The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A top QC has warned it will be “very dangerous” for the Government to impose Value-Added Tax (VAT) without widespread public support, as it was “not the right fit” for the Bahamas at this time.

Brian Moree QC, senior partner at McKinney, Bancroft & Hughes, told Tribune Business it was now impossible to implement VAT by the July 1, 2014, target date without causing “major disruption” to the Bahamian economy.

Calling on the Christie administration to “make the case” for VAT as the best tax reform option, something it has failed to do to-date, Mr Moree estimated its inflationary impact would be greater than the Government’s 5-6 per cent prediction.

Suggesting VAT would increase prices by around 7-8 per cent, and possibly as much as 10 per cent in the services sector, the highly-regarded QC added his voice to those calling for either a payroll or sales tax as a less costly, simpler alternative.

And while backing the Government’s desire to arrest its deteriorating finances, he added that it would be “bad governance” to impose a 15 per cent VAT without support from a majority of Bahamians.

Mr Moree, in an exclusive interview with Tribune Business, argued that VAT was not the appropriate tax reform solution given the Bahamas’ current economic circumstances.

He said: “I don’t have the same visceral opposition to VAT as many people have expressed. I know it exists in many other countries, and has worked in more of those countries than it has not worked.

“As a form of taxation, VAT is premier product, but the real question is: Is it the right fit for the Bahamas at this time given the state of the overall economy and economic activity?”

“It is really on that issue that I would have thought a more simple form of taxation, which doesn’t require an entirely new infrastructure, would have been better for the Bahamas,” Mr Moree added.

“There could be a time when VAT would be a perfectly viable option for us, but at this point in time it would have been better to employ one of the other tax systems that is simpler to implement, less bureaucratic and does not have such onerous reporting requirements.

“That means a sales tax or payroll tax might have been a better first option.”

A 5 per cent payroll tax is among the alternative options being explored by the private sector’s Coalition for Responsible Taxation, with one of the perceived advantages being the ability to collect and administer this via the National Insurance Board’s (NIB) existing infrastructure.

But the Government’s determination to forge ahead with implementing a 15 per cent VAT was further evidenced by its publication of the long-awaited Bill and accompanying regulations on Friday. Despite the outcry from the private sector and many consumers, who will ultimately pay the tax, the Christie administration appears to have decided it is ‘VAT or bust’.

Urging the Government to “make the case” for VAT, Mr Moree told Tribune Business there would be serious consequences for the Bahamas if it ignored public sentiment and imposed the tax against the will of most Bahamians.

“In 2014, good governance is not achieved by imposing VAT by edict,” he warned. “To say that the Government has the raw power to do it, and it will use that power over the objections of the people, that’s not the model to follow in good governance.

“What the Government should do is, having made the decision, it has the responsibility to explain it to the Bahamian people, justify it, and engage civil society in national debate to win over the hearts and minds of people on this issue.

“If they are unable to do that, I think it is very dangerous for the Government to resort to its coercive powers to impose such a major reform over the widespread, and strident, opposition of the Bahamian people.”

Mr Moree further warned that the Government ‘s July 1, 2014, implementation timetable would be fraught with difficulties if it stuck to it.

“I think that if VAT is implemented in the way it is presently contemplated, and within the timeframe of July 2014, it is going to result in an increase in the cost of living, and it is going to create serious problems for individual businesses with regard to implementation matters, with regard to reporting requirements,” the noted QC said.

“In some cases, software issues have to be addressed. Frankly, the learning curve is very steep for supplier-like businesses. It will create a period of some uncertainty, which is never good for business.”

Asked by Tribune Business whether the July 1 implementation deadline was possible, Mr Moree replied: “I think it is an extremely aggressive timetable.

“It is feasible in the sense that if the Government commits to it come what may and introduces it, then it will happen. It’s feasible in that sense.”

But he added: “Is it feasible to introduce VAT in a relatively efficient and seamless way that is not going to cause significant dislocation within the business community and the Government itself?

“I do not think it is feasible to introduce it in a way that will be efficient and seamless by July 1, 2014. If that date is not changed, I think the introduction of VAT will be a major disruption to the economy of the Bahamas, and it will take some time to sort out all the new procedures and requirements, and get through the learning curve where people fully appreciate what is required of them under the VAT regime.”

Most observers believe the Government is losing, and indeed may have lost, the VAT public relations battle already. The late release of the Bill and regulations, coupled with it being ‘slow out of the blocks’ on its education campaign, has created an ‘information vacuum’ that has been filled by a combination of accurate criticisms/concerns and, in some instances, hysteria.

Mr Moree pointed out that perception was everything in the VAT debate, irrespective of whether beliefs and information were correct or not.

“It is extremely important for the Government to make that case, because to-date there are many people in the Bahamas who do not think it is the best option,” he added.

“The Government must take the lead in this debate, and it must convince the Bahamian people that after looking at all these options, VAT is indeed the best solution for our country.

“To date, I don’t think they’ve convinced the Bahamian people of that fact, and the time is short, given the July 1 implementation date. It doesn’t make any difference whether the facts are right. People perceive VAT as a complicated form of tax which is difficult to implement.”

The Government is looking to VAT to generate a net $200 million increase in its annual revenues, some 40 per cent of the total $500 million rise it needs by the 2016-2017 fiscal year.

VAT is projected to generate $500 million in annual revenues, acting as an ‘income substitute’ and compensating for a $300 million reduction in Customs tariffs, which is required for the Bahamas to comply with its World Trade Organisation (WTO) and Economic Partnership Agreement (EPA) obligations.

Mr Moree acknowledged that VAT’s inflationary impact on the economy’s goods sector would be mitigated by the average 17 per cent reduction in Customs tariff, which is designed to make room for the new tax’s 15 per cent levy and produce a ‘neutral’ impact.

Yet he warned that VAT’s impact, from a cost perspective, was set to be more pronounced when it came to the services sector.

“One thing I know, and the empirical data convincingly shows, is that the introduction of VAT will result in an upward, one-time adjustment in the cost of living,” Mr Moree told Tribune Business. “It’s a question of how much.

“My own sense, based on available information, is that it’s likely to be somewhere around a 7-8 per cent increase, and as high as 10 per cent, in my view, in the services sector.”

Those estimates are in line with the projections given by Fidelity Bank (Bahamas) chief executive, Anwer Sunderji, but slightly higher than the 5-6 per cent inflation forecast offered by the Ministry of Finance’s financial secretary, John Rolle.

Still, Mr Moree echoed the general backing given by the private sector to the Government’s fiscal and tax reform. With a $5.5 billion national debt, and fiscal deficits currently standing at $443 million, he agreed that doing nothing was “simply not a viable option”.

And, apart from the fiscal indicators, the top QC said an unemployment rate of almost 16 per cent and “extremely anemic economic growth in our GDP over the past three-four years” all added up to a depressing, worrying picture for policymakers.

“It doesn’t help us to engage in a blame game as to how we got where we are and how we got here,” Mr Moree said. “The fact of the matter is we are where we are, and these economic indicators are very troubling.

“No responsible government can look at these macroeconomic factors and conclude that it has the option of doing nothing.”