The Tribune

By YOURI KEMP

Tribune Business Reporter

ykemp@tribunemedia.net

A leading financial analyst says a VAT rate hike to 15 percent is "inevitable" within two years of the next election as he called for a shift to a more progressive system via personal and corporate income tax.

Anthony Ferguson, CFAL's principal, speaking at a webinar hosted by the Chartered Financial Analyst (CFA) Society of The Bahamas, argued that the business licence fee needs to be converted to a corporate income tax levied on net profits.

Urging a shift away from regressive, consumption-based taxes such as VAT and import tariffs, he added that even if the current Bahamian generation do not end up paying a personal income tax then "I can almost assure you" the next one will.

The private sector has for years urged reform of the business licence fee, which is levied on revenue turnover. It has argued that such a levy penalises high turnover, low margin businesses such as food stores and gas stations while favouring low revenue, high margin services businesses. And many companies say they pay more in business licence fees than they make in annual profit.

Noting these distortionary effects, Mr Ferguson said: "We have in certain sectors, like the insurance sector in particular, we pay three percent premium tax on the revenues, just like business licence, etc. What is does is it causes business to not be able to manage their cash flow. It discourages the entrepreneurship because, if someone is getting started, they have to pay the duty up-front and then try to sell that afterwards.

"In my opinion I think we need to convert the business licence into a corporate tax and, at some point - we can delay it - but if, at some point and time in my life, if I don't pay income tax then I can almost assure you that my daughter or her kids one day will have to pay the income tax because we would not have the working class resource to support a taxation system, and so we are going to have to adjust that."

He added: "The average age in this country is still under 40, but the impact on NIB (National Insurance Board) as we all can see is significant where they are now paying out more than they are actually earning plus the contribution that's being made.

"So the fact of the matter is we have a $2bn unfunded pension liability out there. All of these things have to be funded; it can't be funded by duties. The only place it will be funded is by either income tax, corporate tax or a combination thereof.

"At least with the income tax you can always say anyone under $12,000 or $15,000, which is where the average salary is in this country, don't have to pay taxes. So you can make it a little bit more progressive. Right now we pay 12 percent VAT," Mr Ferguson continued.

"I submit to you that within two years after the next election, whomever is elected, they would probably have to increase the VAT to 15 percent. That's inevitable, if not higher, so we will find ourselves in a place where we have to be reactive as opposed to proactive in terms of planning out how we wish to manage our economy."

"So I would strongly recommend to the government to convert, with immediate effect, the business license into a corporate tax. Make it on net and then adjust from there. But at some point it has to come."