Published On:Thursday, December 03, 2009

By NEIL HARTNELL

Tribune Business Editor

A FORMER finance minister yesterday said now was "the proper time to seriously consider" restructuring the Bahamas' tax regime away from its traditional import-duty dependency, adding that the Government could still "kind of ease its way out of the fiscal crisis" if the situation did not worsen.

James Smith, minister of state for finance in the former Christie administration, said the recession, combined with the Government's fiscal woes, would have exposed Bahamians to the need for a "more modern tax regime", providing the public support such a major restructuring would require for success.

"Now would be the proper time to seriously consider changing this tax regime," Mr Smith told Tribune Business. "We see a lack of buoyancy in it, and need to keep step with the international trade arrangements that call for the dismantling of customs tariff regimes over time, so now might be the time to do it.

"Now would also be more publicly palatable, because during a recession people focus on changes in the economy and understand more clearly why we need a more modern tax regime."

Numerous studies conducted in recent years have called for the Bahamas to ultimately introduce a sales or value-added (VAT) tax to replace the import/Stamp duty-dependent system, arguing that the present structure is too heavily linked to international trade and the global economy, plus internal commercial activity, for revenue buoyancy.

In addition, the Bahamas' move to accede to full membership in the World Trade Organisation (WTO) and its decision to sign the Economic Partnership Agreement (EPA) means that it will be forced to restructure its tax system, given that customs duties/tariffs are seen as barriers to trade and targeted for elimination in a rules-based trading set-up.

A major difficulty in shifting to a sales or VAT tax is that an entirely new collection system will be required. While Bahamas-based companies and importers may benefit from the elimination of customs duties through not having such a large chunk of revenues/cash flow consumed in up-front tax payments, they will be the ones the Government will require to first collect, then pass on, taxes to it.

And, while VAT may lead to a broader tax base through capturing services (the major part of the Bahamian economy) and the value added at each stage of the production chain, its implementation would require a massive cultural shift and changes to many businesses' computer systems.

The potential for fraud and evasion/non-payment of VAT would be a further concern, and the business community would be unlikely to welcome the prospect of tax reform at this time, given that their companies are still grappling with the recession's effects.

A study produced for the Bahamas Chamber of Commerce, on the EPA's challenges and benefits, noted that the "biggest issue" for the Bahamas in relation to this agreement was its impact on government revenues and the tax structure.

Currently, customs tariff rates in the Bahamas ranged from o per cent to 210 per cent, with the average set at around 35 per cent. Duty rates have been amalgamated with stamp tax rates for simplicity, but in the 2009-2020 Budget, import duties and the new Excise Tax were due to account for $646.366 million - some 46.5 per cent of the total anticipated $1.389 billion tax and non-tax receipts.

Under the EPA, the Bahamas is required to eliminate customs duties on 85 per cent of imports from the European Union over a 25-year period to 2033.

To cope with the adjustment, the Government has already moved to shift imports attracting the highest duty rates, such as cars and luxury items, into the Excise Tax bracket in a bid to avoid the WTO's scrutiny.

And another Chamber study, this time dealing with the implications of WTO accession, said that the Bahamas' moves to join this organisation "may need to be accompanied by a shift in fiscal policy towards the adoption of a sales tax or VAT to make up for lost revenues".

Noting that the Government's revenues were dependent on taxes, as opposed to the income earned by individuals and companies, the Chamber study said: "Because the shift to a VAT or sales tax would have significant political implications, it would have to be approached with care.

"The shift would mean some advantage to importers, since the new taxes would be collected not in advance, but on the sale of the goods.

"However, the administration changes required are substantial and would be costly. A more decentralised system of collection is entailed, and great care would be needed to avoid evasion."

Mr Smith told Tribune Business that the International Monetary Fund (IMF) and other international agencies had been "pointing" the Bahamas in the direction of a VAT tax "for a decade or more". Under his watch in the Ministry of Finance, some preliminary studies, including one by UK-based Crown Agents, were conducted on alternative tax systems.

He conceded, though, that because a tax regime restructuring was "such a bold move", the Government would likely take its time since it would be "concerned about having all its ducks lined up properly".

Prime Minister Hubert Ingraham said earlier during his administration's watch that the Government had no plans to restructure or change the Bahamas' tax system, preferring to leave decisions on this issue to future administrations.