The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Wall Street is not anticipating that the introduction of a Value-Added Tax (VAT) will lead to a matching drop in revenues generated from Customs Duties, a prominent Bahamian accountant believes.

Craig A. ‘Tony’ Gomez, the Baker Tilly Gomez accountant and partner, told Tribune Business that “what happens” to existing taxes the Bahamas levies, if and when this country introduces VAT or another alternative, is a key question within the context of tax reform.

Noting that the Government’s performance in collecting revenues due to it under the existing tax system had been “less than stellar”, Mr Gomez said the collection/administration of a VAT structure would be “just as significant” as implementing the new tax itself.

Backing suggestions that the Bahamas needed to graduate more small businesses into larger ones, so as to increase their contribution to the economy and government revenues, the Baker Tilly Gomez partner added that a VAT would remove the “handicap” currently imposed on many companies by the Customs Duty-dependent structure.

By relieving the upfront taxation burden imposed on Bahamian importers, who on average are faced with paying 30-50 per cent of a product’s costs in Customs duties before a single sale is made, Mr Gomez said a VAT should stimulate “more even cash flow” in the private sector.

Ryan Pinder, minister of financial services, last week gave a hypothetical example of how a Bahamian VAT tax might work if implemented, suggesting it could - based on the assumptions he used - generate an extra $100 million in government revenues per annum.

Mr Gomez told Tribune Business: “It is clear from the international rating agencies [Moody’s and Standard & Poor’s] that, if we do not develop additional revenue streams, the Bahamas is in for a challenging time and a bumpy ride.

“Therefore, we must create additional revenue streams for the Government and the country to function. The question for me is what happens to the other taxes, and how much do we revamp our current system?

“For example, if we implement a VAT, what does that mean for Customs duties? It is my understanding that the rating agencies would like to see the introduction of an additional revenue stream, or streams, and at that same time maintain our current revenues.”

In essence, Mr Gomez said Wall Street is expecting that the introduction of a Bahamian VAT - and the extra revenues it will generate - will not lead to a matching, or proportionate, drop in funds derived from Customs duties.

While the latter’s import tariff rates, and revenues, will have to decline to meet the Bahamas’ commitments under the Economic Partnership Agreement (EPA) and World Trade Organisation (WTO) accession, the drop will not be a 1:1 match with revenues gained from a VAT.

Sources have suggested to Tribune Business that the Government’s long-awaited ‘White Paper on Tax Reform’ says as much: That Customs duties revenues will not drop in proportion to those gained from a VAT.

It was also suggested to this newspaper that the Government is initially proposing to adopt a 20 per cent VAT rate, higher than the 18 per cent selected by Barbados when it first introduced its own version, and the 17.5 per cent rate prevailing in the UK.

None of this could be confirmed. But it indicates the Government’s thinking that a VAT, combined with what is left of the Customs duty regime, will increase revenues. The danger is that reforms are seen as a pure ‘revenue grab’, rather than also providing the base platform for future economic direction and growth.

“It will be interesting to see what we develop, but there is no doubt we must develop a new model,” Mr Gomez said of tax reform.

“In the general sense, it makes good business sense for the Bahamas to implement a VAT system. Clearly, the Bahamas remains one of the few countries that does not have this type of system implemented and functioning.”

Mr Pinder last week used data gathered via the Business Licence Act as the basis for his VAT example. Taking the $50,000 annual turnover threshold, below which companies pay an annual $100 flat Business Licence fee, as his benchmark for whether they would pay VAT, the Minister of Financial Services said just 3,798 firms would be liable.

This, in turn, translated into less than 15 per cent of companies with a Business Licence being liable to pay VAT. While just an example, it is probably indicative of government thinking on tax reform, and the data - or something similar - included in the promised ‘White Paper’.

Mr Gomez, meanwhile, said Mr Pinder’s comments were backed by a recent Inter-American Development Bank (IDB) report, which found that around 95 per cent of Bahamian companies generated just 5 per cent of per annum GDP.

“That is not surprising,” he added of Mr Pinder’s VAT paying base example. “We are a small and medium-sized business community, made up of small shop owners who, over time, mature into larger businesses.

“We must turn small businesses into larger businesses for the purpose of enterprise, and also to enhance government revenues.”

And Mr Gomez further told Tribune Business: “What is particularly interesting to me is to ensure that whatever tax model we have, the collection regime is just as significant as developing new proceses.

“For too long we have had new taxes on the book, but the implementation and collection of those new tax regimes has been less than stellar.... Whatever model we come up with, whatever is there we have to collect it. We have to ensure collection. A prime example is real property tax.”

It is estimated that the Government is owed more than $400 million in unpaid real property tax, a bill that continues to rise every year. A VAT will introduce new recordkeeping and collection methods for both the private sector and the authorities, meaning that enforcement and collection will be key.

Pointing to one potential benefit from a VAT, Mr Gomez told Tribune Business: “The challenge for small businesses has always been that they usually need so much cash up front before they sell their first item.

“Hopefully, there’s less handicap and a more even cash flow under a VAT system. Under the current process, a businessman must usually pay 30, 40, 50 per cent of the cost of an item in Customs duties before even his first sale.”

He added that it would be “interesting to see” how a VAT impacted the services side of the Bahamian economy, especially professions such as accountants, doctors and attorneys.