By NEIL HARTNELL
Tribune Business Editor
The Bahamas needs to focus on substance rather than obsessing over the most suitable form of taxation, senior accountants said yesterday.
Michele Thompson, Ernst & Young’s (EY) Bahamas managing partner, told Tribune Business that “compliance and enforcement” ease were key to determining the best taxation system for any nation.
While the International Monetary Fund (IMF) last week recommended that the Bahamas implement a ‘low-rate income tax’ over the medium term to compensate for reduced import duties, Ms Thompson said she “would not strongly advocate” for one form of taxation versus another.
With Value-Added Tax (VAT) generating $1.15 billion in gross revenues during its first two years, the EY managing partner said the Bahamas had to “make the best of it” and “do what is necessary to make it work for us.”
Ms Thompson joined Dan Scott, managing partner for EY’s financial services group, which includes the Bahamas, in arguing that “proper analysis” needed to be conducted before this nation undertook any further major tax reforms.
“At the end of the day, it’s about compliance and getting people to conform to taxation, whether it’s property tax, import duties or Stamp Duty,” she told Tribune Business.
“We’re currently a nation with significant taxation already, and it doesn’t matter what laws we put in place; it’s about compliance, changing the culture and mindset of paying.”
Ms Thompson said the Bahamas needed to focus on maximising revenues, and achieving yields that enabled the Government to meet its fiscal obligations, through a ‘substance over form’ approach to taxation.
“I would not strongly advocate for one over the other,” she explained, in comparing different types of taxation. “It’s about understanding what the needs are from the Government’s perspective to meet its fiscal responsibilities and, whether it be through import duties, VAT or income tax, you have a system of enforcement in place and persons are compliant.”
The reaction to the IMF’s VAT proposal has been overwhelmingly negative, with the private sector demanding that the Government put its own ‘fiscal house’ in order first before imposing new or increased taxes on the back of already over-burdened businesses and households.
There was no indication that the Fund had performed any in-depth analysis of its income tax proposal, its effects and how it would work in the Bahamas, leading to suspicions among some businessmen that there may have been a ‘hidden agenda’ behind its inclusion in the Article IV statement.
The IMF had suggested a ‘low-rate income tax’ as revenue replacement for reduced import tariffs, which have to be eliminated or slashed as a result of the Bahamas’ international trade commitments to the European Union (EU) and, possibly, the World Trade Organisation (WTO).
“Over the medium term, introducing a low-rate income tax as import duties are further reduced should make the tax system more progressive and help protect infrastructure and social spending,” the Fund had argued.
Mr Scott, who overseas the EY practices in the Bahamas, Bermuda, Cayman Islands and British Virgin Islands, said tax reform required much deeper study that just choosing one form over another.
He added that the costs, and complexity, involved in building administrative and enforcement systems were key considerations when new taxes are considered.
“It’s important to do the analysis,” Mr Scott told Tribune Business. “Once you ensure there’s enforcement and you collect, the challenge of changing to a new taxation regime, whether it’s income tax or otherwise, is what is the internal cost of building that out to ensure efficient enforcement.
“In some cases, people argue that you’re able to enforce indirect taxes for pennies on the dollar, whereas with direct taxes you have to build a whole administrative regime around it.”
The senior EY partner added: “It’s not advocating one [tax] or the other. It’s taking a step back, and doing the proper analysis to say how the Bahamas will meet its responsibilities, and have the best and efficient measures to collect the Government’s revenue.”
The cost, and complexity, involved in building a system to properly administer and enforce an income tax was the principal reason why the former Christie administration rejected it in 2014 in favour of VAT.
The 7.5 per cent VAT also places the administration and collection burden on the private sector, reducing the Government’s costs, while also creating a ‘self-enforcing’ paper trail between companies to boost compliance.
Ms Thompson told Tribune Business that the $1.15 billion in VAT revenues collected during the tax’s first two years had demonstrated its worth, and “we just have to make what we have work”.
“If you have a tax regime in place, whatever that tax regime is, making sure persons are compliant and that there is enforcement is critical,” she reiterated.
“We went with VAT because we determined it was the appropriate route to take. If that’s the tax regime we have, let’s do what’s necessary to make it work for us...... It’s not necessarily right this wrong, but let’s make the best of it.”