The Tribune

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

A leading investment banker has expressed concern over the potential for “creeping” increases to the Value-Added Tax (VAT) rate, suggesting the Government needs to broaden its tax base and wealthier individuals more “without scaring them away”.

In an interview with Tribune Business to announce Royal Fidelity’s first annual Bahamas Economic Outlook (BEO) conference, which is scheduled for February 3, Michael Anderson, acknowledged that successive increases in the current 7.5 per cent VAT rate could become problematic over time.

“VAT is a drag, there is no doubt about it,” RoyalFidelity Merchant Bank & Trust’s president said. “When it costs 7.5 per cent more to do things, it’s going to be a drag.

“Does it really stop it? No, I think it will carry on regardless. I think people are maybe going to need even more capital to do what they need to do compared to before when they didn’t have to pay VAT.

“At 7.5 per cent I think VAT is something we can deal with. My worry is what happens later. I’m hoping we don’t start to see a creeping VAT increase, which could become problematic over time,” Mr Anderson added.

“I think as a country we need to understand that we need to raise tax revenues where we can, and if it helps us use that money to repay our debt, rebuild our infrastructure and put ourselves in a better position, it could end up being a positive.”

One of the major criticisms of VAT is that, similar to Customs duties, it is a regressive tax, with poorer Bahamians paying a disproportinately higher percentage of their income in consumptions taxes than their wealthier counterparts.

Alluding to this theme, Mr Anderson continued: “As much as theGovernment needs to start to enforce what they have put in place, I think they may need to think how they need to tax going forward - to actually take on a broader base, and maybe tax some of the wealthier people a bit more without actually scaring them away because we need wealthy people here.”

Several persons, including PLP MP Gregory Moss, have argued that the Government should instead introduce an income tax, on the grounds that it would be fairer with the levy related to people’s ability to pay

The Bahamas has no income tax, corporate tax or capital gains tax, but several observers have suggested privately to Tribune Business that the nature of the information sought on the VAT registration forms indicates an income tax - either personal or corporate - is just a matter of time.

However, introducing a Bahamian income tax would be a fundamental change, and potentially deter numerous foreign investors and real estate buyers who are attracted to this nation’s shores by its absence.

Mr Anderson, meanwhile, said the prevailing low interest rate environment continues to drive Bahamian investors towards the higher rates of return on offer in the capital markets.

“In terms of people’s willingness to invest beyond where they currently invest, I think the low interest rate environment we are in at the moment, and globally as well as here, is forcing people to look for alternatives,” he said.

“Bank deposits traditionally used to be where people put their money, but I think people are finding increasingly that they don’t get an adequate return on their money. I think we are seeing an increasing number of people investing in the capital markets and securities to take advantage of the better returns, and I think that will continue until interest rates reach much higher.”