The Tribune

• ORG executive: ‘Not true’ income tax is cure-all

• Warns of ‘cultural bias’ against such tax types

• Bahamas ill-served if change hasty, ‘superficial’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Tax reform must “not imperil” the Bahamian private sector and citizens, a governance reformer is warning, adding that income taxation is not a cure-all for the country’s fiscal and economic woes by itself.

Hubert Edwards, head of the Organisation for Responsible Governance’s (ORG) economic development committee, told Tribune Business in a recent interview that The Bahamas must “be careful going down that road” of income tax - corporate and/or personal - because this nation has no history of imposing such levies.

Arguing that such reform options require “very careful, deliberate and deep study”, he argued that The Bahamas must at all costs avoid a hasty, “superficial” approach given the culture shock that income-type taxes will inflict on both businesses and the wider tax-paying public.

With education and training “paramount” to the success of any tax reforms, Mr Edwards said the outcome must “serve the interests of all parties” - citizens from an equity and fairness perspective, while ensuring businesses maintain their competitiveness and that the Government generates sufficient revenues to run the country and deliver essential public services without over-burdening taxpayers.

Praising the Davis administration for its willingness to consider tax reform, the ORG executive nevertheless urged caution over long-standing private sector calls to convert the annual Business Licence fee into a corporate income tax that is instead levied on net profits rather than gross revenues.

The Prime Minister, in unveiling the mid-year Budget, confirmed such a reform is being studied and assessed by the Government given the global push for a minimum 15 percent corporate income tax rate to combat tax arbitrage by large multinational enterprises. “I think we generally understand that is one of the areas the country is grappling with at this point in time,” Mr Edwards told this newspaper of tax reform.

“There are some persons who believe the Business Licence fee as it currently stands is unfair because it levies taxes on gross revenues, and there are persons who are proponents of taxation being levied on net income.” Business Licence fees, which are projected to generate some $101m in revenues for the Government in the 2021-2022 fiscal year, are forecast to increase to $150.376m by 2023-2024.

However, while they represent a significant revenue stream for the Government, many in the private sector view Business Licence fees as distortionary. They are seen as penalising high turnover/low margin businesses, such as food stores and gas stations, while favouring low turnover/high margin services companies because they are levied on gross revenues.

Many firms also complain that they regularly pay more in Business Licence fees than they earn in profits, or that it drives them into a loss-making position. Philip Davis’ mid-year Budget position indicates that his administration has picked up where its Minnis predecessor left off in continuing with Deloitte & Touche’s study of tax reform options including imposition of a corporate income tax.

“As you would be very well aware, it’s an approach that requires very careful, deliberate and deep study,” Mr Edwards said of income-style taxes and other options. “To the extent that that is going to be done, then it’s [reform] certainly worth contemplating.

“I would wish to mention this is a very deliberate and complicated path, especially given that The Bahamas’ experience with income tax and corporate income tax. We have to be very careful going down that road. It’s not, as some people say, a panacea that, if done, will solve all our problems. I don’t think that’s true.

“They may be viable, but careful, continuous and deliberate study is what is needed at the end of the day. The bottom line is that it has to be a very studied approach, and not a superficial one. Moving to a corporate income tax is not only fundamental to business people; it has its cultural bias,” the ORG executive continued.

“Up to now, Bahamians are not used to that type of thinking, so there is ground work to be done for persons to understand it, accept it and work with it. I don’t believe it will be an easy task. Education is going to be paramount, and training also. I don’t think this is a matter to be implemented at great speed because speed may have its own set of disadvantages.

“To the extent we can come up with a substantive system that serves the purposes of the country, that is beneficial, that is equitable, and is not disadvantageous to business, certainly it’s a direction worth at least looking at to determine if it serves the interest of all parties. This cannot be all government and business sector. There has to be a balance. There are different stakeholders who have vested interests, and this has to be carefully managed.”

There is a significant body of opinion that believes The Bahamas should seriously consider switching to an income tax-based system aside from global corporate tax pressures. Proponents believe it would create a more fair, progressive and equitable tax system, with contribution’s linked to a taxpayer’s ability to pay, while still generating sufficient revenues for the Government.

Such reform would also move The Bahamas away from its long-standing dependence on regressive consumption-based taxes, such as VAT and import tariffs, which result in lower income persons paying disproportionately more of their earnings in taxes than their wealthier counterparts.

However, given The Bahamas’ relatively narrow 400,000 population base, and 235,000-strong workforce, there are doubts that an income tax would generate enough revenues. This is especially since many wealthy, high income earners generate much of their receipts offshore, with the result that much of the tax burden remains on the middle and lower classes.

Income tax was rejected as a reform option in 2015 in favour of VAT largely because of the complexities associated with it, and the costs involved in administering such a system to ensure all paid their due and fair share. However, the International Monetary Fund (IMF), in its Article IV statement on The Bahamas, reiterated its previous recommendation that a corporate income tax - together with personal income tax on high earners - should be a reform option.

“To the extent that the Government is signalling very clearly its willingness to look at reform it is commendable,” Mr Edwards said. “To the extent that involves a look at corporate tax or any form of income tax is also commendable because history has shown us most administrations have shied away from this.

“Whether it’s a case of we’re here now and the options are limited, or we’re going to be very prudent and serious about how we manage going forward, it’s a good step forward. The Government should be commended for this, but as we go along this road we have to be cautious that the outcome should not imperil the private sector and private citizen” it is relying on to generate the necessary taxes and revenues.