Caribbean Blog International: Bahamas tax

Friday, June 6, 2014

The Bahamas does not need another tax!

VAT model a recipe for disaster?

VAT on top of customs duties ‘a dangerous proposition’

CANDIA DAMES
Managing Editor
candia@nasguard.com
Nassau, The Bahamas

Dissecting the 2014/2015 budget

The logical impact of the government’s new model for value-added tax (VAT) is that it would likely result in less consumer demand and therefore less spending, according to Professor Gilbert Morris, an economist, who chairs the Turks and Caicos Resort Owners Economic Council.

In response to strong opposition from the business community to the originally planned 15 percent VAT rate, Prime Minister Perry Christie announced in the House of Assembly last Wednesday that VAT will now be implemented at a rate of 7.5 percent on January 1, 2015 and customs duties will essentially remain unchanged.

The previous plan called for a lowering of customs duties and an implementation date of July 1, 2014.

According to the 2014/2015 budget, the government projects that it will collect more under the 7.5 percent model than it projected under the previous 15 percent model.

The government had projected to collect $200 million under its old VAT plan. It now says the 7.5 percent would result in a collection of $300 million.

While on the surface the 7.5 percent rate sounds more palatable than the 15 percent, the fact that there will now be very few exemptions and unchanged customs duties (at least in the near term) may not produce a more desirable outcome for businesses and consumers.

But it is a painful measure the government says makes more sense to bear than cataclysmic repercussions within two to three years in the absence of reforms.

Morris predicts the 7.5 percent on top of customs duties will lead to substantial burdens for consumers who must shoulder the weight of current costs along with the new tax.

“My understanding also is that mortgage arrears are very, very high and in that situation if you’re going to add 7.5 percent VAT you’re just piling another cost on top of things and what will happen, because as you know, businesses don’t pay taxes; they pass taxes on to the consumers.

“But the taxes won’t simply be the 7.5 percent. Whatever it costs businesses to comply with the tax, it would be more like 8.5 percent...all of that will be passed on to the consumer.

“Here’s what this does. Consumers may then, and this is a theoretical point, but the logical follow through is that consumers may consume less. The economy may shrink. Black markets may emerge.”

In his budget communication, the prime minister was non-committal on when customs duties will be lowered.

“Moving to a single rate of VAT, other than zero for exports, with very limited exemptions would enormously reduce the compliance costs of the private sector and the enforcement costs for the public sector,” he said.

“Based on the revenue performance of VAT early next year, the government may be in a position to consider tariff and excise reductions at the time of the 2015/2016 budget.

“More general tariff rebalancing, however, is still a requirement that will need to be implemented once The Bahamas concludes the ongoing WTO negotiations.”

But Morris told National Review the new model is simply not a welcomed proposition.

“Adding 7.5 percent to the consumer spending bill to me is a dangerous proposition because you’re just going to lump that, essentially with duties remaining unchanged,” he reiterated.

The 7.5 percent VAT will come as disposable income and savings for many Bahamians remain virtually non existent.

The following year, January 1, 2016, the government plans to introduce National Health Insurance, which is expected to be financed by way of a payroll tax. This will further stretch the incomes of many Bahamians.

As it relates to VAT, the government has not yet revealed what products or services would be exempted, but the prime minister stressed that these will be “limited”.

Christie said VAT exemptions are a costlier method of trying to help the poor, because more revenue is sacrificed to those who are not poor.

“Having the means to provide direct assistance to low-income families is thus a far more efficient mechanism than exempting necessities from VAT,” he said.

The government is introducing VAT in response to what it says is a critical need to act.

Christie announced that government debt at the end of 2013/2014 is projected at $5.1 billion, or 60 percent of GDP.

This is up from the projected 59.4 percent of GDP in last year’s budget.

At the end of 2013/2014, the GFS deficit is expected to stand at $462 million, or 5.4 percent of GDP.

That compares to the budget estimate of $443 million, or 5.1 percent of GDP.

To cover its projected shortfall in revenue in the coming fiscal period, the government plans to borrow $343 million, pushing to $1.5 billion its total borrowing since coming to office.

Public debt interest is draining around $260 million of the annual budget and would likely trend even higher if the government fails to act, Christie noted.

With our finances at such a critical point, few would doubt the need to act. Just what action the government ought to be taking is the point of contention.

Morris contends, “You can’t add costs to an economy which shrinks consumer demand and project higher income. That’s basic economics.

“It’s just not possible because you make no provision for the increased costs of goods for businesses that won’t be able to cope, for businesses that have to add costs. If someone has to hire an accountant and pay out a certain amount every month that’s one staff person gone.”

Economic reform

The prime minister said economic developments in 2013 have had very clear implications for the evolution of public finances this fiscal year.

In particular, the tepid rate of growth of our economy, along with weak consumer demand and imports, impacted recurrent revenues directly, he reported.

Christie also laid out a series of investment projects he said would have a beneficial impact on the Bahamian economy.

“We are diligently striving to strengthen the foundations of the economy to secure steady growth and private sector employment creation,” he said.

“In particular, we are continuing our push to develop new and expanding private sector investment projects across the breadth of the nation.”

But Morris sees no serious effort at transformative economic reform.

“I see all these governments across the Caribbean talking about tax reform and again, as I always say, it’s not that these people are any less smart than anybody else,” he said.

“They went to the same schools with the people whose countries are doing very well, but they are stuck in a system and have adopted the priorities and prerogatives of that system, and appear to advance all that that system permits.

“A first-year economic student would not come with a concept of tax reform except it was embedded in economic reform, and so when I see governments of the Caribbean talking about tax reform and merely adding taxes this is a rather sad occurrence, unfortunate occurrence.”

Morris added, “Economic reform would reveal where that $300 million is going, whether it’s waste, whether there are outstanding taxes that you ought to have collected that you didn’t collect, what the reasons are for not collecting them, and it may be well in excess of the $300 million that you are about to add in taxes to the economy.

“So, the government has the power to tax and the power to impose penalties when people don’t pay taxes, but governments are refusing even to look at their own incompetence, the inability to collect taxes, and instead of reviewing those policies through economic reform and taking responsibility for them, they’re coming out with additional new taxes to make up the shortfall.

“This produces a sense and a habit of aversion in people because eventually people will begin to say why should I pay any more taxes?”

“They’re just going to waste it anyway, so people lose faith. They begin to resent the taxing power of the government and they lose faith in the judicious decision making of the government to spend tax dollars wisely.”

Christie claimed, however, that the government is addressing “deficiencies” in its “grossly deficient” system of tax administration.

But these reforms have clearly done little to change the course of public finances.

Morris is far from impressed.

“We should have had a comprehensive economic review and comprehensive economic reform and that would have revealed where our true direction should be,” he said.

“The Bahamas does not need another tax.”

June 02, 2014

Saturday, March 22, 2014

We don’t like Value Added Tax (VAT) in The Bahamas

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Super Value’s owner yesterday said Bahamians “don’t want VAT under any circumstances, even at 1/100th of 1 per cent”, and called for the Government to instead implement a wide-ranging fiscal reform package that included a sales tax.

Rupert Roberts told Tribune Business that the private sector and consumer’s main complaint was not the level of taxation, but the “complex and evil system” that VAT will introduce should it be implemented in the Bahamas.

His comments indicate that Prime Minister Perry Christie’s conciliatory Mid-Year Budget address, in which he pledged that VAT would be implemented at a lower rate than the initially proposed 15 per cent, has failed to win over the tax’s greatest opponents.

It also contradicts Ryan Pinder, minister of financial services, who in his MId-Year Budget contribution suggested that a 10 per cent VAT, which was introduced on New Year’s Day 2015, would be acceptable to many in the business community based on the feedback he has received.

Mr Roberts’s comments suggest, though, that the Government is unlikely to win over many in the business conmmunity and wider Bahamian public who seem opposed to VAT in any form.

Responding to the Prime Minister’s address last week, in which he indicated that the Government would also likely push back VAT’s planned July 1 implementation date, Mr Roberts said such a move was inevitable.

“The poor merchant doesn’t know how it works, so it has to be pushed back,” the Super Value president told Tribune Business.

Then, suggesting the Government had misread why many Bahamians were so opposed to VAT, he added: “The merchants and public are not complaining about the rate; they’re complaining about the complx and evil system of VAT.

“If VAT was 1/10th of 1 per cent, they don’t want it. We don’t want VAT under any circumstances, even at 1/100th of 1 per cent. VAT is a system that nobody in the Bahamas wants execpt the politicians.”

This assertion says Bahamians, both private sector and consumer, are opposed to the VAT concept, rather than the substance or details. Yet VAT, which taxes the value added at each stage of the production chain, or some form of general consumption tax has been implemented in more than 140 countries.

But one senior banking industry source, speaking on condition of anonymity, told Tribune Business that the pledged lower VAT rate was merely a tactic to “get the camel’s nose under the tent”.

They suggested the cut to the proposed 15 per cent rate was a shrewd negotiating tactic by the Government that was designed to pacify the VAT opposition.

Once VAT was implemented at a lower rate, the banker suggested it was only a matter of time - possibly just a few years - before the Government sought to raise it, as has happened in many other countries. They also predicted that the Bahamas would likely follow Barbados in introducing some form of income tax, too.

While welcoming the Government’s decision to lower the 15 per cent rate, Mr Roberts argued: “The country doesn’t want VAT, and the country doesn’t realise that VAT allows the Government millions and millions of dollars up front.

“We have no VAT now, and the minute we have it, merchants will pay it when we import products. It may be six months before we sell that merchandise, but the Government collects its money right away. They have millions and millions of cash flow, and I might not even sell it after six months if it becomes spoiled or someone steals it.”

Philip Beneby, president of the Retail Grocers Association, yesterday told Tribune Business that the food retail/wholesale sector was still unsure whether VAT was “the right fit” for it and the Bahamas.

He argued that it was “not as fair to the grocery trade as it is to other industries because we cannot reclaim 100 per cent of our inputs”.

Breadbasket items, which typically are price controlled and account for 75-80 per cent of food store inventories, will be treated as ‘exempt’ under the proposed VAT legislation. Vendors of ‘exempt’ items cannot claim back the VAT they pay on these products’ inputs, meaning supermarket operators will only be able to recover 20-25 per cent of their tax payments.

As previously reported in Tribune Business, food store operators fear this will result in reduced profit margins and increased costs, resulting in job losses and outlet closures.

Mr Beneby said the Government had shown no sign to-date of moving from this position, adding: “It’s not fair to us in its present form. I don’t think our industry is treated in that fashion anywhere else. The grocery trade and retailers are carrying some of the burden for Government and it’s not fair to us.”

Mr Roberts reiterated: ‘We just don’t want the system of VAT. It’s not the concept of taxation; we’re willing and able to pay the taxes for them in a system we like.

“If the Government came to the business community and said look, we have a deficit, we’re cutting our expenditure, and we want you to help us collect the money.......... if they were to package it, we’d have been collecting a sales tax for them, at 15 per cent.

“We don’t like VAT. I hope the Government realises that’s the problem. We like the Government; we don’t like the system. It doesn’t work well elsewhere, so why should it work here?”

March 20, 2014

Tribune242

Tuesday, March 11, 2014

The impact of an implemented Value Added Tax (VAT) in The Bahamas

By LAMECH JOHNSON

Tribune Staff Reporter

ljohnson@tribunemedia.net

Nassau, The Bahamas

A DOWNTOWN businessman believes it would take the Bahamas at least a year to adjust to the impact of Value Added Tax if it is implemented this July.

Although it was not an official declaration that VAT will be off the table, Finance State Minister Michael Halkitis told the media that the government will now consider revisiting all proposals in the wake of the proposed regularisation and taxation of web shops.

Dennis Halamino, the proprietor of the Tropicana Club and the Casablanca bar, told The Tribune, however, that if VAT is implemented, “it’s going to take about at least a year for the country to adjust to the change.”

“I hope they know what they’re doing because they’re taking a big risk,” he added.

In Parliament last week, Tourism Minister Obie Wilchcombe announced that the Government will regularise and tax webshop gaming by July 1 after more than a year of speculation following the “No Vote” in the 2013 Gaming Referendum.

Mr Wilchcombe revealed that the government will bring regulations to the House of Assembly within the next two weeks that will legalise the industry.

Following this, Mr Halkitis told the press that if the government is able to “realise revenue” from webshop gaming then it could possibly “relax” on other revenue raising measures.

“Based on the system as it is, if we can implement the regulation of the web gaming and begin to realize revenue from it, then we may have the opportunity to revisit all the proposals that we have to determine okay, if we now can get ‘X’ amount of revenue from here, does that give us flexibility to relax on this other side, and that’s a conversation that we will have,” he said.

Mr Halamino told The Tribune last Friday that businesses like his, which depend on thousands of tourists, will be significantly affected by VAT.

“It will affect business for any person who has customers, whether small or large,” Mr Halamino said.

“The prices are going to rise up and the Bahamas is already an expensive location because of the high standard of living. With this VAT coming, it’s going to make the place less commercial and less viable for people to come here and for entrepreneurs to do business.”

Mr Halamino said he’d be able to stay open with the same number of people on staff; however, he noted that VAT is coming at a “bad time”.

“It comes in a slow season and it will make things worse. If they are inclined to implement VAT, they should push it back to January through April next year when the most tourists and other clients come into the country. But they (government) want to do it from the mid-year to November or however long. And that period is the worst months for businesses like mine. That will make business even slower.”

He believes the government should seriously consider alternatives to VAT and if it is still inclined to implement the new tax measure, they should not only take the proper steps to ensure its collection but also consider a rate that will not cripple businesses and consumers alike.

The Government is proposing to implement Value-Added Tax (VAT) on July 1 at a rate of 15 per cent, with the hotel industry to be subject to the lower 10 per cent rate. The Government expects to generate an additional $200 million in revenue from the new tax regime.

March 10, 2014

Monday, February 24, 2014

The Barbados value-added tax (VAT) experience debated in The Bahamas

Govt urged to learn from Barbados on VAT

By TANEKA THOMPSON
Guardian Senior Reporter
taneka@nasguard.com
Nassau, The Bahamas

Days after Governor of the Central Bank of Barbados Dr. Delisle Worrell said value-added tax (VAT) has hurt that island’s tourism industry, Free National Movement (FNM) Chairman Darron Cash said the criticism should give The Bahamas government another reason to delay VAT’s introduction.

Last week, Worrell told The Nassau Guardian that he has seen “declining enthusiasm” for VAT in Barbados, adding that the tax is “anti-tourism”.

Worrell also said Barbados’ VAT system is a “mess”.

“The recent comments from the governor of the Central Bank of Barbados provide a great example of good advice from a credible source,” Cash said.

“Dr. Delisle Worrell’s statements that in his country VAT has emerged as the anti-tourism tax should give the Christie government reason to stop, review and cancel their July 1 VAT implementation date.

“If the prime minister and his dutiful junior minister (Michael Halkitis) were listening they would have already come to the conclusion that there is an overwhelming strong public view that this administration has not thought [out] its proposed VAT program sufficiently.”

When asked for his take on Worrell’s criticism, Halkitis said several Barbadian government officials see the tax as beneficial.

“For example, I had the opportunity to speak with the Minister of Finance of Barbados Christopher Sinckler at a meeting in Trinidad last week,” Halkitis said.

“He is of the opinion that it is a suitable tax, but that we should be extra vigilant in collections and not allow arrears to build up from businesses that do not pay. Otherwise, he felt that the tax has served them well.

“Former Prime Minister of Barbados and Minister of Finance Owen Arthur is also a supporter of VAT as a tax.”

Halkitis stressed that the government has reviewed a number of studies that estimate VAT’s impact on economic growth.

He said these studies forecast greater productivity and growth if the government moves away from a system of high customs duties and toward a broad-based consumption tax such as VAT.

“Another warning we have received is to avoid a system that has too many different rates and exemptions,” Halkitis said.

“This leads to greater administration costs and could possibly lead to the mess Dr. Worrell is referring to,” he said.

Halkitis said The Bahamas can “avoid the mistakes made by earlier adopters” of VAT.

He said the government’s main concern is that delayed action in getting its fiscal house in order would have a negative impact on the economy.

During an interview with The Nassau Guardian, Worrell said his views on the tax are “very radical”.

“I think VAT is an inappropriate tax for a tourism-based economy,” he said.

“The rationale for VAT is that it is an export promoting tax, because if you are exporting physical goods (VAT is not charged on) those goods, but the producers are able to claim refunds/rebates on their inputs.

“ . . .So there’s a bias in the VAT in favor of export industries; that is if you are exporting physical things that are consumed outside, but not if you are exporting tourism, because the tourists come to you to consume.

“So VAT is an anti-tourism tax if you are a tourism producer because it makes your tourism more expensive than the people who don’t charge VAT, and that’s why all tourism countries who apply VAT have to apply it at a lower rate. A simple sales tax would be much better.”

February 24, 2014

Wednesday, February 12, 2014

Bahamas Union of Teachers (BUT) recommends that the Bahamian Government not implement Value Added Tax (VAT) on July 1, 2014 ....explore other forms of taxation instead

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

Nassau, The Bahamas

The BAHAMAS Union of Teachers’ (BUT) president said yesterday that its 4,000 members were adding their voices in opposition to the “regressive” Value-Added Tax (VAT), as there was still a “great deal of uncertainty” as to how the profession would be impacted.

In a notice to the BUT’s membership highlighting their opposition to VAT, Belinda Wilson said that while teachers were on the list of professionals set to be impacted, it was still unclear how.

“There is a listing of 86 professions in the VAT documents which says these are the professions which will be affected by VAT, and at number 80 it has teachers, but no one is able to say to us what that means,” Mrs Wilson said.

“There is a great deal of uncertainty. I believe that if you want VAT to be successfully implemented then we need to be sure that at the ground level every aspect of it is clear to the wider public.”

The BUT also contends that the revenue component of the taxation is unclear; that the Government has not given a detailed explanation with facts as to show how the fiscal deficit has occurred; and has not outlined measures to ensure that the problem will not be repeated.

The BUT added that VAT implementation has failed in other Caribbean countries such as Barbados, and the Government’s proposed 15 per cent rate is too high, with consumers left to bear the burden.

“The cost of living has increased, and even when you look at other workers, especially those at the minimum wage level, how do you on a minimum wage sustain yourself and family while taking on a regressive tax that they know from the onset will increase your expenditure at least 5 per cent?” Mrs Wilson queried.

She added “Teachers are citizens and consumers, so the teachers have light bills, water bills and they have to go into the grocery stores.

“Teachers are a part of the whole scheme of things. If VAT is going to be implemented in July, there should have been some discussions with teachers and the educational sector as to what changes may need to be made to the schemes of work.”

The BUT is recommending that the Government not implement VAT on July 1, and instead explore other forms of taxation.

The union is also calling on the Government to give a detailed plan on spending cuts for 2014 and beyond. It says that the Government should “not create a Central Revenue Agency but use the system that exists now, and improve monitoring and collection of outstanding taxes”.

Mrs Wilson has urged BUT members to sign the petitions against the implementation of VAT and make their views known to their respective MPs.

February 11, 2014

thenassauguardian editorial

Thursday, January 30, 2014

The unpopular value-added tax (VAT) proposal in The Bahamas

The view of the people on VAT

The Nassau Guardian Editorial
Nassau, The Bahamas

Since the government last year emphasized its commitment to implement a value-added tax (VAT) the Bahamian people have been offering opinions. While many accept that the government needs more revenue to meet its obligations, we think most Bahamians do not support VAT as it has been proposed.

The government issued its white paper on VAT in February 2013. For months now commentators from the business community have offered their views on VAT to the broadcast and print media. There is a VAT story in the business sections of the major papers almost daily. Talk radio also regularly takes up the subject with Bahamians calling in to give their views.

For these reasons it was strange to read on Monday in this newspaper that Minister of State for Finance Michael Halkitis said the public’s slow response to the government’s VAT white paper is responsible in part for their delay in tabling VAT legislation. Although he could not say exactly when the government will table the laws in Parliament, Halkitis did say it must happen before the end of February in preparation for the implementation of the new tax system on July 1.

The business community last year went as far as preparing a counterproposal on tax reform the government does not appear interested in seriously considering. The people have spoken and they continue to speak on VAT. They regularly point out the flaws in the proposed system. They regularly point out the burdens it will cause on businesses and consumers. They fear an increase in the cost of living at a time when unemployment is over 16 percent.

Halkitis said the government is listening and considering all concerns coming from every sector on VAT and that the Ministry of Finance has even “tweaked” some of its VAT proposals. He didn’t, however, provide specifics as to what has been tweaked.

“When we say we are doing consultations and we are listening to alternatives we mean that,” Halkitis said.

“When we find out something or someone brings something to our attention that we may not have considered for whatever reasons, then we have to look at that to make sure that we are not disadvantaging anyone, particularly any business group.

“We have to look at what the consumers are saying to make sure there is nothing we overlooked, and so it is all a process.”

The Progressive Liberal Party (PLP) seems married to its VAT proposal regardless of the likely harmful consequences it will have on our economy if implemented. And now, after bringing forward a poor idea, the PLP seems to be beginning to realize that its solution to the country’s debt problem is not popular. If that realization is delaying the VAT laws from being presented to Parliament the government should not blame the people. It is obvious who is to blame.

January 29, 2014

Sunday, January 19, 2014

Pauline Peters, former head of Grenada’s inland revenue department ...on the challenge to implement value-added tax (VAT) in less than six months in The Bahamas

Bahamas would set VAT precedent

VAT consultant says ‘challenge’ to implement VAT in less than six months with no existing system

By ALISON LOWE
Guardian Business Editor
alison@nasguard.com
Nassau, The Bahamas

Should the government push ahead with plans to implement value-added tax (VAT) on July 1, The Bahamas would set a precedent as the only country in the Caribbean with no already existing domestic tax system to implement the tax with less than six months between the passage of the legislation and the tax taking effect, according to a government VAT consultant.

Pauline Peters, former head of Grenada’s inland revenue department, who oversaw that country’s transition to a VAT system, yesterday described this reality as likely to pose a “challenge”.

“There are a few countries who have done it with less than six months to go between the passage of the legislation and the tax taking effect. St. Kitts did it, St. Lucia, Dominica... but the difference in those countries is that they had a system of indirect tax already, so the culture of paying taxes was already there.

“With the businesses and the changeover they’d have to make with the move over from a sales tax to VAT, it would’ve taken a bit because their systems would have to change, but there were persons with knowledge of taxation; what those countries did was draw from their current domestic tax system, so you have a good blend of people with knowledge of the tax system.

“Without having a domestic tax system in place already, I think that’s one of the major differences between The Bahamas and the other countries which have gone live. On both sides significant progress has been made, but everyone would appreciate the fact that with the legislation not yet approved and The Bahamas not coming from a situation with a domestic tax system in place, that could be a challenge for the most effective implementation that we could have,” said Peters, who pointed out that Grenada allowed for nine months between the passage of the VAT legislation and the implementation of the tax.

Meanwhile, Peters recognized that with the legislation not having been passed, it is all the more difficult to convince businesses to begin investing in software and training related to VAT implementation, even as the intended deadline for the tax to come into effect draws near.

The Ministry of Finance is continuing to finalize the VAT legislation, with Financial Secretary John Rolle having indicated that it hopes to have a final version available for Cabinet, based on input from various sectors in which it has been in consultation by the end of the month.

Peters said that the Ministry is in the process of compiling a document with all of the recommendations from various industries on VAT which will form the basis of a presentation to Cabinet.

This will allow Cabinet to make the final decision about what changes are implemented in the legislation.

“I think that process should be a pretty smooth one given level of involvement our minister of state (Michael Halkitis) has in the process with technical team and the ministry of finance... so when it goes to the cabinet there won’t be much to comment,” said Peters.

Meanwhile, the VAT consultant said that on the Ministry side, “good progress” is being made towards implementation, with officials receiving assistance from a variety of sources in preparing for the launch of VAT.

“Now on the other side we have to have businesses on our side,” added Peters, who encouraged the private sector to continue to review the draft legislation and guidelines, and “see what effort it will take to program their system to accommodate” VAT.

“So you can get costings and quotations from providers so when things are finalized you can move swiftly ahead.”

She added that the VAT hotline has been “ringing off the hook” with queries from the private sector and general public about the proposed new tax, a sign she takes as a positive one.

“Only recently we have put additional resources in place to field the questions as they come in, so that has been pretty busy, and officers have been dealing with that.

“Before Christmas we had a series of questions and comments and those we’ve responded to and those continue to come in; so there’s a fair amount of traffic there as it relates to people seeking clarity – not just businesses, but regular persons in society have been asking very pertinent questions on cost of living, what type of preparations, should I buy now, what should I do. At least the measure is out there and people are becoming aware they need to start preparing.”

Peters encouraged more people to submit questions and call the hotline should they have questions.

January 17, 2014

Thursday, January 2, 2014

Value Added Tax would be a critical element of tax reform in The Bahamas ...as the country battles significant fiscal deficits ...and alarmingly high debt

VAT storm builds

Year in Review

By CANDIA DAMES
Guardian News Editor
candia@nasguard.com
Nassau, The Bahamas

In recent months, concerns about value-added tax (VAT) have been mounting. The debate over VAT has emerged as one of the most significant stories in 2013 and the expectation is that it will also be an important story in 2014.

The government has announced that VAT will be introduced on July 1, 2014.

The tax system would be a critical element of tax reform in The Bahamas as the country battles significant fiscal deficits and alarmingly high debt.

Financial Secretary John Rolle has said repeatedly that the cost of inaction would result in an unchecked rise in debt, less capacity to borrow for emergencies, which increases our vulnerability to shocks like hurricanes and sudden contractions in foreign economies on which we depend for tourists.

“There will also be a credit downgrade and eventual loss of access to credit markets,” he warned. “This will result in one outcome: Much higher tax increases, larger reductions in spending, possible reduction in public sector employment [and] scrutiny of the exchange rate parity.”

The Bahamas’ financial future faces a crisis.

On our current path, it is no understatement that we are doomed without action.

Government debt as at June 30, 2014 is projected to be $4.9 billion, compared to $2.4 billion as at July 2007.

The Bahamas has a legacy of high budget deficits.

Over the last two fiscal years, the government has seen a total deficit in excess of $500 million. The projected deficit at the end of 2013/2014 is $529 million.

The government intends to borrow $465 million to finance the projected revenue shortfall in the 2013/2014 fiscal year. This would add to the $650 million the current administration already borrowed.

Almost one out of every four dollars in revenue collected by the government must be allocated to pay the interest charges on the public debt and cover the debt repayment.

This current state of fiscal affairs is worrying on many levels, and it is unsustainable.

In the government’s white paper on tax reform, Prime Minister and Minister of Finance Perry Christie notes that the government’s revenue base is extremely narrow and ill-suited to the expanding needs and demands of modern Bahamian society.

The country’s tax system is out of balance as it predominantly focuses on goods, he pointed out.

It does not share the tax burden with those who are providing services in a way that is either fair or adequate.

The government has decided to go the way of value-added tax to secure an adequate revenue base in support of modern governance.

According to the white paper, the government intends to effect the eventual reductions in import duty rates that will accompany The Bahamas’ accession to the World Trade Organization (WTO), and reduce excise tax rates to compensate for VAT.

As a consumption tax, VAT provides a broader base for government revenue; imposes taxes on goods and services equally and imposes greater discipline on businesses, the white paper says.

It also says it encourages investments by providing incentives to business on capital expenditure, and the audit trail that would be required promotes greater efficiency in the collection of taxes.

In its look at various options for tax reform, the white paper highlights VAT as a more favorable option than a sales tax, which is a tax imposed at the final point of sale.

Agriculture and fisheries; social and community services; health and education services are among the areas that will be exempted.

But exemptions will be kept “to a bare minimum”, the government has advised.

The effectiveness of the tax is tied to many factors, including how it is implemented, tax experts and others with experience in effecting tax reform have said.

The VAT legislation and regulations are now in circulation, but it is unclear when they will be introduced in the House of Assembly.

Christie has said that while July 1 is a target date for implementation, it is not set in stone.

December 30, 2013

Tuesday, December 10, 2013

The potential impact of value added tax (VAT) on The Bahamas

IDB: VAT will lead to higher growth, lower debt, lower unemployment IDB study assumes all additional revenue goes to paying down debt

By ALISON LOWE
Guardian Business Editor
alison@nasguard.com
Nassau, The Bahamas

Although projected to lead to a decline in disposable income at all levels, a newly-released model prepared for the government projects that value-added tax (VAT) will lead to higher gross domestic product (GDP) growth and tax revenue, decreased debt, lower unemployment and lower inflation after an “initial surge” in the first year.

The model and accompanying report, prepared by the Washington, D.C.-based Inter-American Development Bank, suggest that real GDP growth will be higher relative to baselines once VAT is implemented “especially” if VAT is implemented at 15 percent.

Lower unemployment is anticipated by the IDB model in light of a projection of higher tax revenue and the assumption that with this, there would be lower levels of government borrowing which would make it easier for the private sector to borrow, invest and stimulate employment.

Meanwhile, the expectation of a decline in public debt levels is said to depend on the assumption that all of the “additional revenue” generated through fiscal reform would be “directed toward debt reduction”.

The IDB study supports the government’s claims that VAT will lead to no more than an additional three to four percent rise in price levels above normal inflation in the first year, and has been taken by the government to support the case for the implementation of VAT as the cornerstone of the government’s fiscal reform program aimed at reducing debt levels.

However, the IDB states clearly that VAT, particularly at 15 percent, as opposed to a lower rate, would have a detrimental effect on poverty levels without increases in social spending.

Released on Friday along with an accompanying report, it was prepared on behalf of the government to ascertain the potential impact of a VAT on The Bahamas.

“Tax reform cannot be defined and put in place without in-depth studies of its impact on growth, income distribution, fiscal cost, economic efficiency and a comprehensive tax policy and administration reform. Transparency and predictability rest on the best possible estimates of the revenue consequences of reform that available data allows,” states the IDB report.

In this regard, the model looks at the effect of VAT at varying rates on economic growth, inflation, tax revenue, public debt, poverty, employment and the distribution of income.

It has been much anticipated by the Coalition for Responsible Taxation, which is hopeful of using it in particular to look at what VAT’s impact would be on the economy but also what the potential alternatives might be.

The model, described by the IDB as an “economy-wide” one that “describes the behavior of producers and consumers and the linkages among them”, will be shared with members of the coalition, along with staff from various government agencies, today.

The government said in a statement accompanying the release of the study that it supports its plans to implement VAT on July 1, 2014.

“The study predicts that the introduction of VAT, alongside other reforms to reduce the public debt, would have positive economic and fiscal benefits.

“The IDB’s results are consistent with expectations for the type of fiscal reform package that is being considered for The Bahamas. Reducing distortionary taxes on business activities, and placing more direct emphasis on consumption taxes, would stimulate a projected increase in national savings and investments.

“The private sector investment climate would also benefit from expanded access to financing that would no longer be needed to fund government deficits. These are forecasted to contribute to stronger growth potential and reduced unemployment, which would be felt across all broad sectors of the economy.”

The Coalition for Responsible Taxation declined to comment on the results of the study yesterday, which were presented in a 165-page report published on the government’s website.

Robert Myers, co-chair for the coalition, said he would reserve comment until he had met with the IDB today and had a “better review” of the document.

Speaking prior to the release of the study on Friday afternoon, Gowon Bowe, co-chair of the Coalition for Responsible Taxation, said the group was eagerly awaiting the model, and in particular, whether it predicts the possibility of economic growth and only moderate price level increases as the key determinants of whether the private sector advocacy group can accept value-added tax (VAT) as a solution to the country’s fiscal challenges.

“That’s a piece of information that is an integral part of looking at how it will impact the economy. The most important thing is to look at empirical information now to make a determination; there’s been a lot of emotion that’s gone into it up to this point,” said Bowe.

He added: “The pipe dream would be that the model says we would have economic growth with minimal price increase impact. I think there’s sufficient experience that when you take money out of the economy through tax that has a negative impact on economic growth because you are taking money out of the pockets of consumers, but what we will be looking for is whether the price increase is not as high as 10 to 15 percent, which a lot of us are concerned about, and that it is based on good data and is a reliable model. That will give a level of assurance that [VAT] would be positive and not negative.”

However, Bowe noted that the coalition would still harbor concerns about the capacity of the government to successfully administer the VAT, notwithstanding that ministry officials “have placed great hope in the inherent checks and balances in a VAT system”.

The study looks at 16 alternative scenarios, which involve applying different rates of VAT, hotel tax, average import tariff rates and social “safety net” spending, with VAT ranging from 7.5 percent to the proposed 15 percent.

It does not appear to specifically address the question of what happens under a scenario in which there is significant non-compliance or ineffective administration of the VAT, a point which the coalition and other private sector stakeholders have expressed concerned about with respect to VAT.

It also does not appear to consider the potential outcomes should the government not direct all additional revenue from VAT implementation towards reducing its debt levels.

December 09, 2013

Wednesday, December 4, 2013

The Bahamas government's Value Added Tax (VAT) option in a fiscal crisis environment

Why VAT and When?

By ARINTHIA S. KOMOLAFE
Nassau, The Bahamas

Arinthia Komolafe The Ministry of Finance (MOF) released the draft Value Added Tax (VAT) Bill, draft Value Added Tax Regulations 2013 and Guide to VAT legislation. This release follows weeks of clamor and demand by various stakeholders. In the days ahead, it is expected that the public discourse on this crucial component of our tax reform program will intensify as we begin to decipher the documents and properly assess the impact it will have on The Bahamas and Bahamians.

Consultation on VAT

A quick review of the draft VAT Bill will confirm what a number of Bahamians had known in relation to the initial discussions between the government and various industry groupings.

This observation is apparent by a simple comparison of the proposals contained in the white paper released in February 2013 and positions proposed in the draft VAT Bill. It would be disingenuous therefore to suggest that the consultation period has only just begun with the release of the draft documents. While none of the concessions agreed upon or compromises made during initial discussions could be said to be concrete or documented before now, it is apparent that the MOF had chosen to incorporate some of the portions agreed with the various sectors, associations and interest groups into the draft that was released last week Friday.

The arguments put forward

The discussion on the introduction of VAT has been predictable until recently. As was expected, the government has sought to articulate the importance of broadening its tax base to increase revenue as part of its fiscal consolidation plan to correct the country’s fiscal imbalance. The MOF in leading this charge has highlighted the critical condition of The Bahamas’ finances and submitted that VAT is the best option for boosting government revenue at this point, bearing in mind that tariff rates must be reduced and trade barriers addressed if we are to accede to the World Trade Organization (WTO).

It has been stated and noted that The Bahamas remains the only country in the Western Hemisphere that is not a member of the WTO and the government has warned that this puts us at a competitive disadvantage from an international trade perspective. While the government has stated its commitment to curbing its spending and reducing subventions to its agencies and statutory bodies, the impact of reducing the public service with the current unemployment figures has been outlined using statistics on the multiplier effect on the economy and consumer spending by the MOF.

On the other hand, the private sector had taken the position that the government need not introduce new taxes but rather focus on cutting its expenditures and efficiently and effectively collect existing taxes including those that remain outstanding. The private sector had further suggested that the introduction of VAT at this juncture, considering the current economic climate, would be inappropriate and further slow down an economy trying to fully recover from the Great Recession. A reduction in the size of government, cutting of the public sector workforce and divesting of state-owned enterprises have also been recommended in a bid to address the GFS deficit and national debt.

The meeting of the minds

Our ability to come together in a non-partisan manner in times of crisis for the common good of our beloved country and future generations of Bahamians has become pronounced in recent times. While it is our hope that this is not an isolated development, it is imperative that we applaud the Tax Coalition of the Bahamas Chamber of Commerce and Employers Confederation (BCCEC), the opposition party and other economic experts for what appears to be a willingness to contribute to the discussion and work with the government to address our fiscal crisis.

While enough blame for our current precarious fiscal position can be placed on successive administrations responsible for the governance of The Bahamas, the Tax Coalition was right in stating that we are all responsible for this predicament and all Bahamians have a role to play in solving our financial woes. James Smith, former governor of the Central Bank and former minister of state for finance, on his part had reiterated that tax reform, and more specifically the implementation of VAT, will not be without pain.

The meeting of minds on the seriousness of the state of affairs of our finances and the consequences of not embarking on an urgent correction program must precede any logical discussion on the structure, details and specifics of the tax reform framework. As we appear to have arrived at this point, hopefully the discussions will be elevated to ensure that all parties adhere to their commitments in returning The Bahamas to better financial health and prevent any further downgrades by international rating agencies, multilateral organizations and any potential loss of investor confidence in our economy.

At the core of this matter is the realization that successive administrations have with the help of local and internal experts considered the issue of tax reform and VAT for several years; however, the fortitude to confront the proverbial elephant in the room has been lacking until now albeit this has been spurred by the desperation created by the predicament we find ourselves in.

Preparing for VAT

As the July 1, 2014 proposed VAT implementation date approaches, enough has been said about the need for public education. Ironically, it has been reported that the turnout for the educational and informational sessions held by the MOF to date have not been too impressive. The MOF has promised to strengthen its VAT education and awareness campaign in the weeks ahead. However, it is important that all stakeholders get involved in this process following the release of the VAT governing documents. The media, industry associations, regulatory agencies, business entities and Members of Parliament will have to play significant roles in enlightening the masses in what is perhaps the most substantial change to our tax system in decades.

The private sector must also ensure that their concerns are documented and brought to the attention of the government. It would be a worthwhile exercise to properly review the draft legislation with a view to providing constructive criticism and useful recommendations to improve the draft bill. Business entities will also need to invest their time and resources into understanding what VAT will mean in the context of their operations.

Finally, the general public must fully recognize and appreciate that VAT is a consumption tax; that is, it taxes us on what we consume. The final consumer will bear the ultimate burden of VAT and hence we must familiarize ourselves with the various goods and services that are subject to 15 percent VAT, 10 percent VAT, exempt status and zero-rated status. Attendance at upcoming briefing and educational sessions on VAT by all Bahamians and local residents is therefore encouraged by this writer.

The VAT challenge

Regardless of where the VAT debate takes us in the months ahead, we must remember that there is hardly any gain without pain and there is seldom triumph without trials. Indeed, in Christianity we often state that where there is no cross there is no crown. I n this sense, the days ahead will have challenges but we must look beyond these to the future of our Bahamaland and work towards restoring her by putting country first.

That being said, the government must double its efforts to simplify the VAT debate for the average Bahamian. The MOF must work tirelessly to consider and address all concerns raised by the public during the consultation period. The relevant systems must be put in place and resources engaged to ensure the effective and efficient administrative of VAT. More importantly, the government must continue to demonstrate commitment to fiscal prudence and containment of expenditure.

If our country fails, we all fail, as we have nowhere else to call home or to claim as our own. It would be illogical not to state that no amount of preparation can guarantee a hitch-free implementation, and the introduction of VAT will not be perfect. The record shows that other countries have had challenges in spite of having devoted years to preparation. We must be determined to make it work and co-operate with one another if The Bahamas is to emerge successfully from this fiscal crisis. In the final analysis, the government will have to unequivocally convince the public as to why VAT is the best option at this time and confirm the implementation date. One thing is certain: The urgency of now does not provide us with much time.

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

December 03, 2013

Wednesday, November 27, 2013

If The Bahamas government cannot collect what is now owing ...how will it supervise and collect the taxes from Value Added Tax (VAT)?

Tribune242 Editorial
Nassau, The Bahamas

OVER the weekend, Elcott Coleby, deputy director of Bahamas Information Services, sent a release to the press to announce the downgrade by Standard & Poor of Barbados’ financial rating – the second in four months. Barbados is listed in tenth place as one of the world’s most heavily indebted countries. From a rating of BB+ it has been dropped to BB-.

“The downgrade reflects the mounting external pressures associated with a persistent current account deficit and external financing challenges, as well as the ongoing high fiscal deficit largely because of a substantial fall in government revenues as a result of the weak economy,” the agency said.

“In reacting to the news,” according to the Barbados press release, the “former president of the Economic Society, Ryan Straughn, said the latest rating has not come as a surprise and suggested that the writing had been on the wall for some time since Government did not go ahead with the expenditure cuts announced by the Minister of Finance in the August 2013 Budget.”

But what interested us even more was Mr Coleby’s warning at the top of the Barbados release. “This,” wrote Mr Coleby, “is where the Bahamas could be headed if it fails to act — sooner than later. So far, the Bahamas government has successfully staved off another downgrade in 12 months — thanks to its fiscal consolidation plan. Barbados was not so lucky.”

Nor will the Bahamas be, if it does not get its reckless spending under control.

However, if this hint from NIB is a message from government to hasten the pace for the introduction of VAT, it should slow down and give the matter more thought. It’s a warning for caution. VAT was introduced in Barbados on January 1, 1997, at the standard rate of 15 per cent. However, Barbados took its time investigating and testing before it took the plunge. Nevertheless, after 16 years, VAT has obviously not been the perfect solution. Barbados still does not have its spending under control and the very event that VAT was meant to avoid has happened — another S&P downgrade. Although several Caribbean countries have VAT, it is interesting to note that Grenada experimented with it in 1980, but quickly abolished it. It would be interesting to know why.

On October 1st, the Barbados government – to bolster its failing domestic tourism – reduced the VAT rate on “hotel accommodation” to 7.5 per cent, extending it to the Direct Tourism Service, which had been 17.5 per cent.

It was noted in an article posted by “David” on August 25 that July 2013 recorded Barbados’ “lowest number of long stay visitor arrivals across the last 11 years in any same month.” The land-based arrivals for the same year in October and November was examined and it was discovered that “both again, alarmingly recorded their lowest comparable monthly figures for the past decade”.

In another article, which noted that Barbados, although it had “enjoyed good credit ratings in days of old because of bullish tourism and international business products,” no longer did so because of the general world picture.

It highlighted several problems that needed urgent attention in view of the international down grading. Bahamians should take note of at least one of them, because, with a few amendments here and there, it is a serious problem in the Bahamas.

“It is apparent,” said the Barbadian writer, “that a few of the statutory bodies have grown to be financial albatrosses around the necks of taxpayers. Barbadians know too well those statutory bodies which political parties ‘pad’ to guard party support. Now that money has dried up this strategy of protecting the party faithful has been exposed for what it is, an unsustainable practice. Deal with it!”

Here in the Bahamas after last year’s election Bahamians saw this in high gear as large sums were spent on clearing land in the name of Urban Renewal. It was claimed that it was part of a plan to clear bushy areas that attracted crime. There was a hue and cry when these “landscapers” went on the land turning areas into arid waste and even trespassing on private property. At the end of this unconscionable waste of public money, nature laughed in the face of the politicians and in a few months the bush, in which the criminals allegedly hid, returned — but the money had already been wasted.

Then there was the flushing out of certain areas of the civil service to make room for party faithful. It was claimed that the price paid for this was a return to inefficiency.

Of course, there is also the non-collection of taxes. The question being asked is if this government cannot collect what is now owing, how will it supervise and collect the taxes from VAT.

Of course, an item that is now of paramount concern to the public – especially in these tight economic times — is the cost of official travel by government ministers at public expense. Former National Security Minister Tommy Turnquest in a page 1 article today has urged Prime Minister Christie to give a financial accounting of his delegation’s trip to CHOGM in Sri Lanka, and the side trips to Rome and London. We shall comment on this in this column tomorrow.

However, the point that rankles Bahamians is government’s apparent reluctance to cut unnecessary spending. Bahamians resent having to be taxed to support the status quo. Unless government sets an example, Bahamians will grumble. This is the frequent complaint that we hear within the ranks of the unions.

November 25, 2013

Monday, November 25, 2013

The Bahamas government should not bend to public pressure over value-added tax (VAT) ...says Bahamian Attorney, Wayne Munroe

Munroe: Govt should push ahead with VAT

By TANEKA THOMPSON
Guardian Senior Reporter
taneka@nasguard.com
Nassau, The Bahamas -

Attorney Wayne Munroe said the government should not bend to public pressure over value-added tax (VAT).

The Christie administration has been criticized for not yet releasing the VAT legislation and regulations with the proposed implementation date eight months away. The government’s VAT public education program has also come under fire.

However, Munroe said these issues do not mean the government should delay or abandon the tax.

“They just need to get it done, all this nonsense about educating the public about tax, [were] any of us educated about the business license or real property tax or customs duties?

“So [why] suddenly the great need to educate us over VAT? The people who have to collect it, pay it and administer the system must be told and must make themselves aware of what they need to know and that’s it.”

Munroe also suggested that it might be strategic for the government to delay the release of the VAT legislation and regulations, so people have less time to figure out how to circumvent payment.

“The government’s objective is to maximize revenue collection. If you give me a month with a bill, I will probably be able to show deficiencies that would be able to beneficially impact my client and adversely impact government revenue collection.

“So there is nothing unusual about not circulating a revenue statute in advance and anyone with sense would know that. The less time I have with it, the more time you have before I find out a clever way out of it.

The new VAT regime proposed by the government would allow the state to impose widespread penalties on those who fail to comply with the new act and its regulations, including heavy fines, shutting businesses down, publicly naming and shaming, the seizure of goods and the auctioning off of assets and even jail time.

The new regime proposes to allow the Central Revenue Agency (CRA), which the government is setting up to regulate and collect VAT, to demand details of assets from banking institutions, garnish money owed to registrants by others and restrict access to travel for those who owe outstanding taxes.

Under the new tax system, delinquent taxpayers can also be restricted from travel until outstanding taxes are settled.

Munroe questioned the rationale of this provision and said it should not be included in the final draft of the VAT legislation.

“You can’t restrict my movement because I owe the government money, because what does one have to do with the other?

“Does that mean poor people can’t move about? Now, the U.S. for instance can refuse you entry into their country if you owe people money, but that’s because you have no right of entry into the U.S. or any other country other than your own.

“I can’t see them seriously talking about restricting your movement because you owe taxes.”

The government plans to roll out VAT on July 1, 2014 at a rate of 15 percent in the wide majority of cases.

However, Prime Minister Perry Christie has said he reserves the right to delay the implementation date.

VAT is expected to add an additional $200 million in revenue in the first year of implementation, officials estimate.

November 25, 2013

Thursday, November 21, 2013

Yes, The Bahamas is in a serious debt position ...but the present government has a nerve to ask the Bahamian people for more tax money ...to support the continuation of the manner in which our past taxes have been wasted

Tribune 242 Editorial
Nassau, The Bahamas:

SINCE THIS government has come on the scene, it has stumbled from one sink hole into another. Nothing seems to be going right, because there is no planning, no co-ordination, and, as we have said before, each cabinet minister seems to have his own agenda and his own game plan.

Several months ago, when it was suggested that Prime Minister Perry Christie should reshuffle his cabinet, he is quoted as having said words to the effect that the timing was not right as there were cabinet members who had agendas that they wanted to complete. If there were cohesion in the Christie government, the only agenda to be completed would be government’s agenda, and anyone not at one with that agenda would be shuffled out. This goes to the very core of what is wrong with this administration. There is no strong leader who can keep his colleagues following the same road map.

They don’t even seem to speak the same language. For example, with all the negative feedback, Mr Christie seems open to the idea of exploring new avenues to raise taxes, provided businessmen can suggest alternatives to VAT. Despite this, State Minister of Finance Michael Halkitis has said that there are no plans to postpone the July 1, 2014, date for the implementation of VAT. If there are no plans, then why should the Prime Minister ask for suggestions to find a new, less complicated way to raise taxes and drop VAT?

About the only subject on everyone’s lips today is VAT. And the more government spokesmen try to explain it the muddier the waters become. As a matter of fact, these spokespersons don’t seem to fully understand it themselves, leaving Bahamians at the end of their question-and-answer sessions more perplexed and less confident than before. As a result, public anger and confusion has grown. Grown to the point that at the end of the day the country might see a vocal group of young people ban together to hold government’s toes to the fire.

The Insight feature in today’s Tribune is a speech given by a young mother, who is also a branch manager of a local bank.

Tamara van Breugel, because of the lack of information coming from government, went on her own journey of education and was alarmed by what she discovered. Along the way, she also found many intelligent, like-minded young Bahamians who want to turn a new leaf in our history books and build a new Bahamas. They are fed up with the underhanded shenanigans that have been going on for far too long among what old Bahamians used to call their “representers”. So our readers should be on the watch for Citizens for a Better Bahamas. We predict that Mrs van Breugel’s speech is the launch of a vocal, enthusiastic and, we hope, more responsible Bahamian.

As we have said in this column before, for a government promising 10,000 jobs almost as soon as it became the government, the suggestion of VAT was suicidal. True, government has to get itself out of debt not only to prevent its credit rating from being downgraded, but to become a member of the World Trade Organisation (WHO). Among the many rules and regulations that have to be followed is that government will have to drop its tariffs on imported goods so that the goods of WHO members can enter the country more easily. This means that government will have to find a substitute to the present Customs duties. However, it does not mean that VAT is the answer. If government can’t police the collection of Customs duties now, it will never be able to afford enough inspectors to supervise VAT. A simple sales tax would seem the more sensible route.

Today, we publish a letter from a concerned Bahamian who vowed he would refuse to open his books to any government inspector, until government opened “their” books for public inspection. He was on the right path, but he made one mistake. Government’s books are not “their” books. These books belong to every taxpaying Bahamian. We have a right to know how our money is being spent. We have a right to demand that those books be opened for inspection.

This government started immediately on its grand shuffle among government employees, moving competent persons from their jobs, and replacing them with less competent party supporters. Not only does that create a state of inefficiency in a department, but it is a costly exercise. The clearing of land in the so-called Urban Renewal project was a scandalous waste of public funds. The money used was public money — our money — and we, the people have a right to know. Not only did workers trespass on private property, but the money handed out, regardless of the work to be done, warrants a public inquiry. A government representative is duty bound to prudently administer public funds — administer it as if it were his own. None of that prudence was shown in the Urban Renewal land clearance plan, for example — it was just pay-back election time. The public should demand an accounting of this scandal.

During this belt-tightening time, all of these overseas trips should he scaled down. Certainly, the public has a right to know the cost of every one of them, right down to the last glass of champagne. Remember, this is the public’s money that is being so liberally spent – while the public debt steadily rises.

Mrs van Breugel points out that in the auditor general’s 2010/2011 report, he discovered that:

• 5,980 cargo manifests had not been presented to Bahamas Customs for clearance;

• $95 million in real property taxes went uncollected, taking the total sum outstanding to $541.886 million;

• $302,866 of unpaid fuel from The Ministry of Works.

In the 2014/2015 fiscal budget, subsidies have been allocated as follows:

• $20 million to subsidise Bahamasair;

• $20 million in subsidies to Water and Sewerage;

• $7 million to the Bahamas Broadcasting Corporation.

And so the horror story of how the people’s money is being misspent continues.

Our finances would not be in such a sorry state if we had better managers in charge, and a government that did not believe that it can play Santa Claus with other people’s money.

Yes, the Bahamas is in a serious debt position, but this government has a nerve to ask the Bahamian people for more tax money to support the continuation of the manner in which our past taxes have been wasted.

November 18, 2013

Monday, November 18, 2013

A note to Hubert Minnis on value-added tax (VAT) in The Bahamas ...and how we got there

VAT How we got here

A note to Hubert Minnis

By CANDIA DAMES
Guardian News Editor
candia@nasguard.com
Nassau, The Bahamas

Amid what appears to be a growing public tide against the July 1, 2014 implementation of value-added tax (VAT), Free National Movement (FNM) Leader Dr. Hubert Minnis has finally released a position on this contentious issue.

It came as pressure grew within his party for the official opposition to make a clear statement on what would be the most dramatic shift in tax policy in decades.

The statement Minnis came up with is stunningly shallow. It lacks intellectual rigor and shows a startling lack of vision and leadership, all of which we desperately need at this stage of our development.

That is surprising in the sense that he should have access to the facts and to sound advice from qualified and knowledgeable people within his own party.

Given how long it took him to release a statement, he should have had adequate time to formulate a more reasoned position that could be taken seriously and add value to the ongoing discussion on tax reform.

But given his record on matters of serious import (for example, multiple positions on gambling), no one should be surprised that his sole approach is to attack the government on its plans without presenting a well thought out contribution to this growing debate with accompanying proposed policy alternatives.

It seems once again that the opposition leader has gauged the direction of the wind and formulated his position based on the mood of the country. But be mindful that his position could shift again with any sudden temperature change or change to the national tone.

Minnis, who 18 months ago sat as a minister of government, called on the current administration to immediately “come clean to the people, and to explain, precisely and clearly what the circumstances are which have prompted this sudden lurch towards the imposition of VAT”.

It is worrying that the official opposition leader does not know the answer to this question.

Minnis is operating as someone who only entered the political arena in May 2012, distancing himself from the actions of the former administration.

He pretends instead to be blind to the fiscal circumstances of the day, but more importantly to the fiscal realities that existed while he was a minister of government, and the decisions taken to address those realities.

While no one should excoriate the FNM leader for setting along his own path and defining his own leadership style, he and his party are saddled with their record in office.

They cannot run from the decisions taken by the FNM administration — the good and the bad ones.

If as opposition leader Minnis does not know what the circumstances are that have prompted this “sudden lurch towards the imposition of VAT”, he might be ignoring easily available facts.

Progressive Liberal Party (PLP) Chairman Bradley Roberts has gone as far as saying Minnis might be suffering a case of memory loss.

“How else [do you] explain his scolding for a debt crisis created by his own party?” Roberts asked.

“Or was Dr. Minnis asleep at the Cabinet table when his government approved, borrowed and spent over $2 billion in five years, running up the national debt and pushing the country into this current fiscal dilemma?”

If Minnis is not sure how we got to where we are, he might find it useful to do a bit of research and examine the facts of the country’s debt levels.

This might jog his memory.

In August 2011 when the international credit rating agency Moody’s downgraded its outlook for the Bahamian economy from stable to negative, it pointed to the significant run up in government debt levels in recent years and the country’s limited growth prospects.

Moody’s noted that debt rose steadily between 2000 and 2008, but over 40 percent of the increase occurred between 2009 and 2011.

Government debt at the end of June 2011 was estimated at $3.5 billion. It has continued to grow. It is projected to be $4.9 billion when the government implements VAT next July.

This is unsustainable. We are in crisis.

Had the Free National Movement been re-elected to office last year, we would have been facing the same urgent need to tackle our debt, and reform our narrow and inefficient tax system.

Reform

Before Minnis twists himself into an impossible situation and puts his credibility on the line, perhaps he ought to have a discussion with former Minister of State for Finance Zhivargo Laing, his former Cabinet colleague, who helped engineer fiscal policies under the Ingraham administration.

Laing has not hidden the fact that the FNM had planned to implement VAT within “two to three years” if it had won the election last year.

The PLP administration is seeking to do it at the start of its third year in office.

Laing said more recently, “In office, we certainly looked at implementing it and if returned to office would have given it early consideration. However, we would have also given it broad consideration in the context of the wider reforms to our tax system that we were already undertaking.”

So Minnis’ own party was eyeing what he now calls a “regressive” taxation system. He may wish to examine why his party also thought this regressive tax was the best option.

He now warns that VAT would “seriously impair the already weak, uncompetitive and struggling Bahamian economy and harm and diminish the quality of life of every Bahamian”.

Unlike Minnis, Laing does not run away from the fact that the Ingraham administration piled on the debt.

The pace was dizzying.

Laing noted in a speech to the Rotary Club of Freeport in August that, “A country can borrow to cover its deficits for a long time, for decades and decades.

“It can even do so increasing its debt to GDP ratio to extraordinary levels, above 100 percent, but the price to pay for this is reduced ability to afford products and services (education, infrastructure, technology, etc.) that could lend to a more prosperous, efficient and peaceful state.

“Minimizing deficit spending is good government policy, especially in times of economic growth.”

The former government has been sure to provide a clear explanation that the high level of borrowing was needed in the face of a dramatic downturn in the global economy.

That explanation has been arguable, as the PLP accused the Ingraham administration of taking actions to worsen an already bad situation.

While prime minister, Hubert Ingraham had said often in his last term that without borrowing the government would not have been able to do simple things, like pay the salaries of civil servants.

Minnis ought to know that we are now suffering the fallout of sky-high deficits and annual borrowing.

To be clear, the vast majority of the resolutions to borrow were approved in Parliament by the then opposition led by Perry Christie.

Nobody likes to hear of new taxes, and so VAT and tax reform was not a prominent theme of the 2012 general election campaigns.

Upon coming to office, the PLP itself feigned surprise at the state of public finances. With that excuse in hand, it continued to borrow, saying it needed to do so to deal with the problems it inherited from the Ingraham administration.

“The fiscal accounts are in much worse shape than we had expected as we came into office,” Prime Minister Christie told the House not long after the May 2012 general election.

“In our very short time in office, it has become clear to us that the previous administration has, through its actions and fiscal policies, constrained our room to maneuver.”

In May 2013, the Christie administration brought a resolution to the House of Assembly to borrow $465 million to finance the projected revenue shortfall in the 2013/2014 fiscal year.

This added to the $650 million the new government borrowed in its first year.

Government debt as a percentage of GDP is projected at 56.4 percent at the end of 2013/2014.

Christie advised that much of the money the government borrowed last year was required to cover unpaid financial commitments incurred during the Ingraham administration.

“The legacy of high public deficits and spiraling debt burden that we inherited is brutally onerous: almost one out of every $4 in revenue collected by the government must be allocated to pay the interest charges on the public debt and cover the debt repayment,” he said.

“Had we chosen to ignore the grave structural imbalance in the public finances, the debt would have continued to spin out of control.”

This year, the government will spend an estimated $230 million on debt servicing alone.

While it is true that the PLP claimed to have immediate but unrealistic answers to attack our fiscal and economic woes while on the campaign trail, it is not on its own responsible for the current state of affairs.

It matters not at this juncture who is to blame, however. What is required now is reform to arrest the growing unsustainable debt levels.

As stated by Laing in his address to Rotary, “If you want to punish those who drive up cost through waste or bad decisions, then do that at election time, but know that the cost still has to be paid by the citizens.”

Minnis may wish to read and carefully consider that useful and informative address delivered by Laing.

In the speech titled “VAT and its implications for The Bahamas and the Bahamian economy”, Laing pointed out that the government needs cash and it needs it badly.

“We are in discussions about VAT implementation because there is a glaring reality confronting The Bahamas, which is that its income cannot pay for its operations,” Laing explained.

“It has not done so from The Bahamas became an independent nation. We have run deficits and financed those deficits with borrowings since 1974, when we ran a deficit of some $33 million. Incidentally, we had a surplus of about $3 million the year before that, the last such surplus seen on total budget performance.”

Laing continued, “In the wake of the crippling effects of the global recession of 2008 and the strain it put on the revenue of the government, our deficit spending has reached extraordinary levels, which is unsustainable, especially in light of the modest growth seen both in terms of the world’s economy and our domestic economy so dependent on it.

“The government needs money to pay for its expenses, and it needs money badly. That is why VAT is being discussed with the sense of urgency that it is being discussed today. In 1995 when the issue first arose, it was being discussed as a planning function; today it is a practical issue of money.”

Details

The Nassau Guardian last week reported on the government’s proposed VAT bill and regulations. It is not clear when these will be brought to Parliament.

The debate cannot be vibrant and well informed without the official release of what is being proposed.

Minnis has said the PLP should immediately disclose to the Bahamian people the details of any economic studies and analyses either by domestic or international advisors or agencies that have led the government to this proposed course of action.

Many people are indeed awaiting the release of an economic impact study to show specific projections resulting from the VAT implementation, including the projected cost of living impact.

Financial Secretary John Rolle said last week that the cost of living is expected to rise between five and six percent in the first year. There were no details to show how these figures were arrived at, and there were no projections provided for cost of living increases in subsequent years.

This year is almost ended, and the government will have six months to clearly make its case, to seek to calm frayed public nerves, and cause for a smooth implementation of the new tax system.

That is ambitious.

Anecdotal evidence suggests the government is losing, not gaining support from the public on its push toward the implementation of VAT.

Its marketing of the initiative is on shaky ground, and it is only now just starting its public education campaign.

While there is an urgent imperative to act, it appears that on its current track, the new tax system could be off to a chaotic and undesirable start — a difficult birth, as we opined here previously.

What the government needs now is a more community based VAT campaign and a bit more time to get the message out.

It might be in the interest of everyone to push off the implementation date by a few months. It would allow the business community and consumers to better digest the details of VAT.

And perhaps it would give the opposition leader a bit more time to better understand how we got to where we are.

We hope it would also give the government a little more time to present a tax reform package that has buy-in from the opposition.

On a matter this grave, such a buy-in could only be in the national interest.