been stellar.

It remains very important that any revisions to initial proposals be circulated well in advance of the implementation date and a more effective education program be launched and properly executed.

In December 2013, the Financial Secretary indicated that the government will expand social safety net programs by $30 million in the first year that VAT is introduced to provide transitional relief to those that would be unfairly impacted by the new tax. The expansion, according to the government, would last for the first three to five years following the implementation of VAT.

While the adequacy of the increased allocation to welfare programs is subject to scrutiny, this compensatory measure, which is aimed at mitigating the impact of VAT on the poor, differs from the approach taken by countries such as New Zealand, Australia and Canada due to the existence of other forms of taxation.

In the case of New Zealand, targeted family support income tax credits and welfare benefits via the Guaranteed Minimum Family Income (GMFI) were pivotal in presenting the case for the implementation of consumption tax due to the reduced impact on families with low incomes.

Upsides of VAT?

The obvious expected boost in government revenue, projected reduction in our national debt and recurrent deficit as well as maintenance of our sovereign rating as a result of the introduction of VAT have been reiterated by various commentators. While these benefits are necessities, are there any other additional or potential advantages that could accrue to The Bahamas and Bahamians as a result of VAT?

Will the effective nature of VAT be considered as a part of a bigger reform of existing taxes with a view to replacing the less efficient multiple taxes in existence? Will the introduction of VAT increase the overall tax compliance rate for The Bahamas?

Will the equitable aspect of VAT lead to a redistribution of resources within the Bahamian economy in the long term? What impact will VAT have on the ease of doing business in The Bahamas in the long run? With the successful implementation of the government’s fiscal consolidation plan, can we expect a reduction of other taxes and duties in the long run?

The government will do well to address these questions as part of the education process. Singapore’s GST system was modeled after that of New Zealand in relation to the broad base and single rate. Hence, the proposed discussion between stakeholders in The Bahamas and New Zealand should be instructive and enlightening.

• Arinthia S. Komolafe is an attorney-at-law. Comments on this article can be directed to a.s.komolafe510@gmail.com

April 22, 2014

thenassauguardian

Value Added Tax (VAT) is a major component of the government’s fiscal reform program

The fiscal reform series: A deeper dive into VAT

The analysis of the best taxation model and the appropriate mix of taxes for The Bahamas is far from over as we await the final study commissioned by the government and the results of the work done by Oxford Economics – a global advisory firm engaged by the Coalition for Responsible Taxation (Coalition). It is encouraging to see that the government seems to have kept its promise to work with the private sector in the fiscal reform exercise.

While we await the findings of the referenced studies, it would be unrealistic to conclude that value-added tax (VAT) will not be a major component of the government’s fiscal reform program. It is a known fact that the issue of tax reform, in general, and the implementation of VAT, in particular, have been considered for several years and by multiple administrations. Hence, considerable work and analysis ought to have been conducted prior to the selection of VAT as an appropriate form of taxation, even though the general public is not privy to the specific details of such prior analysis. As the clock ticks and the plot thickens on the government’s fiscal adjustment agenda, we take a closer look at this form of taxation, what is being proposed and where we stand today.

The general nature and details of VAT

VAT is an indirect tax; that is, it is a form of tax that is collected by an intermediary on behalf of the government or revenue agency from persons (either individual or corporate) that bear the ultimate tax burden. In essence, the payer of the tax is often different from the ultimate bearer of an indirect tax. Indirect taxes are therefore also defined by the ability of the taxpayer to shift the tax burden.

It is noteworthy to state that the difference between direct taxes and indirect taxes was first discussed at length by Adam Smith, who is regarded as the father of modern economics. In his classic work, “An Inquiry into the Nature and Causes of the Wealth of Nations,” which is abbreviated as “The Wealth of Nations,” Smith articulated extensively the concept of indirect taxes and the impact on necessaries and luxuries, noting the similarities between indirect taxes and direct taxes with the former falling on the consumer, ultimately.

VAT is a consumption tax that is essentially levied on consumers and what they consume. A key objective of introducing VAT, as indicated by the government, is to broaden the tax base, and the choice of VAT is intended to achieve this as the country seeks to join the World Trade Organization (WTO), which requires the reduction of tariff rates. This goal is consistent with the general consensus among a number of economists and public finance experts that consumption tax should be planned with the widest base and positive rate possible.

The VAT rate and revenue

The white paper issued by the government in February 2013 suggested the implementation of VAT at a standard rate of 15 percent with a proposal to have a special rate of 10 percent, exempt supplies and zero-rated supplies. The draft VAT Bill and Regulations were consistent with the white paper in this regard. The export of goods and services are expected to be zero-rated which means that 0 percent VAT will be charged by the supplier and the VAT paid by the supplier can be recovered from the government.

It is proposed that basic food products, soap and laundry detergent, electricity and water supplies based on established thresholds will be exempt from VAT. Exempt services include, among others, insurance services, domestic financial services not provided for an explicit fee, medical services, education services, daycare and after-school care, domestic travel and services provided by a facility to persons in need of care.

It is important to state that companies offering exempt services or supplies will incur VAT on their inputs, but will not be able to directly charge their customers or consumers VAT; hence, their prices may be adjusted to compensate for the increase in the cost of production. It has been further proposed that a special (reduced) rate applies to a supply made in accordance with the regulations by a hotel or similar establishment registered and licensed by the Hotel Licensing Authority; this is presumably to minimize the corresponding impact on the tourism industry.

We know that the minister of finance has indicated that VAT will be introduced at a rate lower than the proposed 15 percent. However, numerous utterances from officials from the Ministry of Finance (MOF) have also made it clear that the choice of the initial rates was based on the revenue needs of the government. On the one hand, revenue from VAT on goods is intended to replace revenue lost from the reduction in tariff rates. On the other hand, VAT revenue derived from the service sector was expected to provide the government with approximately $200 million in additional revenue. In light of the foregoing, it is logical to conclude that a lower rate of VAT will reduce the expected revenue and the projections will need to be adjusted. Luckily, MOF officials have indicated that they have conducted multiple projections based on lower VAT rates.

A tale of VAT studies

By the end of the debate on VAT, there will have been at least four studies conducted by different stakeholders in The Bahamas to ascertain the impact and suitability of VAT for the country. The stakeholders in this regard include the government, the Coalition and the Nassau Institute. The conclusions of the first two studies were different and subject to much scrutiny as well as criticism.

It is a generally accepted notion that the conclusions of research and studies are sometimes skewed towards the client or financier of the study. This does not in any way diminish the credibility of the people carrying out the study, neither does it suggest their lack of professionalism. However, the nature of research is such that it depends on a range of data and variables which are analyzed based on the mandate of the individual or entity commissioning the study. In essence, it is very unlikely that the findings of Oxford Economics will totally favor the government’s proposals and go against the Coalition’s position. The same applies to the new study ordered by the government. In spite of this expected variance, when read in full, the details of both reports should be identical based on the reputation of the individuals conducting the studies and the fact that the same source data is being used.

Conclusion

The decision to introduce VAT at a lower rate has been welcomed by the private sector, although some remain vehemently opposed to this form of taxation. It is encouraging to see the relevant stakeholders come together to ensure that the best formula for fiscal reform success is implemented in The Bahamas with constructive debate on the proposed VAT regime being a major part of this process. It is incumbent upon all parties to be mindful of the four maxims highlighted by Adam Smith in relation to taxes in “The Wealth of Nations.” The maxims cover topics including the need for subjects of every state to contribute support to the government based on their abilities; the importance of certainty in relation to the time and manner of payment as well as the amount payable; the necessity of convenience to the taxpayer in remitting payment and the adoption of a philosophy that takes out or keeps out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

Consumption tax is not a new phenomenon and has been implemented in several jurisdictions across the globe. While there has been considerable discourse on the experiences of other nations that have implemented VAT, Singapore and New Zealand have been touted as success stories in the introduction of VAT. Next week, we will take a look at these countries with a view to determining how we can benefit from their VAT implementation story and whether differences in our circumstances allow for a fair comparison.

• Arinthia S. Komolafe is an attorney-at-law. Comments on this article can be directed to a.s.komolafe510@gmail.com.

April 08, 2014

thenassauguardian

The Bahamas government is awaiting feedback from the Public and private sectors ...to determine whether there is a viable alternative to Value Added Tax (VAT)

FNM Senator: Bahamas Not Ready For VAT

By Jones Bahamas:

The government has yet to reveal the introductory rate or date for implementing Value Added Tax (VAT), but an Opposition politician is convinced The Bahamas will not be ready by the initial proposed timeline of July 1.

In fact, Free National Movement (FNM) Senator Kwasi Thompson said this is “highly unlikely.”

“The government has not done enough to educate the public and I also ask the questions – are the necessary infrastructure in place? Have all the necessary persons being hired? Have all the necessary persons being trained? Most businesses are still unsure how it works and how it will affect their businesses. There are many issues in terms of VAT,” Senator Thompson said.

Flying in the face of ongoing backlash, the government is pushing ahead with VAT, a tax reform system the Christie Administration insists is needed to expand the country’s revenue base and one that is critical to preserving the country’s confidence as a secure and attractive destination for investment, which can be achieved “no other way.”

Finance experts have repeatedly stressed that to ignore such fiscal planning imperatives would be at the country’s peril.

The International Monetary Fund (IMF) has branded the country’s current tax system as both inefficient and inequitable.

It is the government’s intention to register only businesses with a turnover exceeding $100,000 per annum, thereby avoiding the “entanglement of smaller business in the system of VAT collection and filing.”
According to Mr. Christie, the government would still capture well over 95 per cent of the total turnover in the economy in this way.

“Focusing on the larger firms will also ease the administration of the VAT,” he has said.

But Mr. Thompson lamented the fact that in its present form, the VAT bill requires businesses to file papers on a monthly basis, a process he described as “onerous.”

“What is even more egregious is that the payment of VAT is required 21 days after the work is completed or the bill is submitted and that is whether you have been paid or not,” he said.

“I believe this bill will be disastrous for small business, who do not receive payment for services immediately after their work is completed or do not receive payment immediately after their bill is submitted. In fact, the bill that is submitted sometimes for the service is not always the bill that will be paid. So, I believe even before we get to implement this process, these are the kinds of things that must be looked at must be addressed.”

The government is awaiting feedback from the private sector and the public before actually determining whether there is no viable alternative to VAT.

The Bahamas Hotel Tourism Association is pushing a Smart Tax.

Meantime, the Coalition for Responsible Taxation also believes there are options other than VAT including implementing a payroll tax.

The group is compiling a report on its recommendations.

April 09, 2014

Bahama Journal

Value Added Tax (VAT) would likely change the retail grocery industry in The Bahamas “for the worst” ...says Philip Beneby, the Retail Grocers Association’s president

Vat 'Straw To Break Back' Of Food Retail

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Food prices would have increased by more than 7 per cent under a 15 per cent Value-Added Tax (VAT), with a sector body warning this tax in any form will be the “straw to break the back of our industry”.

Philip Beneby, the Retail Grocers Association’s president, in a February 2014 letter to the Coalition for Responsible Taxation, warned that VAT would likely change the industry “for the worst”, pointing out that a net eight food stores had closed across New Providence and Grand Bahama since 2009.

The letter, obtained by Tribune Business, has come out as the food retail and wholesale industry prepares to hold another meeting today with Shane Gibson, minister of labour and national insurance, over potential price control reforms to mitigate VAT’s impact.

Mr Beneby, speaking to this newspaper yesterday, confirmed the meeting amid industry hopes of an increase to the 43-year gross margin on price controlled items of 18.67 per cent.

“We are hoping we have a positive response from him in that regard, as far as the increase to the price control gross margin,” he told Tribune Business. “We are looking for, pushing for a mark-up increase from 23 per cent to 39 per cent. That’s what we’re pressing for.”

In his letter to Coalition co-chair Robert Myers, the Retail Grocers Association president said price control restrictions “meant that our businesses are slowly being strangled”. The 18.67 per cent permitted gross margin fell well short of the 25 per cent cost structures maintained by many retailers, turning these items into loss leaders.

The meeting with Mr Gibson comes amid other concerns for the industry, which include Business Licence fees that have more than doubled, plus hefty real property tax payments.

The Government’s Business Licence Unit has to-date rejected the food retail/wholesale industry’s request that it be allowed to pay the annual fee in stages.

Yet Mr Beneby conceded that some members felt they were being treated unfairly, and were subject to ‘double standards’, as they were hearing other businesses and industries were being allowed to make ‘phased’ Business Licence fee payments.

“They’re feeling it,” he told Tribune Business of the Business Licence fee increases. “It’s really difficult for them to find one lump sum payment, especially with having to deal with real property tax, National Insurance Board and all these other things and payments at the same time.

“All these things have to be in line before you get the Business Licence. With the way the economy is, the way business is and all these other operating costs, it’s difficult.”

Rupert Roberts, Super Value’s owner and president, told Tribune Business that the Government’s policies were effectively subsidising food purchases by the rich, “millionaires and billionaires”, and making 60 per cent of their purchases duty-free.

He reiterated that the combined effect of VAT ($6 million at 15 per cent); the increase in Business Licence fees to $3.1 million; and real property tax would be to increase Super Value’s annual tax burden by around $12 million.

In his February 2014 letter, Mr Beneby said the premise that duty reductions would offset VAT’s impact did not apply to the food retail and wholesale industry, which operates on gross margin dollars - not percentages.

“Our expense base is expected to increase with the introduction of VAT, and we will be required to produce the same level of gross margin dollars from a lower cost base,” Mr Beneby told the Coalition’s co-chair, Robert Myers.

“In order to achieve this, we have calculated that overall grocery prices will increase approximately 7 per cent, although this increase will be much higher on non-price controlled items to offset the restrictions on increased prices on bread basket items.”

Mr Beneby confirmed that the Government had dismissed the Association’s plea to impose a flat 7.5 per cent VAT rate across all food and grocery sales, expressing particular concern about the plan to classify the majority of the industry’s inventory as ‘VAT exempt’.

By applying this treatment to products that are ‘breadbasket items’ and/or price controlled, the Retail Grocers Association chief said food stores would be unable to reclaim the VAT ‘input tax’ payments they make in proportion to these supplies.

As a result, food retailers will be unable to recover between 50-80 per cent of their VAT ‘input payments’ on costs such as rent and utilities. If VAT had been introduced at 15 per cent, they would have seen such costs increase by between 7.5 per cent to 12 per cent.

“A review of the sales mix indicates that approximately 50 per cent to 60 per cent of current sales generated by the larger retail grocery stores, and 75 per cent to 80 per cent of sales generated by the smaller retail grocery stores, will be classified as Exempt (under the draft legislation), thus reducing the reclaimable VAT on overheads by the same percentage,” Mr Beneby warned.

“The impact of this issue will be the increase in overhead costs such as rent, utilities, security, marketing, office, repairs and maintenance, etc, by 7.5 per cent to 12 per cent.

“ Our businesses are in no condition to absorb these costs and they will be passed on to consumers in the form of higher prices. This increase will be in addition to the 7 per cent noted earlier.”

Mr Beneby’s letter described the Association’s three VAT-related meetings with Ministry of Finance officials as “a waste of time, as the officials are simply not listening to our concerns and suggestions, nor to the supporting information we have provided that contradicts much of their positions.

“It is extremely frustrating to have individuals, who have never operated a business, never have had to worry about meeting sales targets, or ensuring payroll is financed, dictating to us what is best for our business,” he added.

“From our perspective, they are not concerned about the well being of our businesses and the many thousands of Bahamians that are, directly and indirectly, employed by us and whose jobs and livelihoods are at risk.”

Summing up VAT’s likely impact regardless of whatever rate was chosen, Mr Beneby said: “It should be noted that 16 major food stores have closed in New Providence/Grand Bahama since 2009, with only eight of them re-opening. We know that some of our members are currently incurring losses, and unfortunately we expect further store closures with the implementation of VAT under its proposed format.

“Our customers are already under duress, as can be seen in the shift in their spending habits, and lack the ability to absorb significant increases in the cost of groceries. The implementation of VAT, under its proposed form, or indeed any form, may be the straw to break the back of our industry, and we are in no doubt that the face of the Bahamian retail grocery landscape will change for the worst.”

Mr Beneby warned that the industry was opposed to shelf pricing that ‘broke out’ the amount of VAT payable by consumers. He pointed out that in most countries, VAT was included in the total price, with the tax amount shown on the receipt.

Railing against shelf pricing that was exclusive of VAT, he said: “Many Bahamian consumers lack the capability to budget, and will not be able to relate their spending ability to their desired purchases.

“VAT exclusive pricing will lead to mass confusion at registers, with inevitable delays and disgruntled customers. We recommended that the pricing of goods be inclusive of VAT, but this was dismissed.”

Mr Beneby also described the Government’s ‘bonded warehouse’ plan, designed to prevent ‘double taxation’ and ease the VAT transition, as “completely impractical” and lacking support from the Association’s members.

The concerns, he added, related to “space restrictions, the burdens that will be imposed on the ease of business, the lack of confidence in the Department of Customs to execute, and the costs of inspections far outweigh any benefits to a bonded warehouse”.

“Without a credit system in place of duty already paid, larger importers and wholesalers will reduce bulk purchases or will temporarily cease importing food items – this will lead to increased prices or food shortages,” Mr Beneby warned.

“We recommend that businesses have their auditors provide a certificate for tax credits as at June 30, 2014. This certificate and the supporting information would be made available for audit by the Department of Customs.”

Mr Beneby also noted that food retailers and wholesalers had suffered a 20 per cent increase in freight costs, something they blamed on the “monopoly” created by the new Arawak Cay port.

“The increase in operating costs has come at a time when middle and lower income consumers are dramatically shifting their shopping habits to spending less and focusing more on bread basket items, while upper income consumers are abandoning Bahamian retail stores to shop on-line with US based establishments,” Mr Beneby added.

April 07, 2014

Tribune 242

A Bahamian perspective on the “Bahamian” design of value added tax (VAT) and its compliance in The Bahamas

Changing the conversation: Assessing VAT and the nation’s fiscal crisis

Anyone watching the news or reading the newspapers in the past few months would have heard some elements of the government’s planned implementation of value-added tax (VAT). The private sector has mounted opposition to the introduction of VAT and some have raised concerns whether VAT is the best taxation regime to wrestle the gloomy state of the national finances. It should be stated at the outset that VAT is widely employed and recognized in many developed countries as an appropriate model for modern tax collection.

With the publication of the white paper and the value-added tax bill, there is no doubt that the introduction of VAT is a major and radical policy shift in our post-independence fiscal management. If introduced, it will amount to the alteration of an archaic taxation regime that has been in place from the colonial days. It too will have the distinction of modernizing our approach to taxation matters and hopefully will signal a new paradigm in the collection and allocation of the state’s finances. The planned introduction of VAT has major consequences for The Bahamas and therefore it is vitally critical for members of the public to be informed and engaged in the consultative process. Given these realities, it is imperative for the public dialogue to be analytical, informative and frank.

VAT is generally considered a complex and robust tax. Although VAT is not the most progressive of taxation methods, it is viewed as having vast benefits in a multi-tax regime principally because it is a consumption tax. VAT is similar to retail (or sales) tax but is collected in smaller increments throughout the production or service delivery process. Its method of collection does not allow the “full” tax to be paid by the final consumer. The tax is collected by all entities providing taxable goods and services and is imposed on sales to all purchasers. It allows for a set-off of a business’ VAT liability from that of the amount paid for the purchase of the goods and services delivered to the consumer. It has a net-like-effect in the calculation of the total VAT liability owed to the government.

There is need for further explanation and discussion as to whether the “Bahamian” design of VAT will be based on a broad consumption base by an inclusion of all forms of government services. There must also be further consideration to whether there will be neutrality between public and private sector provision of goods and services. Additionally, deliberation must also be given to whether VAT will employ a credit-invoice method and if there is value in the imposition of the intended multi-rate as opposed to a single uniform rate. There has not been sufficient discussion about the increased administrative burden it will place on businesses and the government and whether the rate(s) will be high enough to raise sufficient revenue to accomplish the tax reform measures. These are weighty matters that require broad consultation and public education so that the implementation is progressive and seamless.

Further, special consideration must be given to small businesses and those entities which carry out non-commercial services in light of the added costs associated with VAT compliance. At present, the definitions of “business” and “taxable activity” in the bill are broad enough to include some charitable and religious services and possibly certain non-commercial government services. Although the bill exempts services relating to religious and charitable functions, all ancillary services may not be exempt. This was the experience in the United Kingdom (for example) where children’s clothing had a zero rate VAT but some items in that category were still not exempt (i.e., a basic T-shirt versus one with embellishments).

It is interesting that the bill seeks to create a distinction in the taxes collected from goods and services for local and international consumption. This approach questions whether our present economic model justifies such a division given the limited taxpayer base. We also must examine whether there is any merit in retaining the payment of license fees in the port area in Grand Bahama under the Hawksbill Creek Agreement if VAT is to create a broad base tax regime. Emphasis must also be directed at ensuring that poor Bahamians are not unduly saddled with a greater taxation burden. In this regard, the bill provides exempt status for certain basic food items and services. The question is whether the identified exempted goods are adequate to provide the required protection for the poor and marginalized. It must be noted that some critical services are not subject to zero exemption, albeit they are heavily utilized by the poor.

There are clear advantages if VAT’s application is broad based and levied as a single rate. It should stimulate economic efficiency and can also increase consumers’ choice. It can also have the effect of allowing consumers to properly and wisely allocate resources in a democratic fashion.

The rationale for the exemption of financial services and international transactions requires further public explanation. The intent may have been to blindly continue the decades’ old “protectionism” of foreign banks and financial service providers. For local banks and financial services providers that are majority owned by Bahamians who cater to a predominant foreign clientele, no exemption should apply. Similarly, foreign banks and financial institutions, whose shareholders are predominantly non-Bahamians and whose control is outside the geographical waters of The Bahamas, should not enjoy exempt status. These matters should be further reviewed within the context of whether VAT will be a barrier to the further expansion of the Bahamian financial services sector and the overall economic growth across all sectors.

It must also be recognized that unlike other nations that have employed VAT, the national conversation is not centered on the introduction of VAT in conjunction with the harmonization of income or capital gains taxes. This means that our approach should be fundamentally different to that of the United Kingdom and New Zealand (and other OECD countries). The primary focus should be to attain the greatest potential for overall revenue generation by taxing goods and services enjoyed by all consumers, particularly those who may repatriate savings and profits to onshore or other offshore jurisdictions without the payment of taxes under the present structure.

Our present taxation regime is unitary and based on fixed rates for business licenses and customs duties. Even within this simple system of taxation, noncompliance is remarkably high. It is also true that no matter the taxation method or model, tax evasion is inevitable. In the U.S.A., income tax evasion is projected at between 18-20 percent. It is possible that in The Bahamas the rate of tax evasion is at the higher threshold of 40 percent for customs duties, real property tax and business licenses. The government hopefully has built into its revenue projections and analysis a reasonable percentage for tax evasion, as VAT will not likely put an end to the culture of tax noncompliance. In fact, it may be arguable that tax evasion may be simplified and enlarged with the introduction of VAT, as it may lend to counterfeit inputs and “ghost” transactions. The United Kingdom pegs its tax evasion for VAT to around 13 percent and in OECD countries it is around 18 percent on average. The experience of the developed economies is that VAT is more prone to evasion when more categories of goods and services are excluded and multiple rates are utilized. There are other valuable experiences and lessons that we must take stock of and seek to find creative ways to eliminate in the Bahamian roll-out of VAT.

Government spending and tax collection

Thus far the debate on the new tax has placed too little emphasis on the relationship between VAT and the growth of government spending. Assuming that the government is able to raise more revenue with VAT it must not be a panacea for an exponential increase in government spending and the expansion of government noncommercial services. The fact that there is a need for a more modern approach to taxation demands that the government similarly create a legislative frame that ties government spending to the total amount of taxes actually collected in any fiscal period. There must be dual responsibility and accountability on the taxpayer and the government in the collection, allocation and spending of the tax dollars.

Bahamians fully understand that the government requires a broader tax regime to meet the growing demands of the society. Bahamians are also in tune with the culture of non-tax compliance, which is across all economic classes. Thus far the debate is glaringly and intellectually hypocritical by the failure or refusal to discuss all of the other available options for tax-credit expansion. There is a need therefore for the policymakers to engage in a larger purposeful discussion about taxation (period) and the best measures to increase taxes, albeit in a grueling recession. The debate must also focus on the “new” measures and methods that must be introduced to improve tax collection. There is no denying that presently the government is doing a lousy job in collecting real property tax and in the assessment and collection of customs duties and business license fees. Just as the present system allows for tax evasion, one hopes that the culture of a few paying the tax bill will not remain a staple of our fiscal discipline and management.

Governments are elected to lead. But they are also elected to govern responsibly, sensibly and fairly. There is no fairness in a taxation model that will drive people into poverty and create a further burden on those who are not able to meet the basic needs of human existence. The Bahamian people are duty bound to reject any taxation regime that favors over-taxing the poor or that creates a windfall for those who can afford to pay more.

The honorable prime minister was correct when he suggested that the government should slow down the process. At present there remains too many unanswered questions, and too many other viable options that require public explanation as to why they cannot be employed to fix the nation’s fiscal crisis. It is therefore incumbent on the government to change the conversation and to review all options, inclusive of a payroll tax, to assess and determine if there are other robust models which can be implemented to assist in the expansion of the tax base. The government must also lead by example and must demonstrate to the public that it recognizes that it must reduce waste, foolish and extravagant expenditure and poor fiscal planning. It can lead by recognizing the constitutional provisions on the size of Cabinet and by creating a more lean, responsive and progressive public sector.

There is much merit in a simple and easy to understand taxation regime that better aids in tax compliance.

The government should revisit its overall taxation strategy and devise a plan that fits well within the nation’s future needs and achieves our international competitiveness. The fact is that there can be no new taxation regime without an engaging public dialogue. Leadership on these matters demands a pragmatic approach to the nation’s daunting fiscal challenges and the full engagement of the Bahamian people. The process must be transparent, intellectual in its analyses and focused on improving the quality of the tax product (VAT or a viable alternative).

• Raynard Rigby is an attorney and former chairman of the Progressive Liberal Party.

March 26, 2014

thenassauguardian

The People’s Foundation Economic Empowerment Organisation (TPFEO) alternative to Value Added Tax (VAT)

Group Suggests Exporting Natural Resources as VAT Alternative

By Jones Bahamas:

Rather than implementing Value Added Tax (VAT), the People’s Foundation Economic Empowerment Organisation (TPFEO) is a calling on the government to tax companies whom they claim gain billions of dollars from mining and exporting the country’s natural resources.

President of the TPFEO Pastor Micklyn Seymour said if the government were to tax these companies appropriately the country’s national debt could be reduced.

“It is a known fact that our nation has some of the richest deposits and best qualities of calcium, aragonite and salt found in the world,” Pastor Seymour said.

“It is also a known fact that every year, tons of these minerals are being exported to the benefit of a few persons and to the disadvantage of the many. These products are generating billions of dollars on a yearly basis for these companies that have been allowed to mine these minerals with little or no benefit to the country.”

Mr. Seymour said the country’s natural resources have been exploited for too long and it will give the government two weeks to be transparent and reveal the names of the companies he alleged are guilty of this before his organisation goes ahead and releases the information.

The organisation’s president is also calling for the government to amend laws to facilitate the nationalisation and ownership of all natural resources and minerals to Bahamians.

He added that the government should also consider creating a ministry that focuses on managing The Bahamas’ natural resources.

“Establish a Ministry of Natural Resources to manage and make policies which will have direct responsibility for all natural resources and do researches relative to the development of these areas,” Mr. Seymour said.
“Thus, hereby ensuring transparency and accountability and that the interest of the Bahamian people would be safeguarded.”

Mr. Seymour added the organisation is preparing to launch a national campaign to educate Bahamians on the country’s natural resources, which he said could be a billion dollar industry.

March 19, 2014

The Bahama Journal