17/04/19

BAHAMAS: Island needs ‘ability to pay’ taxation system.

As published on tribune242.com, Tuesday 16th April, 2019.

 

The Bahamas must seriously examine switching to a tax system based on “ability to pay”, a top private sector executive urged yesterday, amid renewed IMF calls for “greater income equality”.

Gowon Bowe, the Bahamas Institute of Chartered Accountants (BICA), told Tribune Business that the consumption-driven nature of this nation’s VAT-reliant structure meant those on lower incomes continue “to bear a disproportionate tax burden” in comparison to their wealthier counterparts.

Speaking after the International Monetary Fund (IMF) renewed its call for a “a comprehensive review” of the Bahamian tax system following the latest Article IV consultation with the government, Mr Bowe argued that no such study had been conducted since the current model was conceived in the late 1950s and early 1960s.

“They’ve been recommending in their various missions for the last two years that there be consideration given in that regard,” he said of the Fund’s review call, “and that will continue for a while until we demonstrate we’re not chipping away at the edges but doing a comprehensive review of our tax system.

“I would beg the question: Have we ever had a comprehensive review? The VAT ‘White Paper’ [in 2013] focused on the need to increase taxes... We have probably never had a comprehensive tax review since the inception of the model in the 1950s and 1960s, which is based on consumption taxes, property taxes and tourism taxes.”

Even though VAT has replaced import duties as the government’s main revenue source ahead of the potential World Trade Organisation (WTO) accession, this has meant the Bahamas’ taxation model remains primarily a consumption-based one.

As a result, lower income Bahamians are still spending a higher proportion of their income on taxes than those earning more - a situation that Mr Bowe, also Clearing Banks Association (CBA), must seriously look at correcting given that tax systems should be based on the principles of fairness and equity.

“It still allows those of us less fortunate among us to bear a disproportionate burden,” he told Tribune Business. “We still need to look at a system based on ability to pay; certainly as opposed to consumption, because that’s distortionary as to who should be bearing the burden.”

The IMF seemed to agree, saying in its release yesterday: “Fiscal policy should play a greater medium-term role in achieving public policy objectives, including greater income equality.

“The Bahamas does not levy income or capital gains taxes, relying mostly on VAT, business license fees and international trade taxes. Global tax trends and the prospective accession to the WTO thus present an opportunity for a comprehensive review of the Bahamian tax regime with a view to achieving a more equitable and less distortionary tax system.

“To strengthen transparency and inform future policies, a quantitative review of existing tax and other investment incentives is recommended.”

Most nations rely on income tax, both personal and corporate, as their government’s primary source of revenue since it is viewed as a progressive levy directly linked to ability to pay. Those earning more pay more in tax compared to those on lower income, thereby upholding the system’s perceived equity and fairness.

But the Bahamas, which has long cherished its tax neutral platform and the absence of any form of income tax, has bucked this world trend. While income tax was one of the alternative options to VAT, the Christie government ultimately rejected it due to the fact it has no history here and, more importantly, the extra costs and bureaucracy involved in setting up and administering such a system.

Some cynics, though, suggested that income tax was also turned down because it would force all Bahamians to declare their annual income - thereby exposing all those seemingly living above their means.

But, regardless of the motivation then, Mr Bowe yesterday said the Government needed to “see through” to completion the study of the Bahamian taxation system that it had commissioned jointly with the private sector from Deloitte & Touche’s UK arm.

K P Turnquest, deputy prime minister, told Tribune Business on Monday that this work had effectively been placed on hold by the need to enact reforms to meet the European Union (EU) and Organisation for Economic Co-Operation and Development (OECD) demands relating to combating tax evasion.

With the Bahamas now having addressed these concerns, Mr Turnquest said the Government would seek to “restart” the Deloitte effort although he gave no dates for when this would happen.

“We hope to restart that project at some point,” Mr Turnquest said. “We have our three-year plan already and will continue to work that. However, as we’ve already said, the Ministry of Finance has to be armed with the relevant research and forward-looking facts, and have the relevant options looking into the horizon.

“While not a priority today, it’s important to have all the tools available to us to address a situation that may arise.”

The Deloitte & Touche (UK) study of the Bahamas’ tax structure was to focus on potential reforms to make it more efficient and equitable, and assess options and alternatives to the Business Licence regime among other issues.

Mr Bowe yesterday said the accounting firm’s work had “gone through various iterations”, and added that the research should have continued notwithstanding the immediate need “to put out the fires with the EU”.

He added that the Bahamas could ill-afford to “wait for the next penny to drop with the EU and OECD”, and suggested that rather than wait for the next attack this nation needed to put itself in a position where it can defend its tax system. “Sometimes a good defence is a good offense,” Mr Bowe told Tribune Business.

He argued that any taxation review should focus on the twin objectives of ensuring the Government earns sufficient revenues to pay its bills and meet its citizens’ needs while, at the same time, providing a structure that was fit for purpose and maintained the Bahamas’ international economic competitiveness.

The BICA chief said tax systems should be focused on the principles of simplicity, equity, fairness and efficiency, while eliminating any distortions that penalised a particular group in society.

Mr Bowe, who met the IMF team during its recent visit to the Bahamas, said the encounter was “a pretty positive one” with the Fund giving the Bahamas credit for reforms already enacted.

“They were very much focused on what our economy will look like in the 21st century,” he added.