The Tribune

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

THE Bahamas will have to replace almost $200 million or 10.5 per cent of government revenues in a "realistic scenario" for WTO accession, a consultant has revealed.

Dr Derk Bienen, who helped drafted a government-funded study on the implications of becoming a full World Trade Organisation (WTO) member, illustrated the scale of the tax reform challenge facing the Bahamas when it starts to eliminate/reduce import tariffs that are seen as barriers to trade.

"In the current situation, you would have collectable duties of about $540 million," Dr Bienen explained. "If the realistic scenario comes into play you would be collecting $340 million, and so you would have a reduction of $196 million or, in percentage terms, 10.5 per cent of government revenues.

"That is just the reduction in duties. That is the effect of the increased level of imports and the reduced level of tariffs." Dr Bienen added that with many tariff lines reduced or eliminated, the Bahamas level of imports would increase, generating more VAT and Excise tax revenues once get passed the 'port of entry'.

This may partially compensate for the revenues foregone in reducing Customs duties, but reform and restructuring of the Bahamas' existing tax system will be one of the main WTO accession challenges that will impact virtually every Bahamian.

Among the Government's reform options is an increase to the existing 7.5 per cent Value-Added Tax (VAT) rate, or the introduction of new taxes and/or increases to other existing levies. The International Monetary Fund (IMF) last year suggested the Bahamas introduce a low-rate corporate tax to compensate for the WTO-related loss of revenue.

Dr Bienen told a WTO panel discussion at the University of the Bahamas (UoB) Harry C Moore library that Bahamian tariff rates are among the highest in the world, but around one-third of potential revenues are given up via tax break incentives and concessions

He added that all Bahamian tariff rates do not necessarily have to be lowered or eliminated, and this nation may be given time to phase-in the reductions once its terms of accession are determined.

"Duties in government revenues is still sizeable, but have greatly reduced overtime. In 2016-2017 in the Budget, the share of import duties was 15.4 per cent of total government revenues. This means that, in a worst case, a theoretical case, if all tariffs would have to be set at zero, government revenue would be reduced by 15.4 per cent and that's kind of an extreme theoretical limit," he added.

The Government-commissioned 'vulnerability study', highlighting the Bahamas' main weaknesses in a WTO accession, was prepared using 2015 data.

Dr Bienen said the revenue impacts were derived from a comparison of this nation's economy with Seychelles, which joined the WTO in 2015, and the previous offer prepared by the Bahamas government.

"We used a combination of those factors to come up with a scenario of what we thought was a likely outcome of the negotiations. That was then put into the model to calculate the revenue," he explained.

"What is also important is in the Bahamas there are high statutory tariffs and, at the same time, there are a lot of exemptions, and so many of those duties that are payable according to the statutory rates are not payable.

"It is a common practice in countries to have those exemptions in place, but the Bahamian case is a bit extreme. One third of the duty that is not being collected is quite a lot, and we took that into consideration."

Dr Bienen said the Bahamas faces four main vulnerabilities with respect to WTO - the reduction in tariffs and an immediate impact on government revenues; reduced protection for domestic industries behind the tariff wall; increased competition in both the goods and services sectors; and an imbalance of trade.

He added that WTO members are bound to respect the rules that govern trade-related laws and regulations. "You cannot do as you please. When you look at the most favoured nation principal (MFN), you could not - even if you wanted - apply one tariff on the imports of one county and one tariff on the imports of another," said Dr Bienen.

He added that the Bahamas faces 'limited vulnerabilities' in the service sector, but said WTO will not provide better market access or export opportunities than those granted to other countries. "They apply their tariffs and conditions on exports from the Bahamas just as they do any other country," Dr Bienen said.