The Tribune

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

A senior Ministry of Finance official says it is “too early” to discuss whether the Government will have to increase the 7.5 per cent Value-Added Tax (VAT) rate, adding that this nation’s World Trade Organisation (WTO) accession process does not “in and of itself” translate into a rise.

John Rolle, the Ministry of Finance’s financial secretary, said: “I think it’s too early to discuss changes in the rate at this point.”

Speaking during a Ministry of Finance VAT/Tariff working session,. Mr Rolle noted that while accession to full WTO membership would call for a reduction in import tariff rates, this did not necessarily mean the VAT rate would have to be increased as a result to cover the revenue shortfall.

“Once the government has done its reform, the WTO does not in and of itself translate into a tax increase,” said Mr Rolle.

This is different to what he told Tribune Business in a June 30 interview, as Mr Rolle said then that the VAT rate was likely to be increased “in the not too distant future”.

He acknowledged that the proposed 7.5 per cent rate would have to rise to compensate for the Customs/Excise tax cuts that will be required for full WTO membership.

While unable to predict the timing, and extent, of any VAT rate increase, Mr Rolle said whether it actually happened would also depend on the success of the Government’s other revenue reforms.

Asked by Tribune Business then whether the VAT rate would soon have to be increased, the Financial Secretary said “the experience” with the tax in its initial six months would be another key determinant.

“It’s difficult to put a timeline on when that will happen,” Mr Rolle said of a VAT rate increase. “There is expectation that it will happen in the not too distant future.”

Border tax cuts will be among the commitments the Bahamas has to make to become a full WTO member, as they are viewed as barriers to trade.

The scale of the revenue adjustment that will be be necessary is illustrated by the 2014-2015 Budget, which shows that Customs and Excise taxes are projected to collectively generate more than $714 million in revenue for the Government.

This is equivalent to 43.7 per cent of the forecast $1.633 billion in total tax revenue for the upcoming Budget year, and 36.4 per cent of the $1.963 billion in collective tax and fee income.

Either way, Customs and Excise Tax revenues account for the largest share of government income, and how much has to be replaced will depend heavily on the skills of the Bahamian WTO negotiating team.

The Government will definitely have to be thinking about how to compensate for this,” Mr Rolle added. “That’s [a VAT rate rise] a possibility, as well as depending on the reforms that we do that improve revenue yields.”

An International Monetary Fund (IMF) study conducted in April this year outlined the Government’s plans on the interaction between VAT and tariff rates.

It said: “To determine the final revenue impact of the Bill, the interaction of VAT with tariff rates has to be resolved.

“The authorities’ intention is to make a corresponding reduction in tariff rates as the VAT becomes effective. The government’s plan is basically to reduce all tariff rates that are currently at 10 per cent or below to zero, and adjust downwards other tariffs by 10 percentage points.

Meanwhile, commenting on the Government’s decision to ‘exempt’ public health care while taxing private healthcare services under VAT, Mr Rolle said: “I should point out that in all of this the Government is going to be paying VAT, too. For that reason, the Government can’t claim credits against it self. Those are cases where the service is free.”

Mr Rolle said that to provide a tax on a free service could create challenges for many Bahamians. Under the revised 7.5 per cent VAT proposal, health services provided by a public health care facility, such as Princess Margaret Hospital (PMH) or the Government-run clinics, will be treated as VAT ‘exempt’.

This means that patients will not have to pay the 7.5 per cent rate on top of their bills, although the health services provider in question will be unable to recover the tax paid on their inputs.

Yet in the case of private healthcare services, such as those provided by BISX-listed Doctors Hospital and private physicians, these activities will be considered ‘VAT-able’.

Regarding the Government’s decision to reverse course on its treatment of Bahamian health and property/casualty insurance premiums, Mr Rolle noted that between January and June 2015, all insurance products would be VAT ‘exempt’.

The Financial Secretary said: “This is really taking on board recommendations to allow the insurance sector to transition. We will work with the sector during the transition period. Initially all of the insurance products were off the table.”

Mr Rolle later added: “That was one of the recommendations that was put to us when we went through the final stage of our consultation; the advice we received from the New Zealand experts. In a number of countries, not just in New Zealand, there is VAT on insurance.”

Howard Knowles, the Bahamas Insurance Association’s (BIA) chairman, in a recent interview with Tribune Business, said the increase in insurance premium costs come July 1 next year would likely cause both individuals and companies to drop their policy coverage.