The Tribune

Dear Business Editor,

IT WAS with some pleasure that I read the letter carried in today's Tribune Business by Dr Nick Karagiannis of the University of North Carolina. Dr Karagiannis is a favourite scholar of mine, and I am very familiar with his work on the Bahamian economy. His efforts, which build off the seminal work of J. Kevin Higgins, were staples for me as an undergraduate at the University of the West Indies in Barbados during the time when VAT was introduced in that country.

His article outlining the Barbados experience in introducing a Value-Added Tax (VAT) is timely, and a very useful illustration for the Bahamas as we grapple with the need to broaden our tax base and increase Government revenues. The issues for the Bahamas are not new, and for almost 12 years both PLP and FNM administrations, and the private sector, have made investments in studies and reports on the tax policy options for our country. The Bahamas Chamber of Commerce facilitated the Hamilton Report in 2002-2003, and the Government had at least two studies funded by international agencies during this same time period. There were many strong recommendations, but to date we have only taken incremental steps in our preparation for alternative taxation.

Today, the heavy lifting has now been left to the Progressive Liberal Party (PLP). A party elected with an ambitious development plan, a large deficit, limited options to generate new revenues and a challenging global environment in which to generate foreign direct investment.

The first step has been to establish a central tax authority with a broad mandate to address tax policy. Tax policy, for these purposes, is defined in optimal tax theory as 'how to raise desired revenues for the state to provide public services while minimising the excess burden or efficiency costs of tax policies'.

It is no longer necessary to debate, and we have been provided with ample evidence from both the present and former Ministers of Finance - and various consultants - that new taxes and a reformed tax system are inevitable in the Bahamas. Just this past month we heard from former Central Bank governor James Smith, who said that our "nation's tax revenue as a percentage of GDP was 10 percentage points below Western Hemisphere average". This view has caused me some concern, and supports the belief of others that we are probably late in this effort, and have taken too long to accept that we cannot continue with our high level of dependence on trade taxes (Customs Duties).

My reasoning goes beyond the acknowledgement that current revenues are insufficient to fund Governments operations and national development imperatives. It is also driven by our engagement in several international trade agreements.

These include our standing commitments under the Economic Partnership Agreement (EPA), and our understanding that tariffs will need to be further reduced in negotiations to accede to full membership in the World Trade Organisation, the replacement of our agreement with Canada and the pending negotiations with the US. There are those that will argue that our duty rates are not discriminatory, and therefore not a barrier to trade, but they are quickly losing ground, as our existing schedule of commitments under the EPA may soon create rate disparities.

The PLP has indicated its intention to continue full engagement with our international trade agreements and, as a necessity, the question of replacement of revenue will need to be addressed, as we are expected to negotiate concessions to further liberalise our economy as a condition of WTO membership and other deals. There are some very difficult and potentially unpopular decisions to be made, but decisions that can nonetheless create greater efficiencies and new opportunities for Bahamian businesses.

While there are several alternatives available to t0 the Bahamas, it appears that most stakeholders believe a tax on consumption to be the preferred choice over options such as income or an expanded application of Business License tax (yes, tax).

The Value-Added Tax does have some advantages, and as Dr Karagiannis notes, it avoids the distortion of 'cascading taxes' - taxes piled on top of taxes - at each stage of a transaction. Another advantage, but not mentioned, is that taxes will now be broadened to include services. The vast majority of our economy is services, and without the benefit of a detailed study there can be a reasonable expectation of lower overall tax rates for the Government to meet its revenue requirements.

These advantages, however, do not negate the very real challenges of implementation for our new Government. The Bahamas business culture will have to be transformed, and new challenges will have to be met by many of our small and medium-sized enterprises (SMEs). Dr Karagiannis mentions the education campaign and other experiences in Barbados, but I am of the view that we are starting from a different level given our propensity to avoid payment of all taxes (Business Licenses, Real Property Tax, Customs Duties) and the widespread lack of adequate bookkeeping among even some of our relatively large companies.

Culturally, Barbados had the experience of taxation and enforcement prior to a VAT, and its implementation offered savings and an opportunity to make more profits. In the Bahamas, it will mean a new administrative cost and the need to develop new skills, as businesses will now need to act as tax collectors for the Government. The VAT would be included in every receipt, and there would be a requirement for these funds to be turned over to the Government. There are some businesses, like Kelly's Freeport, that already have this accounting and technological capacity, but for many others the challenge will require new hires and upgrades of POS systems. Another key concern would be whether these taxes are applied to the offshore financial services sector, and the implications for our long-term competitiveness.

There are many other concerns and issues to be discussed, but fundamentally the question of tax reform can longer be avoided. It is now incumbent on us that we all take a look at our current system, and begin the process of determining the right alternative for our country.

We can follow the almost 120 countries that have adopted some variation of the Value-Added Tax, or we can tweak our existing model to develop something adequate for our purposes. Regardless of the decision, the fact is that a decision must be made and we must commit to its implementation.

I am heartened by the contribution from someone from our academic community instead of our Parliament, and hopefully there will be additional voices from the business community and civil society at large.

Yours truly,

Hank O. Ferguson MSc.