The Tribune

By Richard Coulson

After years of desultory chat about a new tax structure, the Symposium on Tax Reform, scheduled for October 25-26 at the College of the Bahamas, may actually propel us towards a specific programme of change.

The Prime Minister is scheduled to attend, and he will hear presentations not only from local, Caribbean and international experts on the economic implications of tax reform, but also from an officer of Standard & Poor’s speaking on sovereign credit ratings. Accountants from firms in Canada and the UK will focus on the practical administrative challenges of creating a new tax system, and an experienced consultant will explain the adoption of VAT in Barbados. A wrap-up ‘Evaluation of the Options’ will be delivered by an accountant from Australia.

I believe that two general themes will underlie the proceedings:

• First, how large should be our total tax revenue? Do we really need to increase our tax intake?
• Second, whatever the accepted size of our global taxation, how should it be divided among different forms of tax?

On the first theme, there is a substantial fraction of local opinion (and not only the free market leaders of the Nassau Institute) who oppose any increase in Government revenues, believing it will only be wasted in a misallocation of priorities, inefficiency and cronyism.

This is precisely the position being vigorously argued by the Tea Party element in the US Republican party, who want only to shrink the State. Like it or not, the view is widespread, both in the US and the Bahamas. Locally, its adherents point to the lost revenue from uncollected real property taxes, estimated at $400 million, and possibly a similar amount in Customs duties, as well as the unproductive subsidies paid to Bahamasair and ZNS, plus the reluctance to privatise BEC. Our education deficiencies, they claim, cannot be helped by throwing more money at the system, but only by adopting radical new approaches to teaching and teachers. Permanent public employment cannot be regarded as an inherent right, but rather subject to reduction to meet budgetary needs.

Given these factors, any new tax regime should be co-ordinated with a specific no-frills, no-waste budgetary projection. It is not clear how much of the Symposium will be devoted to Government expenditures, but surely the S&P executive will comment and will urge reduced spending to avoid further rating downgrades.

On the second theme, determining the mix of different taxes, certainly the experts will have many useful recommendations. There is general acceptance that we can no longer rely heavily on import duties and related excise taxes, now providing nearly 50 per cent of tax revenues. Not only do they deter our ability to get full membership in the WTO (World Trade Organization) and other trade treaties, they are inherently regressive and inequitable.

Low-income people spend more proportionately on physical goods subject to duty, while higher earners spend more on duty-free services. For businesses importing expensive, slow-moving items such as automobiles, appliances and furniture, duties are particularly tough as they are paid at the beginning of the commercial cycle rather than the end, thus tying up expensive capital. It should be noted that the remaining 50 per cent of tax revenues come from a mish-mash of Stamp taxes and license fees tacked on and revised yearly.

The most popular alternative to our present tax system seems to be VAT (Value Added Tax), a form of sales tax but applied at all levels of commercial transactions. While VAT has many attractions, it may need to be supplemented by some degree of income tax, just as in Panama. The very hint of income tax has long been anathema in the Bahamas, but we are living in a changing world where more earners must contribute, and income tax will doubtless arise at the Symposium.

VAT will apply to the presently untaxed fees received by accountants, lawyers, doctors, electricians, plumbers, etc, and to insurance premiums. But it will not cover the compensation of highly paid corporate executives, since they do not provide a service but simply receive a salary. The exact rate(s) of income tax would have to be closely analysed, probably in the range of 15-25 per cent, but the minimum taxable income would be set high enough to leave low-paid hourly workers outside the net, and certainly we could avoid the host of complex deductions, credits and exemptions that bedevil the US Internal Revenue Code. Whether to tax dividends, interest and capital gains would be a policy decision based on economic studies. Just as in Panama, the income of IBCs whose earnings are foreign-source would not be taxed. It should be noted that the Panamanian economy is booming, in no way hobbled by modest territorial income tax.

This Symposium will clearly not result in an immediate revolution in our tax regime. But it should certainly stimulate serious planning and move the Government towards firmly choosing long-range objectives. As is on record in Barbados, initiation and final enactment of VAT took several years of experimentation and education. The same course can be followed here. The Symposium can be the essential spark-plug.

Corporate Takeovers

Because our economy is still small and simple, we do not see many of the complex corporate deals - acquisitions, mergers, recapitalisations, changes of control – that are an everyday event in sophisticated capital markets like the US and UK. But we have had a few, and there are likely to be more.

No one will forget the controversy surrounding City Markets, the Nassau/Freeport supermarket chain, beginning in 2006 when a Bahamian investment group bought Winn-Dixie’s 78 per cent equity stake in the parent organisation, Bahamas Supermarkets, a public company with about 1,200 local shareholders. As is well-known, this transaction led to all the shareholders, both majority and minority, losing every penny of their investment, and mass lay-offs with employees still waiting for severance pay and satisfaction of their pension claims.

In earlier years, a few other deals involving publicly held companies came to the market. Global Insurance Company was merged with an affiliate of the Colina Group; the regional business of Barclays and Canadian Imperial Bank of Commerce (CIBC) were combined to create First Caribbean International Bank; and, more recently, Sol Kerzner did a leveraged private buy-out of the publicly-held Kerzner International, while the ownership structure of Cable Bahamas was reorganised.

Fortunately, thanks to careful operational and financial planning by the parties involved, none of these deals, although initially raising some questions, resulted in any loss to Bahamian shareholders. Nevertheless, it was recognised that the Bahamas had no formal rules for scrutinising the terms from the point of view of shareholder interests, and that this deficiency had to be corrected.

For many years the capital markets in New York, London, Canada, Australia, India – indeed, in just about any country with a stock exchange – have been governed by rules set by a regulatory agency, and interpreted by a growing body of court decisions.

Under our new Securities Industry Act that became effective early this year, our Securities Commission was mandated to promulgate a ‘Takeover Code’, which they recently drafted and circulated for comments. It is a thorough, comprehensive document of over 100 pages, based on precedents studied in several countries. Its basic objective is assuring fair treatment for minority shareholders who are not party to the initial, high-level negotiations of any deal. But inevitably it is not easy reading, and its technical provisions will need careful study. I understand that the Commission will organise seminars to introduce and explain it to the financial and legal community. These will be worth attending.

Doubtless, many analysts will consider whether the Code would have covered the catastrophic City Markets acquisition and required it to be handled differently. This is the most relevant ‘case study’, giving guidance for structuring similar transactions in the future. In any event, we now have a much needed addition to our armoury for investor protection. As long as the Commission creates an effective oversight body, the Code will be a solid backstop for the rules of corporate behaviour that BISX tries to enforce, now with full Government enforcement powers.