Turks & Caicos Budget Reveals Major Tax Changes

by Robert Lee, Tax-News.com, London

15 April 2011

The interim government of the Turks and Caicos Islands (TCI) has produced its 2011/12 Budget, which includes major adjustments to the tax system, designed to pave the way to a successful implementation of a value-added tax in 2013.

Presented by Delton Jones, Permanent Secretary for Finance, on April 5, the Budget statement was due to have been delivered to the Consultative Forum on the same day. However, the Forum was cancelled the previous day due to the refusal of several members to attend, those members citing a lack of preparedness, having received Budget booklets only days earlier. The statement was, nonetheless, published, and proposes a serious overhaul of the TCI's tax regime, as the country struggles to deal with its continuing financial crisis. According to Jones "Our aim is to restore and firmly embed the principles of sound financial management, sustainable development and good governance".

With a significant budget deficit and high levels of debt placing pressures on the economy, Jones said that, without the help it has received from the UK, the TCI would be bankrupt. The previous administration had failed to pay many of its creditors, damaging local businesses, yet also offered tax concessions at what Jones called an unsustainable rate. Despite these difficulties, Jones stressed that the financial support provided by the UK has given the country the time it needs to tackle the crisis, and he regards this as a one-off opportunity to take the necessary measures to bring revenue and spending into line. "We have no alternative other than to balance TCIG's budget by raising revenues and cutting spending: like any household or business, the public sector cannot continue to live beyond its means".

Jones also provided a brief history of TCI's economic troubles, citing heavily the deficiencies in the country's tax system. While the economy doubled in size between 2002 and 2008, its growth was neither balanced nor sustainable. Public sector spending increased threefold, outstripping revenue growth. Most problematically, the tax system was incapable of generating the sufficient recurring revenues required to fund such high levels of public spending. This problem was compounded by the fact that an already narrow tax base was systematically eroded through the grant of generous exemptions and concessions, and by poor administration, collection and enforcement, he said. Statistics show that tax revenues fell to 16% of GDP in 2010, from a peak of 24% in 2006. The government's priority is now to effect modernization of the system, improve the efficiency of collection, expand the tax base and increase revenues.

With this goal in mind, the government proposes a new, reformed tax system for the medium-term, the cornerstone of which is to be the introduction of value-added tax (VAT). It is felt that the imposition of VAT will provide the stable source of revenue the country so desperately requires, eradicate many of the system's distortions, boost the economy and ease the country's fiscal position. Although not specified in the Budget, it is widely expected to sit at a headline rate of 10% when introduced in 2013/14. However, given the existing deficiencies present in the tax system and the high levels of preparation required to ensure a smooth transition to the new regime, the government is also to implement a succession of temporary measures designed to pave the way to 2013/14.

The initiatives are as follows:

• The introduction of an immediate 4% Customs Processing Fee, to be levied on all imported goods and importers, and expected to raise USD12m in 2011/12;
• A series of changes are to be made to the system of work permit fees, which the government says have not been increased since 2001, and are complex and can lead to error and manipulation. The government is investigating a possible move to a percentage-based fee system, but, at the present juncture, proposes to radically simplify the employment categories under which permits are issued, and raise fees by September 1, 2011, increasing revenues USD5.2m this year alone;
• Responsibility for business licensing is to transfer to TCInvest from July 1, 2011, with fees having been increased by an average of 35% from April 1, 2011;
• A new carbon tax on electricity generators will apply by September 1, 2011, and raise an estimated USD1.6m in 2011/12, and USD3.4m in 2012/13;
• A water sales tax on commercial customers and large residential customers will come into force by September 1, 2011, generating USD0.7m in 2011/12, and USD1.4m in 2012/13;
• A 10% bank tax on non interest-bearing services provided by banks will have effect by September 1, 2011, replacing money transfer fees and stamp duty, and raise USD2.7m in 2011/12; and
• A 2.5% insurance tax on gross premiums for general insurance (excluding life and health premiums) will apply by September 1, 2011, and provide USD5.7m in 2011/12.

TCI will not see the introduction of either a property or an income tax, the government has clarified.

It is expected that these measures should, by April 2013, allow for the introduction of VAT, and thus be followed by a drastic simplification of the tax system, which will include the reversal of many of the temporary measures outlined above, and of accommodation, telecommunication and vehicle hire taxes.

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