By NEIL HARTNELL
Tribune Business Editor
The Bahamas has the most productive Value-Added Tax (VAT) regime in the Caribbean, an IMF paper yesterday holding out its ‘low rate, broad base’ structure as a model for the entire region.
A ‘working paper’ on tax administration reforms in the Caribbean found that the Bahamas’ VAT productivity/efficiency even exceeded the average across OECD member states, plus European and Asian nations.
The paper’s author, Stephane Schlotterbeck, measuring ‘productivity’ as the ratio of actual VAT revenues collected to potential collection if all domestic consumption was taxed at the same rate, found that the Caribbean average was “slightly below” international standards.
“It ranges from 0.36 in St. Lucia to 0.79 in the Bahamas, with an average of 0.54 in the region compared to 0.55 in OECD countries, 0.59 in Europe, and 0.64 in Asia and Pacific,” Mr Schlotterbeck found.
“A low productivity ratio indicates erosion of the tax base, exemptions, excessive zero-rating, concessional rates, evasion, and weak enforcement.”
The Bahamas’ high VAT productivity rating likely results from its ‘low rate, broad base’ model, which has to-date avoided the “excessive” exemptions and zero-rating treatments granted to numerous goods and industries by other Caribbean countries.
It also reflects the ‘newness’ of the Bahamas’ VAT regime, and the fact that unscrupulous businesses and registrants have yet to develop sophisticated evasion and under-reporting techniques.
The IMF paper indicated that the Bahamas’ VAT structure, which the Christie administration ultimately accepted following extensive lobbying by the private sector, was a model that the rest of the Caribbean should look to.
Noting that the Bahamas’ VAT rate was half that in many other Caribbean nations, the paper said: “The recent Bahamian experience indicates that introducing a broad-based VAT with minimum exemptions allows for the application of a lower tax rate (at 7.5 per cent compared to 15–17 per cent in the rest of the region).”
The IMF paper and its author also found that the Government’s total tax revenues, as a percentage of gross domestic product (GDP), rose by 4.4 percentage points after VAT’s first full year compared to pre-implementation.
“In the Bahamas, total revenue collection increased by 39 per cent between fiscal year 2013-2014 (prior to VAT introduction) and fiscal year 2015-2016 (after one full year of VAT operations),” the IMF paper said.
Those two years were chosen because VAT was introduced on January 1, 2015, half-way through the 2014-2015 fiscal year, meaning the latter was not suitable for comparison purposes.
The IMF paper also disclosed that the Bahamas’ enjoys one of the best on-time VAT filing compliance rates, with 75 per cent of its 6,710 tax-paying registrants hitting the payment deadlines.
Only Bermuda, Dominica and Grenada, with VAT on-time filing compliance ratios of between 80-81 per cent, were shown as performing better than the Bahamas, with this nation well ahead of the 62 per cent regional average.
However, the IMF paper said the Bahamas’ Department of Inland Revenue, as the central tax administration authority, had the second highest population-to-staff ratio in the Caribbean.
It revealed that only Haiti, where there is 8,600 persons for every tax administration staffer, had a higher ratio than the Bahamas’ 2,549 persons per tax officer.
The IMF paper effectively sets out a ‘road map’ for the Bahamas on what not to do with its VAT regime, setting out many of the challenges the Government and Department of Inland Revenue will likely face, and how this nation can learn from the experience of other Caribbean nations.
Warning against the granting of widespread VAT ‘exemptions’ and zero-rated treatment, the paper said: “In a number of countries, the expansion of zero-rated domestic supplies of goods and services has contributed to building up a large volume of VAT credits, including in the retail sectors.
“This has increased the number of refund claims and put tax administrations under pressure to refund the credits within acceptable periods (good practice is 30 days). In many cases, the turnaround time for reimbursing VAT credits exceeds 90 days, and quite often it is not monitored at all.....
“In Trinidad and Tobago, VAT refunds have been temporarily suspended due to an insufficient budget. Refund delays and related cash flow issues have been the primary reasons for granting VAT exemptions to investors.”
The IMF paper suggested the deferment of VAT on capital goods imports, such as machinery and equipment, plus raw materials and spare parts, rather than use exemptions.
However, the political pressure for the Bahamas to go down the VAT ‘exemptions’ route is mounting, with FNM leader, Dr Hubert Minnis, on Wednesday night repeating previous campaign pledges to remove the tax from so-called ‘breadbasket’ items.
He also promised to exempt electricity and water bills; education; and healthcare from VAT, adding: “This will provide tremendous savings for Bahamians. These savings will make a difference for Bahamians, who will now have more money to buy food, more money to pay rent, more money to pay expenses for their children, more money to put back in their businesses, and more money to pay other bills.
“The removal of VAT in these specific areas will bring relief to Bahamians who are struggling to make ends meet. It will bring relief to the middle class, to families in general, and to small business people.”
However, those companies and industries treated as VAT ‘exempt’ will be unable to recover the 7.5 per cent levy paid on their ‘input’ costs if they cannot charge the tax to their consumers.
As a result, under Dr Minnis’s plan, the cost structure for entities like Bahamas Power & Light (BPL) and the Water & Sewerage Corporation will increase, not decrease. And these increases will be passed on to consumers in the form of higher bills - the opposite of what Dr Minnis is intending.
“VATs have been effective in terms of mobilising additional tax revenues since their introduction in Caribbean countries,” the IMF paper said.
“The VAT has proven to be more effective than the consumption taxes it replaced. However, its contribution should have been much greater. On average, an increase of 20 per cent of VAT productivity for the region would represent an increase of 2 per cent of VAT revenues in terms of the GDP.
“Initially intended to be a broad-based, single rate tax, the VAT’s legislation has deviated from these objectives. Zero-rating of domestic supplies, generous exemptions, lower rating of tourism activities and low registration thresholds have affected its performance negatively and compromised administrative efforts. This paper argues that, instead of eliminating the VAT, the objective should be to strengthen it.”