The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas is currently operating at just 40 per cent of its tax capacity, the Government’s US consultants have warned, ranking this nation near-bottom of 98 countries.

The Compass Lexecon report, which the Government leaned on heavily to produce its restructured 7.5 per cent Value-Added Tax (VAT), also strongly backed the Bahamian private sector’s calls for greater enforcement and compliance with the existing tax system, noting that only 40 per cent of real property tax bills are being paid.

“The IMF has estimated that The Bahamas collects only 40 per cent of its maximum attainable tax-to-GDP ratio as determined by the economic structure of the country, a metric on which it ranks 92nd out of 98 nations,” Compass Lexecon said.

“In comparison, Sweden and Denmark collect 98 per cent of their tax capacity.”

This will likely add fuel to ongoing private sector, and public, suggestions that if the Government were to get existing tax compliance levels up to international standards, and combine this with targeted spending cuts/restraint, there would be no need for Value-Added Tax (VAT) or any other new taxes.

Robert Myers, the Coalition for Responsible Taxation’s co-chair, yesterday told Tribune Business that the Bahamas’ tax compliance rates and ratios were “skewed” by the fact the collective $285 million in annual investment incentives is treated as revenue foregone.

But, acknowledging that compliance rates with the existing system were “still lower than they should be”, he added: “Some of that is due to the fact we have concessions, so concessions are factored in.

“Compliance does take a hit because of the concessions given out to the hotel industry and other investors. These concessions are counted as revenue, but hurt our compliance.

“It makes it difficult to say what the true compliance is, but it’s still low; lower than it should be,” Mr Myers added. “It does skew the numbers.”

The Government’s restructured 7.5 per cent VAT appears to be a model produced from the amalgamation of Compass Lexecon’s report with that produced by the two New Zealand consultants, Dr Don Brash and John Shewan.

The private sector’s efforts further buttressed these reports, and the lateness of the Government’s decision is further highlighted by the date on the final Compass Lexecon report - May 27 - the day before the 2014-2015 Budget announcement.

Returning to the poor compliance/enforcement theme, Compass Lexecon said: “At present, taxes in the Bahamas are regressive, inefficiently administered, and apply to a very narrow base.

“The Bahamas is not realising anywhere near its potential revenue on property taxes. The Government presently exempts the first B$250,000 on owner-occupied housing and does not means test this exemption, while it also gives breaks to hotels, timeshares, and other tourist-related investments.

“In addition to having a narrow tax base, the Bahamian property tax is inconsistently applied. Government property rolls have a coverage rate of about 70 per cent, and the Government receives payment on only 40 per cent of the property tax bills it issues. Enforcement against non-compliance has been weak to non-existent.”

The Government has repeatedly pledged to address this issue, and Michael Halkitis, minister of state for finance, on Monday said another 1,000 properties had been added to the tax roll following the latest amnesty programme’s conclusion.

As for Customs, the Compass Lexecon report said it was investing $6.745 million over three years to re-engineer its business processes.

“Reforms include the development of a new computerised system for the processing of transactions, training for staff in the implementation of the new trade agreements, the introduction of a new K9 unit, and the enhancement of the existing marine unit,,” Compass Lexecon said.

“These measures are expected to improve enforcement capabilities, decrease fraudulent activities, and reduce the cost of collecting revenue by 15 per cent.” To comply with World Trade Organisation (WTO) requirements, the Bahamas is looking to reduce the weighted average tariff rate to 10 per cent - a drop of 15 percentage points.

The US consultants also disclosed their belief that the original 15 per cent VAT model, and estimates that it would generate a net revenue increase equal to 2 per cent of GDP, “may not be necessary to put the Bahamian Budget on a sustainable trajectory”.

“Furthermore, immediate implementation of a VAT at this rate would substantially reduce economic growth over the short and medium terms, which would result in even higher unemployment,” Compass Lexecon said.

“In combination with other fiscal reforms, a VAT raising less revenue than initially proposed - in the range of 1 per cent of GDP in incremental revenue rather than over 2 per cent - should be sufficient to address the long-term fiscal challenge, and would be substantially less of a drag on short-term economic growth and employment.”

The US consultants said this pointed to the option ultimately chosen by the Government - VAT in the range of 5-10 per cent - with the “greater flexibility” to increase this if more revenue was needed.

Compass Lexecon said that with VAT raising revenue equivalent to 1 per cent of GDP from 2015-2016 onwards, debt would start to fall by one percentage point, growing to almost a two percentage point drop the following fiscal year.

“But, this is only the case if all other deficit reduction measures are fully implemented and achieve the targeted savings, and the economy grows as expected,” Compass Lexecon said.

“Notably, the most recent IMF projection shows debt-to-GDP falling by smaller amounts than in the Government’s official projections. The IMF’s pessimism largely results from the IMF assuming that the Government’s other revenue measures (like property tax reform) raise significantly less than the government projects.

“In sum, the target is achievable based on the Government’s current projections and without a VAT of 15 per cent, but there is a real risk that the extant measures discussed so far prove insufficient in achieving the fiscal targets and a higher VAT will be needed.”