The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The IMF last night called on the government to raise real property tax rates while again forecasting that it will miss its 2018-2019 deficit target by a sum equal to 0.5 percent of GDP.

The International Monetary Fund (IMF), in its full Article IV report on The Bahamas, called on the government to “see through” its just-launched initiative to develop a comprehensive property database and, from that, tax bills based on market valuations.

Besides urging stepped-up reform in that area, the fund reiterated its previous suggestion that The Bahamas look at income taxation over “the medium term” both as a means to achieve a more equitable system and potentially replace the existing business license fee.

While it is unclear whether the IMF was referring to personal or corporate income taxation, its Article IV report said introducing such a progressive taxation system would also help “contain increasing profit repatriation” out of The Bahamas by non-residents.

The government, based on the Article IV report, already appears to be implementing much of what has been recommended by the IMF. Besides the real property tax modernisation initiative, it is also moving to assess whether it is getting value for money from all the tax breaks granted to investors - something that the fund says costs Caribbean nations 3.5 percent of their GDP.

And, despite the government’s optimism, the IMF is more pessimistic on whether and when the targets set out in the Fiscal Responsibility Bill will be hit. It is forecasting that that the “fiscal balance” goal will only be achieved in 2022-2023, later than the government’s own forecast, while the debt-to-GDP ratio will remain above the 50 percent target through 2024-2025.

Focusing on revenue enhancement, the IMF report said: “In the short-term, staff encouraged seeing through efforts to complete a comprehensive land/property registry and recommended building comprehensive real estate price indices to provide a basis for market-value-based property taxation, and consider an increase in its tax rate or rate structure.”

While the Government is moving ahead with the former, K P Turnquest, deputy prime minister, said there were no plans to increase real property tax rates during the recent 2019-2020 Budget debate. And no increases were introduced for the just-started fiscal year.

The IMF, though, continues to prod the Government to consider wider tax reforms. “Tax policy could play a better role in achieving public policy objectives, including greater equality in income distribution,” it argued. “The Bahamas does not levy taxes on income, capital gains or inheritance...

“Global trends in taxation present an opportunity for a comprehensive approach to reform the tax system with a view to increasing its efficiency and enhancing progressivity. For the medium-term, income taxation can help achieve a more equitable income distribution, reduce distortions arising from a tiered Business License fee system (especially if applied in the context of the VAT), and contain the increasing non-residents’ profit repatriation.”

Mr Turnquest repeatedly stated prior to the Budget that the Government had no plans to introduce any form of income tax. However, the taxation system review by Deloitte & Touche’s UK arm has stalled due to the need for The Bahamas to prioritise compliance with the European Union’s (EU) anti-tax evasion drive.

The deputy prime minister also voiced optimism during the Budget debate that the Government would hit its 1.8 percent of GDP forecast for the 2018-2019 fiscal deficit, coming in slightly below the $237m target at around $229m.

The IMF, though, is more sceptical, stating in its Article IV report: “For the fiscal year, staff projects that the deficit target will be missed by 0.5 percentage point of GDP.

“Staff underscored the importance of delivering on the full target to rebuild fiscal buffers and boost policy credibility, and therefore urged the Government to limit new hiring to essential staff, rein in low-priority current spending, and reprioritize capital expenditure to cover for the projected shortfall.”

A 0.5 percentage point of GDP miss is equivalent to just over $50m, which would put the final 2018-2019 “red ink” around $280-$290m. “Additional fiscal effort is necessary to meet the Fiscal Responsibility Act targets over the medium term,” the IMF added.

“Absent additional measures, the fiscal balance is projected to reach the Fiscal Responsibility Act target only in fiscal year 2022-2023, and the debt ratio will remain above 50 percent of GDP (the Fiscal Responsibility Act target) beyond fiscal year 2024-2025.”

Still, the IMF backed the Government’s decision to review its investor incentives regime. “While efficiently designed tax incentives can play a role in attracting investment, they need to be weighed carefully against current and future costs,” it explained.

“Studies estimate that tax expenditures amount to, on average, 3.5 percent of GDP in the region, narrowing the tax base and creating distortions. Staff recommended introducing a periodic quantification and review of tax expenditures and other incentives, noting that such a review can rationalise incentives policy, raise revenue, and increase transparency and accountability.”