The Tribune

• In this third of a series of articles, Hubert Edwards says its own needs rather than outside agendas must guide The Bahamas when it comes to tax reform.

This will be a very interesting year economically. Continued COVID-19 headwinds, the first true Budget from the new administration and, consequently, the change in “ownership” of prevailing policy positions will definitely cause a shift in perspective.

How effectively we manage this will be critical to protecting revenues. With just under five months to the May budget, the conversations on taxation will become more pointed with calls for reforms. I am hoping that the fragile economic improvement being experienced will hold and improve. However, what I am confident in is that the fundamental issues will not go away.

As I stated in the second part of this series: “No one can claim to have clear answers to the most optimal solutions that will fix the challenges and protect the country. I certainly do not. What I seek to do is to draw some awareness to the issues surrounding this, and why narrow conversations will not serve the cause of the country. Among other important matters, a national debt of $10bn, fiscal deficits averaging $500m, 18 percent of government spending paying interest on loans, and a narrow 18 percent revenue-to-GDP ratio, the time is “perfect” to consider whether this low tax intake is beneficial for the country”. That, coupled with the continued fall-out in tourism, renders the discourse urgent.

And, back in March, I noted: “The EU previously indicated that it had its foot on the neck of The Bahamas, a foot it will not move until it gets its way. This, together with the idea that small tweaks will not get a jurisdiction off the blacklisting, hold important implications for The Bahamas. Will we be forced to implement corporate income tax to accommodate the survival of the financial services industry?” This remains relevant, and important, but focuses on potential external issues. Our focus must shift internally. Consider a neighbour drawing the conclusion that you are hungry, and deciding to provide you with food. This neighbour with the best of intentions is likely to provide you with the type of food he has, the kind of food he likes and the food he thinks is best suited for you. This is akin to the proposals by the International Monetary Fund (IMF). What they are proposing might not be in our best interest. Consider that you become acutely aware of your own hunger and set out to satisfy it. You are likely to select what is available and best for you. The food may not be ideal, but you will avoid anything detrimental to your health such as foods that would aggravate allergies. This is why the response to this tax debate must be internally focused. What is in the best interest of The Bahamas? What will satisfy the hunger for additional revenue without killing the important value proposition that the current tax regime is designed to create.

This was made clear in my March 2021 piece. “While there are great arguments to be made for reclassification of current taxes and charges such that the financial impact of any tax burden remains relatively unchanged, it is my view that the introduction of corporate income tax of any amount fundamentally shifts the value proposition of the financial services industry (offshore segment). This is why, in my opinion, the current public discussions on taxation are inadequate. Forced into implementing this form of income tax, the country will have to face its challenges without having the chance for careful, deliberate analysis and full comprehensive assessments”. With this reality held firmly in our line of sight, let me be bold in saying we must forget, for the time being, about the IMF, EU, OECD, US. Forget every single entity that may be pushing any agenda that does not align with what our local needs are, and let us focus on our taxation from an internal perspective only.

In The Bahamas, the tax regime is largely regressive, being based on consumption taxes. Consequently, the individual earning less pays proportionately more of their income in taxes. The question is whether the country needs to switch to a progressive tax system which is more equitable to taxpayers, how will that be achieved and its potential impact on the economy. One of the prevailing ideas, often proffered, is that the current regressive system needs to be more progressive with the underlying view that there are things that can be done to achieve it. The reality, from my perspective, is that this will never be achieved. The system will always be regressive. The current regime may be highly efficient, convenient and certain, all being fundamental principles for a tax regime. It is, however, not likely to be seen as equitable and, at current levels, sufficient. Equity and sufficiency are the first and most important internal considerations that reform would need to address, with the latter being most critical in my opinion. Tinkering with a regressive tax system will not make it progressive or more equitable. However, does this mean that a progressive tax system is the right one for The Bahamas? The answer is not clear. A system that implements personal and/or corporate income taxes comes with a number of issues that could drastically affect not just the value proposition of the country but, critically, further erode the sufficiency of government revenues especially when it comes to practical, legal tax avoidance by companies.

Without delving into this too much at this stage, let us consider taxation needs from the perspective of the obligations with which we have to contend. The place to start would be to determine whether or not there is sufficient headroom in The Bahamas’ taxing capacity such that, if there is a need for reasonable tax increases, it could be done. My research shows, based on a 2013 IMF report undertaken when the country was transitioning to VAT, that The Bahamas was using only 40 percent of its tax capacity. The same report places the country at the lower performance end of the scale at 92 of 98 countries in its tax effort – the extent to which it has measures to maximise its tax capacity. There is no reason to believe there have been drastic changes since then, and this would therefore suggest The Bahamas has available taxation capacity. The challenge for policymakers is where to draw the line. What is unclear is that while consumption tax rates, such as VAT, are in the high teens across the Caribbean, to what extent could The Bahamas actually increase such levies? To what extent would policymakers be comfortable increasing them, and will there be any real economic fall-out from such moves. The latter point plays into arguments that suggest increases in taxation slow economic growth.

These arguments, while definitely leaning to the conclusion that the current tax regime provides insufficient revenue for effective management of the economy, do not immediately argue for increases in taxation or system changes. This is the foundation for an effective review, a focused study, and careful analysis with any determined reforms being informed by these actions and strategically implemented to protect The Bahamas’ interests. This approach is necessary to arrest the ongoing narrow conversations, often driven by abstract information and personal convictions, neither of which are useful if we desire to secure sound decisions. As an example, a call for income tax may be debunked by such studies. On the other hand, the studies may identify areas of weaknesses in the current regime, unearth workable options or highlight clear limitations, and therefore suggest what the optimal mix of both regressive and progressive taxes may be. The tax discussion, though, turns on the simple question: Does the Government need additional tax revenue, and where will it get that revenue? Is the revenue currently earned sufficient to meet the Government’s economic objectives?

Consider the 2021-2022 Budget projections. Revenue was projected at $2.244bn, and expenditure at $3.198bn. Without any deep analysis, there is a $951m deficit that is unfunded by taxation and will therefore require debt financing. This provides a glimpse into the fact that The Bahamas’ tax revenue is not sufficient to meet its obligations, which has been exacerbated by COVID-19’s impact. One could argue that 2021-2022 is in the middle of the greatest revenue downturn experiences by The Bahamas, and such assertions would be accurate. However, let us remind ourselves that pre-pandemic we also had significant deficits (2017: $660m; 2018: $415m; 2019: $215m) and, in fact, had them for many decades. The numbers show that over a sustained period revenue has never been sufficient. This is supported by the narrow percentage of revenue-to-GDP, which over the last five years has been as low as 15.3 percent (pandemic impacted) and projected to be only 18% percent in the current fiscal year. These low percentages must be assessed against the 25 percent revenue-to GDP target declared by the Prime Minister. We are currently seven percentage points below that benchmark, based on projections, not actuals. The very process of budgeting anticipates insufficient revenue. Therefore, in my opinion, the appropriate starting point for any discussion is to ask why it has been impossible for government to collect more of the revenue it needs to run the country.

While the current discussion about minimum corporate income tax rates holds important strategic implications for The Bahamas, I believe it is insufficient tax headroom to move the country forward that is the most important issue. How do we broaden this conversation? How do we move from the point we are at now to where we can find common ground and consensus? How do we convey there is an urgent need? I believe we start by refusing to embrace the emotional impulses that come with such a discussion. We must be willing and open to consider all the possibilities. We must recognise that the discussion is about broad-based reforms, not an abstract set of arguments, of which taxation is but one. We cannot be limited to one or two ideas, but must contemplate what reform looks like in totality.

I believe that the time is right to start national discussions that confront the structural impediments and tax realities head-on. The implications of any potential changes are significant, and must therefore be diligently assessed. While the pressures from the EU and other external agencies remain relevant, their demands are not the most compelling issue we face. Their actions could certainly worsen our situation, but internal structural weaknesses are much more substantial at this point, and these are what The Bahamas will need to grapple with urgently. Our success is dependent on it.

NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. He specialises in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management; internal audit and policy and procedures development; regulatory consulting; anti-money laundering; accounting; and strategic planning.