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Showing posts with label Zhivargo Laing. Show all posts
Showing posts with label Zhivargo Laing. Show all posts

Saturday, November 16, 2013

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

Thursday, March 3, 2011

Bahamas: Cable and Wireless Communications (CWC) and the Utilities Regulation and Competition Authority (URCA)... What's The Connection?

CWC and the URCA connection
By CANDIA DAMES
Guardian News Editor
candia@nasguard.com


A closer look


Government officials are often quick to point out that the Utilities Regulation and Competition Authority (URCA) operates independently.

URCA may be so independent that ministers aren’t quite sure which of them is responsible for the regulatory agency.

Is it Minister of State for Finance Zhivargo Laing?

He said no. That would be Deputy Prime Minister Brent Symonette.

So we contacted Symonette.

He too said no. That would be Minister of National Security Tommy Turnquest.

So we contacted him.

But Turnquest said that would be Attorney General John Delaney, who we were unable to reach.

Perhaps it is Delaney.

We are still unsure whether he would have referred us to another minister.

With URCA reviewing the pending sale of a majority interest in the Bahamas Telecommunications Company (BTC) to Cable and Wireless Communications (CWC), in some circles questions are being raised about the affiliation former CWC executives have with the regulator.

CWC said last week that a foreign human resources consultant for URCA is a former CWC employee — not a current one as her LinkedIn profile had said. The Nassau Guardian based an initial story on what she was saying on that online professional profile.

Marsha Lewis left CWC in 2009, according to the telecoms company, and has been providing human resources consultancy to URCA since 2009.

So she is no longer with CWC.

On Friday, information came to our attention that her husband, Philip Lewis, is.

So we did some digging.

His LinkedIn profile confirmed that he is CWC Caribbean’s Vice President for Business Development.

We needed to be sure though that his LinkedIn profile was current.

So we confirmed through CWC that Mr. Lewis is still with the company.

We then sent a formal question to CWC: "Given that a former CWC executive is CEO of URCA (Usman Saadat), another former executive is the HR consultant for URCA (Marsha Lewis), and a current CWC executive (Philip Lewis) is married to the HR consultant, is CWC concerned in any way that there may be at the very least an appearance of conflict given that URCA is considering CWC's purchase of BTC?"

After The Nassau Guardian’s original story on Wednesday based on Mrs. Lewis’ LinkedIn profile — which has since been changed — CWC shot back, informing that Mrs. Lewis left the telecoms company in March 2009 to start her own business — LCI Inc., an HR consultancy.

Why URCA needed to bring in a foreign HR consultant is another issue. It was certainly the board’s prerogative.

And URCA has indicated that it is quite satisfied with Mrs. Lewis’ services.

Why Mrs. Lewis changed her profile to say she left CWC in December 2008, instead of March 2009, is not clear.

Following our inquiry on Friday about her husband, LIME CEO David Shaw approved a brief response from the company: “As the largest telecoms employer in the region CWC/LIME has been a corporate home to many people who gained experience with us and then moved on to other businesses or ventures.

“In this region, that’s not uncommon, especially in telecoms. And as for a conflict of interest, the legislation and regulatory framework were set up before we were the successful bidder.”

Indeed, The Nassau Guardian has no evidence to suggest that CWC had any advantage in the privatization discussions, but the connection to URCA is interesting to note, even if it is purely coincidental.

THE INTRODUCTION

URCA engaged LCI Inc, Mrs. Lewis’ company, in August 2009 “to provide assistance and advice in relation to URCA’s ongoing development of its human resource capacity.”

The former CWC executive was introduced to URCA by another former CWC executive — Saadat, the now CEO who at the time was URCA’s director of policy and regulation.

This was confirmed in URCA’s recent press statement.

“LCI’s selection by URCA’s then CEO was through an introduction of LCI by Mr. Saadat. URCA’s board endorsed the decision to engage LCI,” the statement said.

At the time of the approval of Lewis’ contract with the regulator, URCA pointed out, CWC was nowhere in the privatization picture.

“Public announcements by the government have disclosed that C&W did not participate in the government’s initial search for a strategic partner in the privatization of BTC, and was therefore not under consideration as a possible purchaser of BTC until 2010. From URCA’s perspective, there was no actual or perceived conflict arising out of the recruitment of Mr. Saadat or the engagement of LCI in 2009. “

The Nassau Guardian noted in a story on this issue this past Friday that CWC — though not a bidder in the BTC privatization process in 2009 — was on the government’s radar as Privatization Committee Chairman T. Baswell Donaldson advised Prime Minister Hubert Ingraham in 2009 that CWC had conducted a “lengthy” review of the opportunity to purchase 51 percent of BTC.

CWC in 2009 was one of the companies the privatization committee said it favored to bid for BTC. But CWC at the time decided not to proceed.

URCA has stressed that there is no conflict involved in the fact that two former CWC executives play key roles with the regulatory agency.

But is there an appearance of conflict?

It depends on who you ask.

The Progressive Liberal Party insists that there is.

Its chairman, Bradley Roberts, has said Saadat should not serve as CEO.

What’s clear is that URCA will not only have to provide the necessary regulatory approvals to CWC’s purchase of BTC’s majority shares, but it will also have to regulate the new company.

So the appearance of fairness and transparency is not only important in the approvals process, but in the ongoing regulation of the new BTC or whatever CWC will decide to call it.

Furthermore, URCA may need to provide repeated assurances to BTC’s competitors that CWC does not have an advantage in the regulatory process due to connections any of its key officials may have to CWC.

Competitors may get jittery at the knowledge that a former CWC CEO is now CEO of URCA, and that a current executive is married to URCA’s human resources consultant, who is a former executive of CWC.

But URCA’s Chairman Wayne Aranha said in a statement to The Nassau Guardian over the weekend the board has no concerns in this regard.

He advised that Mrs. Lewis’ company is an advisor to URCA in relation to certain human resources matters and initiatives.

“As such, Mrs. Lewis does not initiate or authorize transactions or otherwise make decisions for URCA relating to HR or any activities,” Aranha explained.

“To be clear, she has no involvement with regulatory matters and there is no issue of conflict.

“The board and I are aware of her husband’s employment. This does not concern me given the conclusion above relating to Ms. Lewis.”

USMAN SAADAT

In May 2009, Prime Minister Hubert Ingraham informed the House of Assembly that URCA — which was about to be formed — would be headed by a non-Bahamian.

Usman Saadat became URCA’s director of policy and regulation, and later its CEO, a post he currently holds.

“We have already accessed the talent of someone from outside The Bahamas who will be the policy director of URCA,” Ingraham said in the House of Assembly in 2009.

He explained then that while it was the government’s hope to populate the entity with Bahamians, it might not be realistic in the near term.

“In this early phase...we will be required to access talent that may not be available in The Bahamas,” Ingraham said.

He noted then that the policy director’s salary will also be “far in excess of anything heretofore known by public sector enterprise.”

“I would expect that some of the salaries paid to some of the professionals will be higher than what is normally paid in other areas in The Bahamas,” he said without divulging the pay scale for those appointed to URCA.

URCA’s goal, the prime minister noted, is to “have a transparent, effective, well-managed and knowledgeable entity that can act independently: that has no axes to grind; no preferences, no bias to cause the sector to be regulated in accordance with the Communications Act.”

The bill to establish URCA was passed in Parliament in 2009, as part of a package of communications bills designed to restructure the communications industry in the country.

URCA made extinct the Public Utilities Commission (PUC). URCA has far more extensive powers, authorities and duties than the PUC.

In September 2010, Chairman Aranha announced that Saadat was the new CEO of URCA.

He said URCA received applications from the local market as well as regional and international candidates for the top position.

Saadat, who headed CWC St. Lucia, reportedly has more than 15 years of global experience in regulation and competition strategy, coupled with a proven track record of leadership roles in the communications industry.

It wasn’t long before concerns about Saadat’s appointment made it to the press.

Trade Economist Hank Ferguson asked on The Guardian Business Facebook Feedback months ago: “Should I be worried that the former CEO of Cable and Wireless is now the regulator for BTC which is being purchased by his former employers? This should concern us all.

“If I were a visitor to this country, I would be forced to believe that the local population did not have competent or capable people, as every major entity within the country seems to have foreign (non nationals) at the helm. Where are the Bahamians?

“I do not question Mr. Saadat’s capabilities and his work in St. Lucia but noted that when he resigned from that post he noted his desire to return to his home country.

“I assume he has lost that desire but it worries me that our dependence on foreign talent may come at the expense of developing our own skills and talent (and God forbid that he and others are not engaged in the transfer of skills).”

The timing of Saadat’s hiring to the regulatory body after he left his position at Cable and Wireless prompted one union leader to say “we smell a fish there”.

But URCA said in December 2010, “The appointment of Mr. Saadat as former DPR (director of policy and regulation of the Public Utilities Commission) is far from sinister and would not give rise to any reasonable person concluding that some untoward scheme was underway or otherwise provides a basis for one to ‘smell a fish there’.

“…This URCA board is very pleased with Mr. Saadat’s performance, firstly as DPR and now as CEO. The board is satisfied that no conflict of interest exists, and will ensure that none rises between Mr. Saadat’s duties as CEO (and an executive board member) of URCA and any past association that he had with Cable and Wireless.”

At the time, the names Marsha and Philip Lewis were not yet in the press.

But last Thursday, URCA said, “From URCA’s perspective, there was no actual or perceived conflict arising out of the recruitment of Mr. Saadat or the engagement of LCI (Mrs. Lewis’ company) in 2009.”

PLP CONCERNS

The PLP has expressed concern about the fact that a former CWC executive heads URCA at a time when URCA is considering the BTC sale.

“The Progressive Liberal Party finds it most interesting that Mr. Saadat’s resume made no mention of his return to the Far East to ‘settle down’ as noted by him as his main reason for resigning from Cable and Wireless St. Lucia in 2008.

“The PLP asks how is it that in less than eight months Mr. Saadat, with just 14 years of experience, was selected by the FNM government to become the director of policy and regulations at URCA in The Bahamas and was then instantly promoted to the position of chief executive officer at URCA,” a recent statement from the party said.

The issue was raised in the House of Assembly last week by Golden Gates MP Shane Gibson. It came after The Nassau Guardian article based on Mrs. Lewis’ LinkedIn profile.

“Now bear in mind, Mr. Speaker, that this thing was carefully plotted out. Cable and Wireless has a former employee working in the MIS (management information systems)department at BTC. Cable and Wireless’ former employee is in charge of URCA (Saadat).

“Cable and Wireless’ current employee is also a consultant to URCA. You see the picture, Mr. Speaker? This thing was carefully crafted and carefully designed.”

As previously mentioned, CWC subsequent to these statements released a statement saying Mrs. Lewis left in 2009.

Speaking in the House early Wednesday, Gibson said, “This didn’t just start. Don’t mind them saying (it), Mr. Speaker. Everybody knows that Cable and Wireless did not just parachute into this position where they decided to purchase BTC. This was carefully planned out and mapped out where they put their people in strategic positions to make sure that at the end of the day, Mr. Speaker, they get what they want.”

Gibson added, “I wouldn’t be surprised if this was condoned by the Government of The Bahamas, because when you look at that contract that they signed with Cable and Wireless the Bahamian people would wonder who is it that the government is representing.”

But Minister of State for Finance Zhivargo Laing denied that Cable and Wireless had received any advantage in the BTC privatization process.

“I’d like to make it abundantly clear that any suggestion on the part of the member for Golden Gates that the government coordinated, orchestrated for any employees of Cable and Wireless to work at URCA or anywhere else in pursuit of this privatization is false, inaccurate and absolute nonsense, absolute nonsense,” Laing said.

“URCA is an independent organization and has employed and engaged at its pleasure. I want to make that abundantly clear, Sir.”

That independence will no doubt be important as the regulatory body considers whether to provide the green light for the sale of BTC.

2/28/2011

Bahamas: Cable and Wireless Communications (CWC) and the Utilities Regulation and Competition Authority (URCA)... What's The Connection? (Part 2)

thenassauguardian