The Tribune

• Praises deficit-eliminating plans as ‘well-calibrated’

• Opposition tells Gov’t: ‘Stop being coy’ on taxation

• Bank chief points to ‘risk premia’ warning by Fund

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) yesterday subtly signalled that The Bahamas must introduce new and/or increased taxes to hit fiscal targets that include a 25 percent revenue-to-GDP ratio before the next general election is due.

The Washington D.C. based Fund, in a statement on its Article IV consultation with The Bahamas, while praising the Davis administration’s “well-calibrated” plans to eliminate persistent Budget deficits and boost tax enforcement warned that this needed to go “hand-in-hand” with tax policy reforms.

“The Government’s goal to achieve a 1.5 percent of GDP fiscal surplus over the medium term is well-calibrated,” the IMF said. “The authorities have invested considerable resources in strengthening tax administration with a goal of increasing the revenue-to-GDP ratio to 25 percent.

“Measures include the re-establishment of the Revenue Enhancement Unit and an updated property tax roll. The envisaged overall surplus would be consistent with rebuilding fiscal buffers and putting public debt-to-GDP on a decisive downward path towards the target of 50 percent, as laid out in the Fiscal Responsibility Act.”

However, the Fund then added: “A well-calibrated tax policy reform should go hand-in-hand with ongoing revenue enhancement efforts. Options include gradually bringing VAT rates close to the regional average of 15 percent; further limiting tax concessions; and increasing property tax rates on higher-value residences. In addition, consideration could be given to corporate and personal income taxes for large businesses and high earners.”

The phrase “tax policy reform” appears to be IMF code for new and/or increased taxes. The “options” it refers to are the ones contained in a set of policy recommendations that it presented to the Government just prior to the September 16 general election, including the call for The Bahamas to “pre-empt” moves towards a 15 percent minimum global corporate tax by introducing such a levy for its own purposes.

Directly tied to this was the proposed personal income tax on so-called “high earners”. This was urged on the basis that Bahamian companies could seek to avoid/evade a corporate income tax by switching their profits to salaries paid to shareholders, senior executives and upper management, thus requiring that both company and personal income be taxed.

Senator Michael Halkitis, minister of economic affairs, could not be reached for comment yesterday. However, Prime Minister Philip Davis QC, in his mid-year Budget statement, indicated that his administration will be guided by the results of Deloitte & Touche’s study into The Bahamas’ tax reform options, and especially whether the existing Business Licence regime could be converted into a corporate income tax.

Raising the VAT rate to 15 percent, in line with the Caribbean average, is likely to be a more remote possibility - at least in the near-term - given that it has just been slashed to 10 percent. Raising taxation rates on high-end properties, though, would be one step towards making the Bahamian tax system more progressive and linked to ability to pay.

The Official Opposition, meanwhile, last night urged the Government to “stop being coy” with its fiscal plans after picking up on the IMF’s hint that new and increased taxes will be required to achieve the $1.3bn revenue increase it is targeting over the next four fiscal years.

“The Government has stated in its Fiscal Strategy Report 2021 its intention to increase its tax yield by over $1bn - a whopping 50 percent increase - over the next four years,” Kwasi Thompson, former minister of finance and FNM MP for east Grand Bahama, said in a statement.

“Yet there have been conflicting statements from senior government officials as to whether this plan includes new tax measures. The IMF report indicates that the Government should give consideration to new and increased taxes. We ask again: Is that the plan of the Government?

“We have said before, and we maintain, that the Government should stop being coy with the issue and instead engage the full range of stakeholders for meaningful dialogue on the way forward in respect to any tax reform that may be necessary.”

The Government, in its Fiscal Strategy Report, is targeting a projected 55.7 percent increase in government revenues over the next four years - an objective critical to achieving a forecast $71.9m Budget surplus by the 2024-2025 fiscal year.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business then that some “new tax measures” will be required to achieve these goals while confirming that the Davis administration had not fully declared its hand on all possible options in the Fiscal Strategy Report.

He held to the position that enhanced enforcement and greater compliance will be “the primary driver” behind the attainment of $3.643bn in total revenues in the 2025-2026 fiscal year. This means the Government has to increase its total tax and fee income by over $1.3bn from the $2.339bn projected for the 2021-2022 fiscal year.

Such a goal, together with the forecast $71.9m and $220.4m Budget surpluses for 2024-2025 and 2025-2026, have already provoked concerns that the report’s projections are too aggressive and overly-optimistic given the struggles of many households, businesses and the wider economy to recover from the twin devastating impacts of Hurricane Dorian and COVID-19.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, yesterday told Tribune Business that enhanced tax compliance, enforcement and administrative measures will be insufficient by themselves to achieve the Government’s revenue forecasts.

“On the tax front, we’ve known that for a while,” he said of the IMF assessment, backing its conclusion. “In reality, any collection of arrears is a one-time collection and that will not enable you to sustain 25 percent revenue-to-GDP.... I think the IMF statement is balanced. It says we have the right objectives, but we have to ensure we have the right action plan to meet the objectives.

“The statement was very balanced and sober. It highlighted that there are positive developments in tourism and the growth of the economy (see other article on Page 1B), but gave equal value to the precarious situation we are at with the debt levels. There’s very little headroom. We have to be more deliberate because there’s no room for error, or no forgiveness for mistakes, let’s put it that way.”

“The new administration has pledged relief through tax cuts and increasing investment in resilient infrastructure, health and education. However, fiscal space has been eroded, limiting the room for manoevere to achieve these goals. Public debt is close to 100 percent of GDP, gross financing needs are high and fiscal financing costs are elevated,” the IMF warned yesterday.

“In addition, a sharp rise in global risk premia could limit the ability to place new debt and further strain public and private balance sheets. Natural disasters related to climate change are a continuous risk. On the upside, the global recovery could prove stronger than is currently anticipated, which would help support tourism.”

Mr Bowe placed particular emphasis on the IMF’s “risk premia” warning. The recent increase in US interest rates, he warned, could spell higher borrowing and debt servicing costs for the Government (and Bahamian taxpayers) when it next sought to raise debt financing on the international capital markets.

Based on the US prime rate of 3.25 percent, the Fidelity chief said there was a five percentage point spread between that and The Bahamas’ last $225m tranche of bonds placed internationally, which attracted an 8.25 percent coupon. Prior to COVID and successive rating downgrades, The Bahamas had typically placed its debt at interest rates in the 5.75 percent to 6.675 percent range, coming much closer to what was then US prime.

Arguing that The Bahamas has to show “we are a stronger risk” than the country’s present credit rating, Mr Bowe added: “We really need to work on getting our risk premia back to 150 basis points so that any increase in global interest rates does not have a deleterious effect on our debt servicing costs.”