The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Tax Coalition co-chair has questioned the rationale for the Bahamas becoming a full World Trade Organisation (WTO) member, given that it cannot compete with lower cost Caribbean rivals.

Robert Myers questioned “what’s the point of going through” associated upheaval, such as the need to largely replace the existing Customs duty regime, if the Bahamian economy and its companies did not become more competitive as a result of WTO membership.

The VTrade and Caribbean Landscaping chief said the need to replace “hundreds of millions of dollars” in Customs duties inevitably made tax/fiscal reform “more challenging”, and narrowed the options available to the Bahamas.

Acknowledging that the Coalition for Responsible Taxation’s favoured payroll tax option became more difficult when the WTO’s implications were factored into the equation, Mr Myers questioned how the Government would respond if joining the rules-based trading organisation failed to make the economy more competitive.

“If we’re not competitive now, because of power prices, labour prices, labour productivity and have no raw materials, what makes us think we can compete under the WTO?” Mr Myers asked.

“What’s going to be cheaper than the Dominican Republic and Puerto Rico, where costs are one-third of what ours are? I’d like to hear from the Government, its position on that. What’s the plan if we go through that [WTO accession], and can’t produce something efficiently and competitively? What’s the point of going through all that?”

Mr Myers is not the first to question whether full WTO membership would produce a net benefit to the Bahamas and its economy. This nation’s tax reform direction, and the finer details, will at least in part be influenced by the WTO, which requires that Customs duties be lowered significantly (in this country’s case) because they are barriers to trade.

One of the factors why the Government has leaned so heavily in favour of Value-Added Tax (VAT) is because it is projected to generate the revenues necessary to replace those lost by Customs duty rate cuts.

The Coalition’s initially proposed 5 per cent payroll tax was forecast as generating $190 million, in comparison to the $500 million gross from VAT, some $300-$320 million of which would have replaced foregone Customs Duties.

Mr Myers acknowledged the implications WTO would have for the proposed payroll tax, telling Tribune Business: “We have good to reasonable compliance with NIB payments, and can tie all that in [with a payroll tax].

“Where that may fall short may depend on what happens with WTO. We have additional pressures from WTO to eliminate duties, and a payroll tax becomes more challenging. Getting duties down to 10 per cent, which is ostensibly what they are looking to do, is challenging as you’ve got to make up hundreds of millions of dollars from somewhere else.”

Some observers believe that WTO membership is not worth the pain, especially since the Bahamas is not a major producer or exporter of physical commodities. They argue that joining will fundamentally change the rules for how business is conducted in the Bahamas, opening up key markets to foreign businesses and squeezing locals out, while also eroding this nation’s sovereignty.

But those on the other side of the debate argue that the Bahamas cannot be ‘isolationist’, as it is the only Western Hemisphere nation that is not a full WTO member. They believe membership will force the Bahamas to modernise its economy, and ensure its exporters - and those to come - will be able to access overseas markets under predictable trade rules, and not be subject to discriminatory treatment at a whim.

Mr Myers, meanwhile, suggested that a payroll tax would likely enjoy 65-70 per cent compliance, given that the National Insurance Board, which would collect and administer it, enjoys similar with its existing contributions (self-employed persons excepted).

“We know the NIB and payroll tax is going to be collected around 70 per cent,” he added. “That’s pretty efficient compared to what’s happening now with two potentially easy taxes, Customs duties and real property tax, where collection is at less than 50 per cent. That is atrocious.”

The Tax Coalition co-chair was speaking after the Barbados Central Bank governor, Dr DeLisle Worrell, again indicated he was likely to officially recommend that the Bahamas’s southern neighbour abandon VAT.

He described the system as a “mess” and too complicated, arguing that it was “inappropriate” for Barbados’s tourism industry and an economy that imported the majority of its raw materials - characteristics it shares with the Bahamas.

Dr Worrell instead advocated that Barbados implement a sales tax, adding that VAT had become too complex because of the number of ‘exemptions’ that had been obtained by various industries.

Mr Myers said he was unsure whether a sales tax, which is only levied on the end user, would be much different from a VAT that taxes the ‘value added’ at each stage of production.

He agreed, though, that the tax base needed to be kept as wide as possible to ensure minimal rates, and that exemptions should be minimised to achieve this.

Mr Myers told Tribune Business that VAT at a 5-7.5 per cent rate, with a wide base, minimal exemptions and the elimination of other, inefficient taxes, would have some merit in the Bahamas.

“From that [exemptions] standpoint, I don’t think anyone wants to make that mistake,” he said. “A lower VAT rate with no exemptions, and the impact mitigated with a social safety net and the elimination of ineffective taxes, it’s worth looking at as an alternative to payroll tax if it gets into that realm.

“Get it down to 5-7.5 per cent, keeping it wide, keeping it clean, getting rid of ineffective taxes and keeping a wide tax base, and it starts to have some merit.”

Mr Myers added that Barbados’s VAT was “very complex and failing miserably”, and said the Bahamas needed to “take a page out of New Zealand’s hymn sheet. New Zealand has a low rate, eliminated a bunch of inefficient taxes, made it extremely simple and got good compliance”.