The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government yesterday slammed as “far off range” a study suggesting Value-Added Tax (VAT) implementation would produce a $165 million decline in its total annual revenue intake.

John Rolle, the Ministry of Finance’s financial secretary, described as “not credible” the findings of a report commissioned by the Nassau Institute, which warned that Bahamian GDP would contract by between $322-$483 million per year if the Government hit its VAT revenue goals.

The study, ‘The Economic Consequences of the VAT for the Bahamas’, conducted by a former corporate tax auditor with the Canadian Revenue Agency, warned that the Government’s tax reform centrepiece “may force the Bahamian economy into further decline”.

Calculating that it would cost the Bahamian private sector $103 million annually to comply with VAT, the study’s author, David Godsell, said its implementation would achieve neither of the Government’s key twin objectives - fiscal deficit reduction and economic growth/job creation.

“The Bahamas is currently faced with a swelling budget deficit, a moribund economy and elevated unemployment,” the Nassau Institute paper said.

“This paper has shown that, if enacted, VAT adoption will not only adversely affect GDP growth, domestic consumption and domestic employment; it is also unlikely to achieve government revenue targets, all the while burdening the private sector with substantial compliance costs.

“The negative effects of VAT adoption, in the current economic climate, may force the Bahamian economy into further decline,” it added.

“VAT adoption, rather than restoring the economic foundation of the Bahamas through deficit and debt reduction, would only raise additional economic concerns.”

When contacted by Tribune Business about the study’s findings yesterday, Mr Rolle was quick to downplay and dismiss them, questioning the methodology employed to arrive at its conclusions

Noting that the study’s author appeared not to have spoken with any government minister or official in preparing their work, the Financial Secretary pointed to what he suggested were numerous weaknesses and flaws.

“Just listening to the results, it doesn’t sound like a very credible study,” he told Tribune Business.

Describing several sections, read out to him by this newspaper, as “speculative”, Mr Rolle added: “It sounds very good on paper, lots of general statements, but I think the study is far off range in terms of its findings.”

Michael Halkitis, minister of state for finance, declined to comment on the report because he had not seen it, and thus was unable to examine the calculation methodology. Tribune Business subsequently sent him a copy.

To calculate the net revenues the Government will likely derive from VAT, the Nassau Institute study based its calculations on an annual Bahamian GDP of $8.043 billion.

Mr Godsell gave three different tax base-dependent scenarios, pegging the VAT base at 41 per cent, 49 per cent, and 51 per cent of GDP respectively.

With a 15 per cent VAT, he calculated the potential tax collectible at $494.645 million; $591.161 million; and $687.677 million respectively.

But, pegging the so-called ‘tax gap’ or level of non-compliance at 20 per cent, the Nassau Institute paper estimated that between $98.929 million and $137.535 million would escape the Government’s clutches.

And, taking fraud costs as equivalent to 14 per cent of taxes assessed - the same benchmark as the European Union’s (EU) VAT average - the Nassau Institute paper estimated that between $69.25 million and $96.274 million would be lost this way.

Deducting these two sums meant the Government would likely earn between $326.465 million and $453.867 million in gross VAT revenues, but the Nassau Institute and its consultant said further deductions were necessary.

“Taxpayers may confirm they owe tax and yet not pay it. Sources are scarce for country-level uncollected debt data, but the Canada Revenue Agency is reported to have an uncollectible expense ratio of 7 per cent of cash receipts,” the report said.

Using the same 7 per cent benchmark, the Nassau Institute report said between $22.852 million and $31.77 million would be lost in this fashion.

And, with VAT refunds and rebates often equivalent to 40 per cent of gross collections, the report added that between $130.586 million and $181.547 million would likely be handed back to the Bahamian private sector.

And with the Government likely to pay $18 million in annual VAT itself, the Nassau Institute report calculated that, depending on the size of the tax base, the net revenues generated by the proposed tax will range between $155.027 million and $222.549 million.

Taking the $189 million calculated as generated from the average 49 per cent tax base, the Nassau Institute study calculated that it would cost the Bahamian government $65.7 million annually to administer VAT.

“This analysis suggests that the Government may collect as much as $188 million on $390 million in taxes assessed in VAT collections, while expending between $65.7 million and $80 million on administration,” the Nassau Institute and Mr Godsell said.

“Subtracting the administration costs ($65.7 million) from the taxes collected ($188 million) yields net VAT revenues amounting to $123 million.”

Yet the report noted that to calculate the total revenues generated by tax reform, the accompanying reduction in import tariffs also had to be factored into the equation.

Noting that the Government currently collects $552 million in revenue from $2.88 billion worth of imports, a sum equivalent to 20 per cent of their total value.

Mr Godsell, in estimating that import and Stamp Duties will end up being cut by 50 per cent, dropping revenues from this source to just 10 per cent of total import values, assumed “conservatively” that there will be no reduction in Excise Taxes.

“The customs tax revenues foregone, which we subtract from net VAT revenues, amount to $288 million per year,” the Nassau Institute study said.

“Subtracted from net VAT revenues of $123 million, the Government is estimated to lose $165 million per year by adopting VAT.”

As for private sector compliance costs, the study described these as “non-trivial” for Bahamian businesses. They have been estimated as being between 1-1.5 per cent of a nation’s GDP, or between 3-6 per cent of revenues collected - the latter percentage being endured by countries with small populations.

“Characterising the Bahamian context is an absence of widely-held accounting tools,” the report said.

“It is difficult to imagine how a Central Revenue Agency might train the auditors it requires to audit remittances and refund claims; it is virtually impossible to conceive how the private sector might martial the personnel and resources to discharge its would-be new obligation to maintain proper books and records.”

And the Nassau Institute and Mr Godsell concluded: “A conservative estimate of the time to comply in a country new to VAT, which requires monthly filing and which is populated by many relatively small businesses, and new to the institution of maintaining credible books and records, may be twice the Latin America and Caribbean average.

“Thus, we estimate 384 hours of compliance time for the private sector. At the aforementioned rate for accounting staff of $31.50 per hour, and given the aforementioned estimate of 8,515 registrants, we can determine an estimate for total private sector compliance costs.

“Multiplying the number of hours of compliance time per registrant (8,515) by the number of hours of compliance time for the average firm (384 hours), and then multiplying the product by the rate per hour, yields a private sector compliance cost estimate of $103 million per year.”