The Tribune

• Coalition chief says such thinking ‘fool’s errand’

• ORG executive: Put collection above new taxes

• ‘Lack of trust in governance’ hurting compliance

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s self-proclaimed $1bn in tax arrears must not become an excuse for failing to “bite the bullet” on reform, a private sector tax chief said yesterday, describing such thinking as “a fool’s errand”.

Gowon Bowe, who headed the Coalition for Responsible Taxation (CRT) prior to VAT’s introduction, told Tribune Business that even if the Government was to ultimately collect 100 percent of that sum it would still come nowhere near to wiping-out the $2bn-plus deficits incurred over the two Budget cycles featuring Hurricane Dorian and COVID-19’s peak.

Voicing doubt that the full $1bn is collectable, he added that the number cited by the Department of Inland Revenue’s (DIR) acting director only served to further expose the “loopholes, leakages and inefficiency” that have long bedevilled this nation’s taxation system and justify why major reforms are necessary.

Meanwhile, Matt Aubry, the Organisation for Responsible Governance’s (ORG) executive director, told this newspaper that poor tax compliance was strongly linked to “low public trust” in governance. He suggested there was “a disconnect” because Bahamians did not see the payment of taxes resulting in improved public services and “a better quality of life”, while post-Dorian and COVID financial struggles had left many unable to service annual property tax and other obligations.

Acknowledging that The Bahamas “has a cultural issue we have to work on”, Mr Aubry took an opposing view to Mr Bowe in arguing that the $1bn arrears showed the Government needs to focus on cracking down on tax cheats and bill duckers before thinking about implementing new and/or increased taxes.

Still, the minimal details offered by Ministry of Finance, Customs and Department of Inland Revenue (DIR) officials makes it very difficult to determine what the $1bn figure includes, which taxes are especially vulnerable to non-compliance and over how long a period these arrears have been allowed to accumulate.

Many observers believe a significant chunk of the $1bn relates to the $600m in outstanding real property taxes cited by the Auditor General in his last audit of the Government’s annual financial accounts, which was for the 2017-2018 fiscal year. “We have to focus on the length of time those arrears have accumulated,” Mr Bowe said. “We know of areas like real property tax. We know there are elements of Customs duties, Business Licences etc that may go back several years.”

The Coalition head said the situation highlighted the need for the Government to switch to accrual-based accounting, as this would require it to determine how much of the $1bn should be written-off. Under the present cash-based system, all these past due taxes remain on the balance sheet as accounts receivables even though the prospects of collection are slim to non-existent.

“How much is collectable is the more important question,” Mr Bowe added. “You could have $1bn, but if the prospects of collection are 20 percent it puts it into greater context. We have to appreciate why that level of tax slippage is occurring, and I think that is the inefficiency in the tax system we have. It allows for that type of inefficiency and shortfall.”

He argued that the “$1bn” revelation should not distract from the need for comprehensive tax reform by focusing discussion on “legacy” sums that are owing. Even if the full sum was collected, Mr Bowe said this will still be far short of the $2bn-plus cumulative deficit incurred in the 2019-2020 and 2020-2021 Budget cycles, meaning that it would only reduce - not eliminate - the ‘red ink’ from that period.

“We often look for the silver bullet for why we don’t have to bite the bullet on tax reform,” he told Tribune Business. “Do we have an equitable system that allows the Government to meet its obligations as they come due and is competitive internationally? The answer to all three is no.

“We can be the hamster on the spinning wheel with regard to the tax arrears. The Government should take all necessary actions to collect and use the funds to reduce the $10bn debt, so it can provide more headroom, but believing these arrears will make a monumental difference in whether we reform taxation or not is a fool’s errand.

“Since Independence we have not had a tax system that enables us to receive the revenues we need to meet expenditures we incur annually. Our system does not allow us to provide all services demanded by the population, have a balanced Budget and pay down debt. Every time they highlight the arrears, it highlights the inefficiency of the tax system more and more,” Mr Bowe argued. “It doesn’t give a solution. It highlights how big the problem is.”

Mr Aubry, though, argued that among the root causes of tax non-compliance are low public trust in government and a belief among many citizens that payment will not result in any measurable improvement to their quality of life.

Referring to recent work by ORG on public trust in governance, and Bahamians playing a role in these processes, the ORG executive director told Tribune Business: “When you have citizens who are not very active, government that is not very participatory and low public trust you tend to have low compliance in paying taxes....

“What we see here is a disconnect between paying taxes, and government spending resulting in far better services, a better quality of life and better responsiveness from government. If citizens have a better understanding of the necessity of paying, and see it come back and translate into a better quality of life - better roads and services across the board - there is likely to be greater tax compliance.

“We have a cultural issue that we have to work on, and people better understanding the critical importance of paying taxes and monies that are due to the state, so the state can use it. But we need greater trust that these funds will be used to better effect.”

Enforcement, Mr Aubry added, needed to be implemented in such a way as to “reinforce people’s trust in government and how the money is spent”. Calling for greater transparency and education on the latter issue, he said there was a perception among many Bahamians that government services are “not up to standard” or the level people need.

While government was investing heavily in digitisation and areas such as social services, he added: “People are not feeling that they are getting what they need from government. We’re not seeing that level of understanding.” And, with $1bn in existing taxes said to be past due, Mr Aubry asserted: “It’s important they focus on collection of outstanding taxes before they look at new and increased taxes.”

One financial source, speaking on condition of anonymity, yesterday agreed that “a deep dive” is needed to understand the make-up of the $1bn arrears. Besides real property taxes, they suggested it also largely consists of Business Licence fees and VAT payments owing from COVID’s peak when the economy was virtually locked down.

“You have to be cognisant that a lot of businesses were in survival mode or shut down for several months,” they said. “What percentage is collectable? And any collections will be a one-off event, not recurrent. The Government seems to have sold themselves on arrears taking care of their tax hole. If you do well you may get a windfall, but only a small portion of taxpayers will have the money to pay off their arrears at any one-time.”