The Tribune

• Tells Bahamians: Be alive to income tax ‘possibilities’

• Multiple untapped options to avoid sovereign crisis

• Says seeking IMF assistance ‘not on the table’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor yesterday voiced optimism that The Bahamas is far from a sovereign debt default as it retains multiple revenue-raising options including an income tax.

John Rolle told a webinar organised by the Chartered Financial Analyst (CFGA) Society of The Bahamas that its members “should not be deriving any comfort” from the possibility that the Government will default on its $10.6bn direct debt when they assess the country’s prospects for returning to fiscal sustainability post-Dorian and COVID-19.

Emphasising that he was not advocating for The Bahamas to impose any type of income tax, personal, corporate or a combination of both, he nevertheless warned Bahamians to remain alive to the possibility that such a levy may be implemented over the medium to long-term should the Government’s financial needs become pressing.

“In theory you have already priced in some level or other of what the path to fiscal sustainability for The Bahamas looks like,” Mr Rolle told the CFA society members, suggesting that they will have subjected their models to stress testing and an evaluation of “extraordinary risks” facing this country.

“I can tell you that, in those extraordinary risks, you should not be deriving any comfort from a sovereign default because our sovereign has room to tap into much more resources if it needs to,” he added. “You need to be mindful of that when you look at the outlook, and what that means for the fiscal policy space.”

The Central Bank governor reiterated this view later in the webinar when asked to respond to analyses by Marla Dukharan, the former Royal Bank of Canada (RBC) chief economist for the Caribbean, who has predicted ever since the COVID-19 pandemic began that The Bahamas is just one to two years away from falling into an International Monetary Fund (IMF) restructuring.

“We need to recognise and acknowledge more readily, in so far as say our fiscal framework, that The Bahamas is a high - or some say middle to high - income country with resources,” Mr Rolle argued. “The Government has important options around its taxation approach that it can use if prompted to do so as a means of steering the sovereign to an improved outcome.

“That’s very important in terms of the kind of commentary we should exercise around, the reasoning around, fiscal sustainability issues. We need to think much more about that.”

Mr Rolle was effectively disagreeing with Ms Dukharan on the basis that her assessment of The Bahamas, and likelihood of an IMF bail-out or restructuring, is based on a static model that assumes the Government has no policy tools with which to change the debt and deficit trajectory.

His argument, by contrast, is that the Davis administration has multiple untapped options in its fiscal armoury which it can call upon if circumstances become pressing - one of which is the possible implementation of more progressive taxation, such as an income tax.

The Central Bank governor made this point when he spoke to the difference between “the active scenario and the passive scenario” when analysing the Bahamian economy, the country’s fiscal affairs and its future prospects.

Describing the latter, he asked: “Why does a blind man walk over the cliff? Because he cannot see the edge.” However, he referred to the former as the man who avoided walking over the cliff because he can see “and change course. But you don’t want to get too close to the edge either”.

Asked during the webinar whether The Bahamas may approach the IMF for fiscal help, Mr Rolle replied: “From a public policy point of view, that’s something that is not on the table. There’s full appreciation that, if The Bahamas saw that as an attractive route it could follow, it would do so.

“[But] there’s no indication that is a path The Bahamas is going to take. It does not, however, diminish the importance of the kind of reforms that The Bahamas needs to undertake to strengthen the outlook for the fiscal balance sheet.”

Mr Rolle identified one such revenue-raising measure as an income tax, although he strongly emphasised he was not advocating for such reform. He acknowledged, though, that such a levy and the need to make the Bahamian taxation system more progressive, fair and equitable had been a dominant feature of fiscal debate in recent years.

Urging all Bahamians to remain alive to the possibility of an income tax, the Central Bank governor added: “We have to be conscious as a society that tax reform is going to stay in the picture in terms of how it impacts the sovereign risk profile.

“As Bahamians, let’s confess, let’s acknowledge that the only tax we’ve kept off the table until now, and mentioned from time to time, is income tax. I think from a policy point of view that The Bahamas has signalled it is not ready to go in that direction now, but it’s still an area where there needs to be a lot more work and study.

“There’s recurring discussion in The Bahamas about how to make our tax system more progressive, which is one where the Government is not financed through consumption taxes that fall disproportionately on low income people by consuming a greater share of their income.”

Mr Rolle said persons have to “forget about high tax rates in The Bahamas” because these are inextricably linked to the Government’s size and role in the economy. He pointed out that tax revenues, as a percentage of economic output, are just barely at 20 percent while many other nations are at around 30 percent.

Quick to say he was not suggesting The Bahamas “aspire to target” that 30 percent range, Mr Rolle said he was making the point that The Bahamas still has significant untapped capacity and resources to finance government and public services.

“I did not say we should have income tax,” the Central Bank governor added for clarity. “I said we should not ignore the fact that this is an option that The Bahamas has.

“To the extent The Bahamas is not yet enacting it for various reasons, we need to understand it is not a permanent space, and we need to appreciate how it feeds into the medium and long-term position around how we improve the infrastructure we all think of and need.”

The Prime Minister indicated income-tax related reforms remain firmly in the Government’s thinking when he unveiled the mid-year Budget on Wednesday. He disclosed that converting Business Licence fees to a corporate income tax, which has long been mulled and advocated, is one such option.

“Over the past few years, Business Licence fees have averaged 0.9 percent of GDP. Save for the impact of COVID-19 in the most recent years, nominal GDP growth has been placed around 3 percent. This tells us that while there may be improvements in economic activity, that is not being reflected in increased fees from businesses operating in the country,” Mr Davis said.

“A possible solution would be to move towards a corporate income tax regime to provide simplicity in the manner in which businesses are taxed and improve government revenues.” While the Business Licence fee is levied on gross turnover, a corporate income tax is based on profits. 

Mr Davis also acknowledged that such reforms may be driven by external pressures. “Similar discussions have been held at the international level with respect to the implementation of a global minimum tax of at least 15 percent, determined on a jurisdiction-by-jurisdiction basis, to which the former administration has signed on to,” he added.

“The goal is to ensure that the profits of multinationals with global turnover exceeding 750m euros are subject to the minimum effective tax rate. Such a measure could be a significant source of revenue for The Bahamas and could avoid corporate profits of multinational enterprises in the country being taxed elsewhere.

“Additionally, not imposing a corporate income tax could pose reputational risks on the country, which could jeopardise the buoyancy of future prospects for the economy,” Mr Davis said. “We fully appreciate that the introduction of a corporate income tax framework would be a complex undertaking, with important economic and fiscal ramifications.”

He added that the Deloitte & Touche accounting firm has been hired to study the proposed global minimum corporate income tax’s impact on The Bahamas.