Turks And Caicos Fiscal Review Underway

by Jason Gorringe, Tax-News.com, London

14 March 2011

The temporary UK-led government in the Turks and Caicos Islands has presented a number of proposals to resolve the territory’s fiscal woes, including the introduction of a value-added tax, a fixed tax on imports, a review of the charges and fees levied on the financial services sector, and an alteration to the tax-like fee paid by employers for non-resident work permits.

In mid-2009, it emerged that the British authorities, acting on allegations of systemic corruption, had assumed political control, removing the majority of the elected officials, and partially suspending the constitution. Following this, the Governor of the Islands assumed governmental responsibility, and new permanent secretaries were appointed to various Ministries in late August 2009. The government then set about introducing new frameworks to prevent corruption and to establish a fiscally-sustainable regime. A revenue study, commissioned by the government and released in 2010, recommended that considerable measures would have to be implemented to correct the islands’ tax system which was deemed to be complex, regressive, costly to administer, easy to avoid, difficult to enforce, and with too narrow a base.

Although the government has already made minor tax changes - to stamp duties and a reduction to the transfer tax in failing tourism resorts - the government’s latest statement is the first indication of a comprehensive approach to tackling the fiscal imbalance.

Although radical measures – such as the introduction of a corporation tax – have not come to the fore, what is certain is that the tax burden will need to be hiked considerably. The TCI’s tax-to-GDP ratio fell considerably from 23% in 2007/08, to 16% in 2009/10. The deficit is expected to fall - as a result of expenditure-related measures introduced by the government - to 3% of GDP in 2010/11, down from 3.2% of GDP in 2009/10.

The government has proposed that a customs processing fee will be introduced, following a failed review of the import tax system - which, due to a unexpected pronounced downturn in the construction industry, failed to generate sufficient extra revenues. From April 1, 2011, all imported items will bear a 4% tax. The government indicated that this could be on a temporary basis, but noted that such a levy is consistent with those in place in other CARICOM nations. All importers will be liable to pay the fee, even if they currently receive exemption from customs tariffs.

The 2010 Revenue Study proposed that the majority of import duty-payment exemptions should be axed - a recommendation the government has adopted, noting that it would achieve simplification and boost revenues. The Revenue Study noted that by removing the exemptions, the government would be able to cut import tariff rates considerably, by around 10% on average. In addition, import fees are to be rationalized, the government said, to remove anomalies and make taxes placed on similar goods more equitable.

Next, the government has announced that it is to review the system of work permits and residency fees, which has been deemed to be ‘cumbersome and full of distortions’. As part of this reform, the government has proposed the elimination of the repatriation program in favour of establishing an efficient monthly fee collection mechanism (to be collected by the National Health Insurance Board). The system will replace the current charge, based on the non-resident worker’s field of employment in favour of a 10% rate on the worker’s monthly salary, with no cap, effectively in the same way as an individual income tax would be levied. The government said this would be implemented as soon as legislation has been passed, and the framework agreed with its overseers.

Fee and charge levels, and license fees are to be hiked to take into account inflation that has occurred since they were last increased, some of which have not been altered for fifteen years. In most cases these will be increased by 35%, but are still expected to be competitive compared to jurisdictions competing for financial services business.

According to the Revenue Study, an analysis of the fees paid by bank licencees, insurance licensees and for company registration in the TCI, with rival jurisdictions Bermuda, the Bahamas, and the Cayman Islands, showed that "even after the September 2009 increases in charges, TCI has the scope to raise its licensing fees quite a lot more before it is likely to lose its competitive advantage."

Meanwhile, concerned parties will benefit from the abolition of the following fees: the administration fee paid as part of Business Licence applications; temporary work permits; audit fees; dental fees; examination fees; ID card fees; medical fees; Salt Cay boat fees; tender document fees; school fees; migrant health processing fees; and taxi meters.

Further, from April 2011, TCInvest will take over the responsibility of granting business licences.

Looking to the medium-term, it is increasingly likely that the territory will introduce a value-added tax to ensure the stability of the islands’ tax base. To facilitate the introduction of such – which is expected to take 18-24 months - it is proposed that electricity and water would be subject to a temporary 10% sales tax, to be replaced eventually if the VAT is introduced - expected to also be imposed with a headline 10% rate.

In addition, as part of the government’s efforts to increase the contribution of the financial services industry, it has been proposed that a sales tax rate of 10% could also be applied to the processing of cheques, the purchase of cheques, mortgage application processing, the use of ATMs and debit card transactions etc. but the government admitted that a broad levy on the activities of the industry would be difficult to administer.

The 2010 Revenue Study recommended that a value-added tax, combined with a review of the import tax system, would be the best way to enforce higher taxation without adversely affecting the Turks and Caicos’ international attractiveness. Value-added taxes and Goods and Services Taxes are in place in 12 of 15 CARICOM nations and a rate of 10% would be below the prevailing rate of between 15-17.5%. It was identified by the report that VAT could be implemented no earlier than April 2013. The government has confirmed if implemented, the TCI market would not be subject to price controls.

The Study said that VAT would be effective at improving fairness in the tax system by removing cruder attempts to broaden the tax base through indirect taxation on specific sectors – to make up for the lack of corporation tax - such as is the case with the Hotel Accommodation Tax on hoteliers. A VAT, the government said, would lead to the abolition of:

• The Hotel Accommodation Tax;
• The Stamp Duty on Vehicle Hire;
• The Money Transfer Duty;
• The Electrical Sales Tax;
• The Water Sales Tax;
• The Bank Insurance Tax; and,
• Customs tariffs could be reduced by 50%.

As part of efforts to reduce tax expenditure – the amount it costs the government to administer and enforce the territory’s tax regime – the government plans to undertake a review of which departments are responsible for the collection of the islands’ levies, to derogate the number of responsible government divisions.

Lastly, although the Turks and Caicos Islands does not operate a corporate income tax, a levy on the country’s largest telecoms company is expected to be hiked as part of austerity efforts, and the possibility of bringing other large operators under the levy is to be investigated.

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