The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) has urged the Government to increase motor vehicle licence fees by at least 20 per cent, arguing that this would improve the “fairness and progressivity” of Bahamian taxation.

The Fund, in a June 2013 study on the Bahamas entitled ‘Tax Reforms for Increased Buoyancy’, said a “more ambitious” tax structure for passenger vehicles would help combat tax avoidance/evasion by high income earners.

It suggested that a 20 per cent increase in the lowest motor vehicle licence rate, from $150 per annum to $180, coupled with better auto registration and enforcement, could boost this revenue source’s yield to 0.5 per cent of gross domestic product - $40 million - per annum.

Calling for higher rates for larger vehicles, such as SUVs, the IMF said: “Imposing more ambitious annual circulation tax on passenger vehicles would increase collections from visible wealth. Overall, it would improve the tax system’s fairness and progressivity.”

The IMF’s focus on the auto industry as a fairly easy source of increased revenue thus backs previous assertions by the Bahamas Motor Dealers Association’s (BMDA) president, Fred Albury.

He has told Tribune Business some $30 million in extra annual revenues could be generated via a combination of doubling the existing Driver’s Licence fee; imposing a five-year old age limit on imported used vehicles; and increasing its petroleum tax take by $0.15 per gallon. These proposals have also been embraced by the Coalition for Responsible Taxation.

The IMF report, meanwhile, said the Road Traffic Department estimated that 85 per cent of the Bahamas’ 125,000 vehicle population fell into the lowest $150 annual licence bracket.

Of the remainder, some 10 per cent attracted an annual $550 motor vehicle licence rate, and 5 per cent the highest rate of $700 per annum.

“The projected revenue of $27.2 million is close to vehicle license collections of $28.4 million in 2011,” the IMF added.

“By increasing the circulation tax rates by 20 per cent, collections could easily reach 0.41 per cent of GDP, and with improved registration and enforcement, the revenue importance of circulation tax could attain, over the short term, 0.5 per cent of GDP.”

Placing all this in context, the IMF said: “To put the proposed 20 per cent increase of the circulation tax [motor vehicle licence] in perspective, in Nassau, it costs approximately $90 to fill up a 60-litre fuel tank of a passenger car.

“Hence, the increase of the recurrent vehicle license from $150 to $180 (20 per cent increase) would be equivalent to the gas pump price of one-third of a tank filling. This is not an unaffordable amount, and policymakers should, therefore, express the circulation tax as a multiple of the gas pump price of a fuel tank filling.

“Motorists evidence a fairly price inelastic demand for gasoline, even in a rising fuel price environment. Finally, increasing gasoline taxes - together with higher circulation taxes - may just provide the necessary push for motorists to switch to the proposed Unified Bus System in Nassau, with the view to reducing costly congestion and rising fuel import bills.”

The IMF said that from 2009-2011, motor vehicle licence fee generated 72.4 per cent of all monies the Government derived from the auto industry.

They peaked at $28.36 million in 2011, but only accounted for an average 0.29 per cent of GDP over the decade to that year. The IMF is thus suggesting that motor vehicle licence fees could at least be increased by $10-$12 million per year, if its reforms are adopted.

“The authorities [government] are concerned about incomplete registration records of the active vehicle population, which undermines compliance and collections,” the IMF said.

“The authorities expressed a concern that taxing the informal sector is difficult, and that high income earners are inclined to understate transaction values or turnover for Business Licence fee. Equally, tax compliance with real property tax is low and arrears are mounting.”

The Fund added, though, that vehicles were a good indicator of hidden wealth. It described motor vehicle licences as “an effective instrument to tax incomes in economies plagued by informality or a tax system that ignores income as base”.