The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Reducing Customs duties to 10 per cent at the same time Value-Added Tax (VAT) is introduced would enable the Bahamas to achieve “the Holy Grail” of matching US prices and increasing government revenues.

Raymond Simpson, a Freeport-based small business owner, writing in Tribune Business today (Page 5B), warns that VAT will “increase significantly” prices for consumer goods unless it is accompanied by a simultaneous drop in average Customs duties rate to 10 per cent.

Producing calculations to back up his assertion, Mr Simpson says the Bahamas’ proximity to Florida means VAT’s implementation will have a much different impact here when compared to other Caribbean nations that have introduced the tax.

Unlike their regional counterparts, the short travelling distance means Bahamians are more easily able to shop in the US, thus exposing local companies to the ‘substitution effect’ if prices are pushed too high here by VAT.

And Mr Simpson also expresses concern about the “nightmare scenario” of Customs duty rates rising after VAT’s implementation, especially given that the Bahamas - unlike other Caribbean states - is not also introducing income and/or corporate taxes.

“I am not afraid of change and appreciate that perhaps our tax system needs to be closely looked at,” Mr Simpson writes

“However, the argument that other countries in the Caribbean have successfully introduced VAT really doesn’t carry much weight with me. The Bahamas has a very unique situation, with a very close proximity to Florida.”

With Bahamians having the income and transportation access to shop in the so-called ‘Sunshine State’, Mr Simpson added: “I know firsthand that my business prices must be very close or on par to US pricing in order for Bahamians and foreigners to purchase from me, all the while having to

absorb high duty rates and transit costs from the US.

“I would argue that almost all of the other countries within the Caribbean that have adopted VAT are a much longer and more expensive plane ride to

Florida, or simply don’t have the disposable income to travel like us Bahamians, so people in these other Caribbean regions have to just accept the price increases due to VAT. For the most part they have no choice.

“With VAT and duty rates above 10 per cent, I fear our Bahamian customers will travel to Florida to shop and bring items back much cheaper, even after paying the 6 per cent Florida sales tax.”

Taking the cost of an imported good valued at $100 as his base, Mr Simpson said that under the current Bahamian taxation structure of 35 per cent duty, plus brokerage fees and a 35 per cent retail mark-up, the final consumer price would be $223.30.

The retailer’s gross profit (retail price less landed cost) would be $78.30 with the Government earning $35 in revenue.

But, under a 15 per cent VAT and 20 per cent Custom duty regime, Mr Simpson’s calculations showed the same good would be sold at a $239.55 retail price inclusive of the new tax.

While the retailer’s profit margin would be the same, the Government’s revenues (duty plus VAT) will increase to $51.25. This is comprised of $20 in duties, and $31.25 in VAT.

The Government has hinted that Customs duties would be reduced by a proportionate amount to VAT, implying that average rates will drop from 35 per cent to around 20 per cent.

But, based on his calculations, Mr Simpson said of a 20 per cent duty scenario: “The customer would pay 7.2 per cent more, the retailer would profit the same and the Government would make a whopping 46 per cent more.”

Yet, under a 15 per cent VAT and 10 per cent Customs duty scenario, with the same mark-ups and broker/travel costs, Mr Simpson said the Government would collect $39.75 and the price to the customer would be $228.05.

“In this case the customer would pay 2.1 per cent more, the retailer would profit the same and the Government would make 13.5 per cent more,” Mr Simpson writes.

“This scenario is manageable with the consumer only paying 2.1 per cent more, but the Government realising its goal of increasing tax revenues significantly.

“The point is that prices to the consumer for goods will increase significantly with the introduction of a 15 per cent VAT unless the duty rates drop drastically to somewhere around 10 per cent.”

Setting duties higher than 10 per cent, Mr Simpson added, would send Bahamians en masse to Florida, with local retailers either suffering a decrease in sales or going out of business.

And, voicing another fear, the small business owner adds: “Another concern, as has been proven around the world, when new taxes are introduced they rarely go down, and more often go up as Governments grow and social obligations balloon out of control.

“A nightmare scenario would be duty starting out small under a VAT system but slowly growing back to the current rates with the addition of VAT. Once the can of worms is opened this will be a real possibility. It may take five years, a decade or longer, but the risk of it happening is very real.

“‘The White Paper’ claims they have no desire to implement an income tax or corporation tax. However, if the hard questions are not asked now, and

risks addressed now with VAT, will these other taxes become a reality in the future as well?”

Qestioning whether the Bahamas would benefit from becoming a full World Trade Organisation (WTO) member, Mr Simpson called on the Government to impose higher rates of duty on imports brought back by those shopping abroad, so as to encourage ‘Buy Bahamian’

“Make no mistake, regardless of how the Government chooses to move forward, the net result will be they will be taking more money from the people’s pockets and putting that money in the Government’s pockets,” Mr Simpson concludes.

“Our goal as a people is to challenge them to make the right decisions so as to minimise the amount of additional taxation that occurs, while allowing enough of an increase to the Government’s revenues to fund its’ financial obligations.”