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VAT Could Solve Bahamas' Fiscal Woes

by Amanda Banks,, London

14 November 2012

The introduction of value-added tax (VAT) has been proposed as a solution to the Bahamas’ dilemma over how to meet World Trade Organization (WTO) membership criteria while at the same time reducing burgeoning government deficits.

Kevin Burrows, senior vice-president of Bahamian investment management company CFAL, speaking at the Bahamas Institute of Chartered Accountants, stressed the need to reduce customs tariffs if full membership of the WTO were to be realized.

“The Bahamas’ average tariff rate is 33%. Most countries that accede to WTO have rates between 9% and 20%," he observed. "Our high rates of duties are definitely going to be deemed as a barrier to trade by these bodies, and there is already pressure on us to reduce them or eliminate some of those tariffs completely”.

Commenting on the inadequacy of the current system which derives 50% of tax revenues from import duties and related excise taxes, Burrows added: “Our current tax system based on customs duties is most obviously not providing the government with the revenue it needs to support the current expenditure. Our tax base is pretty narrow and completely leaves out the services-based economy, and it also requires merchants to pay their taxes up front at the point of import, prior to making a sale to consumers, so basically they have capital tied up having already prepaid to the government.”

Burrows sees the introduction of VAT as an attractive solution to the problem. “VAT is a consumption-based tax much like a sales tax, where it is basically collected in pieces all along the production chain. When we talk about taxation or tax reform, ultimately the conversation moves to VAT, and whether we need to be changing to value added tax. VAT is the front runner to supplement or completely replace our system of customs duties”.

Shawna Hansen, senior manager at PwC, Vancouver, Canada office, came to the same conclusions when speaking at last month’s Symposium on Tax reform at the College of the Bahamas. “I think what happens when you put in a value added tax, you are broadening the tax base. That’s what’s happening; you are bringing in more services and goods into the tax base, and you can actually get away with lowering the tax rate perhaps, and apply the tax to more goods and services in a jurisdiction.”

In September, the Bahamas government outlined measures to address issues raised in a recent report from Standard and Poor's (S&P) which downgraded the territory's credit rating outlook from stable to negative because of fiscal concerns.

The S&P report says the territory is experiencing a "deteriorating fiscal situation", with deficit targets being overshot by a significant margin. The agency noted that the sale of government assets had only temporarily closed the gap between expenditure and revenue in previous years, and the deficit is substantially higher than the 4% of gross domestic product level reported by the previous government.

In response to the S&P report, the government stressed that it is working on a number of initiatives to address the fiscal crisis, including:

  • The introduction of a White Paper on Tax Reform which would lead to the first major public discourse on the topic and to significant changes in the tax system;
  • The introduction of a 'fiscally-responsible' Mortgage Relief Programme, which is a part of a broader initiative to restart the housing sector;
  • New measures to revitalize foreign investment in the Bahamas; and,
  • Concrete steps to improve revenue administration and expenditure control.

In the Bahamas there are no taxes on profits, dividends or income; there is no capital gains tax, no withholding tax and no sales tax. The taxes impinging on companies are business license fees, stamp duty, property taxes and import duty. Most offshore or non-resident entities are exempt from business license fees and many are exempt from stamp duty. Corporate entities pay incorporation or registration fees to the government.

TAGS: tax | business | value added tax (VAT) | sales tax | Bahamas | tariffs | offshore | tax reform | trade

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