The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The deputy prime minister yesterday warned that following the IMF’s income tax call would likely result in “a significantly higher tax burden” for middle class Bahamians.

KP Turnquest told Tribune Business that there would likely be a major shift, or rebalancing, of the tax burden that would work against middle class and working Bahamians should The Bahamas heed the International Monetary Fund’s (IMF) oft-repeated suggestion that it consider switching to such a taxation system.

He added that The Bahamas’ relatively small 400,000 population was another factor working against the imposition of an income tax, and warned that this nation had to guard against “complicated tax models” being pushed by external forces that took no account of the practical realities on the ground.

Again ruling out any plans “at present” to introduce a Bahamian income tax, either corporate or personal, Mr Turnquest said the government will also not be taking up the IMF’s advice to raise real property tax rates.

He added that the Ministry of Finance, together with the Department of Inland Revenue, is instead focused on cutting the $480m real property tax arrears mountain to an “irreducible number” through a combination of enforcement measures and legal reforms that passed with the 2019-2020 Budget.

Mr Turnquest explained that these gave the Government the ability to write-off “erroneous and over-charged” billings after clauses in the Financial Administration and Audit Act that previously prevented it from doing so were replaced.

He conceded, though, that the IMF’s decision to cut The Bahamas’ 2019 economic growth forecast to 1.8 percent was “not unexpected” given gloomier worldwide developments, and said the Government’s 2019-2020 Budget estimates had been based on more conservative figures.

Voicing optimism that The Bahamas could beat the revised projections if projects such as the Grand Lucayan purchase and Carnival cruise port came to fruition quickly, Mr Turnquest said the Government was sticking to its 2018-2019 deficit target and three-year consolidation goals despite IMF pessimism that these will take longer to achieve.

And, while the Ministry of Finance’s economics unit continues to monitor global tax developments for any changes that may impact The Bahamas’ current system, the deputy prime minister said this nation faces no pressure to implement a radical overhaul via income tax or any other option.

“As we look globally, countries are moving to flat, simplified tax systems,” Mr Turnquest told Tribune Business. “That’s what we have in The Bahamas; a simple flat tax through VAT, Customs Duties and Stamp Duty.

“For us to try and adopt some kind of complicated tax model to satisfy the external view of what we ought to be doing complicates the situation on the ground. There’s only 400,000 of us here.

“When you talk about progressive taxation you have to take a serious look at what that means. The burden would potentially shift towards the middle class from the lower class. Any progressive tax has to take these things into consideration,” he continued.

“Given the make up of our economy, our economic class, it would very difficult to see how we could make that work without a significantly higher tax burden.

“We’ll do the modelling and see how that works out, and be prepared for any change in global circumstance that may cause us to look at these things more aggressively. At the moment, we have no intention of implementing any kind of corporate or income tax. That’s the position of the Government.”

The IMF’s latest Article IV report argued that introducing an income tax over “the medium term” will create a Bahamian tax system that is more equitable and fair, with the payment burden based on each individual’s ability to pay.

It added that such a change could also lead to a replacement for the annual Business Licence fee, and help “contain increasing profit repatriation” out of The Bahamas by non-residents.

The Bahamas’ existing 50-year tax structure, which is largely based on consumption and property, is regressive in that it imposes the same burden on rich and poor Bahamians. With much of the existing system acting as a tax on the cost of living, lower income Bahamians pay a disproportionate amount of tax from their earnings compared to wealthier counterparts.

While they would likely be among the greatest income tax beneficiaries, the burden will likely increase for middle class Bahamians who comprise the majority of this nation’s 220,000-strong workforce.

Income tax systems also tend to be complex and incur high administrative costs, which was one of the key reasons they were rejected in favour of VAT, while there is no history or culture of paying income taxes in The Bahamas.

Mr Turnquest, meanwhile, confirmed that the Government is rejecting another IMF recommendation to raise real property tax rates. Instead, he said: “We are focused on compliance and ensuring we get the assessment correct, and that we have every taxable property on the tax roll and being billed the proper tax.

“The focus is on the project we’ve launched and having that completed as soon as possible; potentially in the fall. We anticipate that will result in a significant bump up in tax revenue overall. On the arrears issue we have inherited, we continue to work on that to bring that down and are taking some enforcement action to realise security on outstanding arrears.

“We will do that as best we can to reduce arrears to an irreducible number and collect that outstanding tax from those people.”

While that accelerates, and carries on, initiatives started by the Minnis administration’s predecessor, Mr Turnquest said the $480m real property tax arrears number cited by the Auditor General likely contained errors and amounts that are uncollectable.

“In some instances there are duplications, and in some instances there are properties that are not taxable,” he explained. “The list needs to be cleaned up, and that’s part of the process.

“One of the amendments we passed gives the Ministry the ability to write off erroneous and over-charged bills it will never collect, which before it could never write-off as it was constrained by the Financial Administration and Audit Act.”

Mr Turnquest added that the IMF’s decision to cut The Bahamas’ projected 2019 GDP growth from 2.1 percent to 1.8 percent was “not unexpected” and “in line” with negative global developments that include the US-China trade war, Brexit and China’s slowing.

“We indicated in the Budget debate there would be some slowing from the original projection,” he told Tribune Business. “When you look at historical growth rates for the country it’s [1.8 percent] not out of line and exceeds the long-term rate. We’re in a positive trend, and may beat the expectation if some of the projects we’ve lined up come to fruition in time.”

The deputy prime minister identified these as the Carnival and ITM/Royal Caribbean projects for Grand Bahama, together with Nassau cruise port’s planned overhaul, the Hurricane Hole redevelopment and Gold Wynn.

“We accept that there is likely to be some push back on original growth projections for the year, and want to be realistic and practical about this thing,” he reiterated. “If some of these projects kick-off we may yet hit the original targets.”

Mr Turnquest also remained optimistic that the Government will meet its 2018-2019 deficit target despite the IMF’s projection of a $50m, or 0.5 percent of GDP, miss. The Fund also forecast that the “fiscal balance” and 50 percent debt-to-GDP ratio will take longer than anticipated to hit.

“We managed our situation as best we could through the end of the year and we anticipate we should still be within the Fiscal Responsibility Act’s compliance/tolerance rates, so we’re very confident,” he said.

Mr Turnquest said the Government retained similar confidence in its three-year fiscal consolidation plan, and added that the Fiscal Responsibility Council was supposed to have been appointed and sworn in this week. He declined to name its five members or the chair.