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

'We Don't Want V.A.T., Even At 1/100 Of 1%'

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

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

'Year To Adjust' To Vat, Warns Businessman

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

Tribune 242

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

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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

Teachers Join Vat Opposition

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

Tribune 242

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

thenassauguardian editorial

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

thenassauguardian

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

thenassauguardian

Bahamas Blog International

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

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Bahamas Blog International

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

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

thenassauguardian

Bahamas Blog International

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

Warning On Vat From Barbados

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

Tribune 242 

Bahamas Blog International

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

thenassauguardian

Bahamas Blog International

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.

thenassauguardian

Bahamas Blog International

Zhivargo Laing answers five questions on Value Added Tax (VAT) ...and what it means for The Bahamas, Bahamians, and the Islands' economy

 VAT and its implication for the Bahamas and the Bahamian economy

by: Zhivargo Laing, Former State Minister of Finance


The Bahamas.




... ... My talk today will seek to answer five questions, namely:

1. What is V.A.T.?

2. How does it operate?

3. Why is it an issue in The Bahamas at this time?

4. What is likely to happen?

5. What should happen?

What is a V.A.T.?

Briefly, it is a tax on goods and services at each stage of production and distribution. As its name implies, it is a tax on each increase in value as goods and services are produced and distributed.

More specifically, and here I have the European Unionâ s website to thank for what I regard as a succinct set of specifics, a Value Added Tax is:

• Charged on wide range of goods and services, commercial activities;

• A consumption tax because the final consumer ultimately pays the tax; we will get into this a little bit more later;

• Not a charge on businesses, which will become clear as we move along;

• Charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.

• Collected in pieces, through an invoice credit payback system or by partial payments where taxable persons (i.e., VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities, which make it neutral or places no charge on businesses, as I alluded to earlier.

• Paid to the government by the seller of the goods, who is the â taxable person,⠝ but it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.

You would have heard me mention â taxable person⠝ several, in which case I am referring to any individual, partnership, company or trading entity that supplies taxable goods and services as a business. In many instances, however, if that business has an annual turnover that is less than a certain minimum, a VAT is not levied on its sales, it is VAT exempt.

Generally speaking, there is no VAT charged on exported goods since it is already paid on the inputs of the good for export. However, VAT is paid on imported goods as means of ensuring that they do not have a price advantage over goods produced locally.

The Bahamas, of course, is a predominantly service based economy; not manufacturing based economy. So, if implemented, a VAT would be applied on many services. So the lawyer, doctor, electrician, carpenter, etc. might all be subject to a VAT on their services. Here again though, it is not their businesses that will be ultimately charged if they had to pay a VAT in the course of producing that service, as they would be able to deduct any VAT paid. It is the consumer who would ultimately pay the VAT, just as is the case with a sales tax. Quite naturally, VAT on services can be fraught with complexities, especially in multi-jurisdictions, where place of supply issues arise; but we need not bother with that here.

Typically, there are a range of services that may be exempt from VAT, including financial services, insurance, health services, social services, education, cultural, leasing of property and the sale of property services.

In some jurisdictions, there may be several VAT rates, including a standard rate, a reduced and a zero rate. Zero rates might apply to such things as food, books, childrenâ s clothes, public transport, etc.
Some 130 countries apply a VAT and the rates can range between five percent and 25 percent from country to country. There is no VAT charged in the United States of America but President Obama did propose the implementation of one which was met with fierce opposition from conservative politicians in the U.S. In the Caribbean countries that have a VAT include Barbados (17.5), Guyana (16 percent) Saint Kitts and Nevis (17 percent) and Trinidad and Tobago (15 percent).

Why have so many countries adopted the VAT, why are so many more considering it and why VAT over sales tax? There are a number of reasons, including the fact:

• Governments needed more revenue which was not being supplied by their predominantly income and sales tax systems;

• Governments found that their tax bases needed to be broadened in order to collect greater revenue; and

• Value Added Tax broadens that base while producing a neutral tax for businesses but a self-policing system through the invoice credit payback system that a sales tax could not provide;
Time does not permit me to get into an extensive discussion on the arguments given by some against a VAT. However, briefly stated, they include the following:

• It is complicated to implement, especially in a service based economy; this notwithstanding, it is in most territories in the world and others are seeking to implement;

• It is regressive, as is the sales tax and customs duty, and IT IS;

• Problems for businesses in adapting to VAT that include time, paperwork, difficulty reclaiming funds and issues with how the VAT applies to unique supplies.

Why is VAT being considered today?

It has been known for some time that The Bahamas could not indefinitely fund the State enterprise with its existing tax sources. Our economy is, conservatively speaking, about 70 percent services and 30 percent goods, yet the Government raises about 70 percent of its revenue from 30 percent of the economy. Some 40 percent plus of Government revenue comes from taxing imports into the country, that is goods brought into the country from overseas.

A growing state with increasing cost of operations cannot continue to look to the narrowest segment of its economy to pay for the bulk of the cost. This was combined with the growing recognition that you cannot run deficits indefinitely without at some point paying a high price. Thus the need arose to look for alternative sources of funding. This effort was launched in 1995 when the Government asked the International Monetary Fund to explore the issue with it.

Another consideration was the fact that with the creation of the World Trade Organization, to which every Caribbean country belonged having joined at the time of the creation of the organization in 1995, would eventually mean The Bahamas had to look at reducing its dependence on customs duty for revenue if it hoped to belong to that international trading system on day. Talks of a Free Trade Area of the Americas to be negotiated also played a role in this consideration.

Study launched into new tax opportunities, namely sales tax and VAT because of the challenge of imposing income tax in our offshore finance environment that was extremely sensitive to such issues.
Many years of inquiry by IMF and IDB and Ministry of Finance has taken place but a concrete written first proposal was developed in 2008/9. This technical proposal is the basis of the existing proposal.

It is a live issue today because in the wake of the Great Recession and its impact on The Bahamasâ fiscal position, the imperative for increased revenue is even greater.

The Government needs cash and it needs it badly. The proposition on the table is to produce a VAT by July 2014, next year.

What is likely to happen?

One of two things is likely to happen: (i) delay of the proposed implementation date and uncertainty as to a future date; or (ii) implementation within proposal date with numerous headaches in doing so. We could all be surprised and have a painless implementation of the VAT.

What Should Happen?

The Value Added Tax proposition on the table today is, for the most part, a technocratic proposal. It does not have the benefit of broad academic consideration or input.

It also lacks commercial consideration, as serious study, thought and consideration by the entrepreneurial community of The Bahamas, including the professional supportive communities of accountants, lawyers, economists and financial experts is lacking.

The proposal does not have, as far as I can assess, a current economic impact study to form the basis of any genuine analysis of revenue need medium to long term or spending and fiscal targets medium to long term.

Such a study would also have concluded what, for the medium to the long term, should be the appropriate tax system for The Bahamas, meaning that we should determine what taxes should exist in the modern Bahamas and which should be eliminated. Doing this would mean that we have a vision for the economic and commercial life of The Bahamas and what fiscal system would best support the realization of that vision.

It certainly has not yet been given an organized public education process and deliberation. This means that the community it remains largely an uncertainty to most of the public.

The proposal also lacks important details, especially as it relates to its implementation, though I do believe that the rudiments for such details were emerging as a consequence of certain legislative, administrative and technological reforms undertaken over the last six years and some are alluded to in the paper itself.

Tourism and financial services, along with their ancillary supportive services, account for more than 60 percent of our economy. Applying a VAT to these internationally competitive sectors with their major impact on our economy must be approached with caution. It is not clear whether the proposal on the table has carefully analyzed this situation and therefore has accounted for the implications of the VAT to them and the economy as a whole.

What we know about the VAT proposal from a white paper on tax reform issued on 13 February of this year include the following:

The Government's objectives are:

• To secure an adequate revenue base in support of modern governance;

• To establish a tax structure that promotes economic efficiency and stronger economic growth; and

• To make the tax system more equitable.

These are laudable objectives but the implementation of a VAT alone, even when combined with a congruent reduction in customs duty will not achieve these objectives. Reform of the tax system itself that results in a structure supportive of these objectives is necessary.

The aim is to introduce the VAT on 1 July 2014 at a rate of 15 percent.

The Government should rethink this.

Firstly, I think that the date is not doable, certainly not to achieve the best results. However, more importantly, I believe that we should step back and see the tax reform exercise more fundamentally and profoundly.

Many of the considerations that drove us to look at our tax system with jaundiced eyes have faded. In particular, our offshore finance centre has seen revolutionary changes in the international regulatory environment in which it operates.

The timidity that it once had to issues of no or low taxes and even secrecy has matured in some ways. We can, as a mature nation, take account of our needs as a state and the cost of financing those needs, and consider our vision for a dynamic, robust and growing economy and the commercial opportunities that exist to realize that vision, and develop a tax structure that suits us.

In other words, rather than be driven, lets drive our reform to do for us what we wish to do for ourselves within the context of the global environment in which we exist and are likely to exist. We should aim for reforms and should do them sooner rather than later but let us do our best and most considered reforms, so that we can look back at them and be proud of what we did for us.

There will be a reducing of both import duties and excise tax rates and elimination of the business license tax (but require a minimal annual business license fee) and the elimination of hotel occupancy taxes (which will be substituted with VAT). As a part of a considered tax reform process, these could have merits but cannot be fully known without that more complete picture in place.

There will be a limit to become a VAT Registrant of $50,000 turnover per annum, meaning that about 3,798 businesses will qualify as VAT Registrants. At this rate, the revenue potential to the Government will be around $200 million. If we return to pre-2008 GFS deficits, this new revenue could totally eliminate our deficit, if the government enjoys levels of growth seen in that period and controls increase in spending, which, I admit is a tall order for governments. If we maintain post-2008 GFS deficits, this new revenue will still mean GFS deficits of $300 - $400 million, if all else remains equal; and that would not be sustainable or acceptable.

In keeping with what happens in other jurisdictions, it is proposed that financial services, agriculture and fisheries, social& community services, health and education and leases on land and residential buildings will all be tax exempt sectors. Nothing unusual there!

There are other details in the paper about the administrative procedures proposed for the VAT, but I do not have the time to comment on them.

Freeport

Any consideration of new tax implementation in The Bahamas has to take account to legal and economic privileges enjoyed by Freeport through the Hawksbill Creek Agreement. Let me say here that I have looked at the issue and while I do have some initial thoughts, I am not prepared to draw any specific conclusions at this time. However, I will say that just as it ought to be the case with all taxes imposed by the Government, the imposition of a VAT must not proceed without definitively considering its legality and appropriateness for Freeport in light of The Hawksbill Creek Agreement. No one, least of all the economic hard pressed businesses and people of Freeport, and Grand Bahama, need a legal battle or economic issue that pushes their misfortunes further. I will speak to this issue following upon my further study of this matter, however.

Conclusion

We are discussion VAT implementation because there is a glaring reality confronting The Bahamas, which is that its income cannot pay for its operations. 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.

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 worldâ 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 is itâ s a practical issue of money.

Bahamians must embrace the realities of our present moment and those that relate to our moments going forward. A country is community to which all citizens and residents belong. There is a cost to operating a country. If it is operated efficiently, the cost is not as high as when it is operated inefficiently. However, operated, the cost exists and it must be paid by its citizens through taxes. If the governors drive up the cost through decisions regarded as good or bad, the cost exists and must be paid for by the citizens. 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.

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.

Our present tax system is not serving our needs well. It needs to be reformed. We need to eliminate some taxes, to introduce some new taxes and ensure that that at the end of the exercise, we have a tax system that meets the revenue needs of an efficient Bahamian state and supports the ability of the commercial sector of that state to do what it does best, create, grow and conduct business resulting in good jobs and good income. A VAT has the potential to fit into this kind of a scenario.

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. Consistent with this was changes to our business license regime, real property tax reform efforts, the proposed creation of the Tax Administration Department, reforms to the Tax Administration and Audit Act, a new framework for support small and medium size business through SMEDA, the modernization of customs laws and department, etc. If we step back and approach this issue with the maturity, intelligence and integrity that it deserves, we could do wonders to help The Bahamas realize its greater potential." 

The Freeport News

Bahamas Blog International

Questions for Doctor Hubert Minnis on Value Added Tax (VAT) in The Bahamas

By Dennis Dames
Nassau, The Bahamas:

I have read The Nassau Guardian article today entitled: Minnis blasts government on VAT.  It is my view that the perspectives expressed by the Honourable leader of Her Majesty’s loyal opposition and my MP, were hypocritical, and amount to rock and bottle politics.

Therefore, I have some questions for Doctor Minnis.  Where were you sir, and what did you have to say in May of 2004 when the government of the day announced the process of preparing a white paper on sweeping tax reforms of The Bahamas’ tax system?

Where were you, and what did you have to say in 2004 when the Value Added Tax (VAT) experts from the UK-based Crown Group were here to perform a review of our tax system?

Where were you, and what did you have to say then, when The Bahamas was signing the Economic Partnership Agreements (EPAs) with the European Union, between 2002 and 2007.

Where were you, and what did you have to say then, when The Bahamas made application to join the World Trade Organization (WTO) in 2001?

Where were you, and what did you have to say when your party chairman, Mr. Darron Cash  recently stated publicly, that the FNM had plans to implement Value Added Tax (VAT) in three years or thirty-six months, if the party had won the 2012 general election?

What is the Free Nation Movement’s (FNM) plan to plug our menacing, destructive and continuous fiscal deficits?

Do you think that The Bahamas need a broader tax base, in order to control our outrageous deficit spending?

When will it be an ideal time for us to get together and address our national budget, revenue and deficits; if this is not the right time?

Are your personal business interests and those of the FNM’s elite base conflicting with your political judgement and commonsense?

I’m looking forward to your reply, Doc.

November 14, 2013

Bahamas Blog International