By NEIL HARTNELL
Tribune Business Editor
The government has already started discussing potential income tax reforms, the IMF revealed yesterday, although it has admitted any changes will take “years” for The Bahamas to implement.
The International Monetary Fund (IMF), in its full Article IV report on The Bahamas for 2020, again sought to nudge The Bahamas towards more progressive and “equitable” taxation options such as an individual and/or corporate income tax.
And it disclosed that the government, in response to its findings, had confirmed that internal talks are already underway to explore the feasibility of an income tax system in The Bahamas. These revelations came as the Minnis administration voiced optimism it could achieve $300m in extra revenues and spending cuts if required - an increase upon the $200m it is targeting.
“The authorities reiterated their commitment to fiscal discipline once the crisis subsides,” the IMF report said. “Most of the COVID-19 measures have time limits, and thus the fiscal balance should swiftly improve once the recovery sets in.
“They have also started discussing property and income tax policy reforms, and are seeking technical assistance from the international community, but acknowledge that implementation will take years.”
Income, and/or corporate income, taxes have always been a controversial topic in The Bahamas which has no history of them. VAT was preferred as the central element of tax reform under the last Christie administration since its self-enforcement mechanism at each stage of the production chain, and reliance on businesses to collect it, was seen as one where compliance was easier to attain while administrative costs and complexities would be less.
However, The Bahamas’ present consumption-based tax structure is regressive in that it imposes a disproportionate burden on lower income Bahamians who end up paying a greater percentage of their income in taxes than their wealthier counterparts.
Data produced in the IMF’s Article IV report, which appears to have been taken from a Deloitte & Touche study conducted for the Bahamas Financial Services Board (BFSB) in 2018, suggested that a corporate income tax could generate revenues in excess of four percent of gross domestic product (GDP) or $400m if implemented.
“Tax policy reforms are essential to a robust and equitable fiscal consolidation. Without income taxation, The Bahamas relies on VAT, stamp duties, business license fees and, to a lesser extent, property taxation,” the IMF said, calling for the latter to at least be made more progressive via increased taxation of high-value real estate.
“While there is scope to enhance revenues within the existing tax policy regime, staff also recommended building comprehensive real estate price indices to provide a basis for market value-based property taxation and consider strengthening the progressive features of the current system by increasing the rate on higher value residences,” the fund added.
“Over the medium-term, income taxation can help achieve a more equitable income distribution. The government should also review its tax expenditures.” The IMF said a “sin tax” on alcohol and tobacco remains among the potential short-term measures it can employ to increase revenues.
It added of the Government: “They remain committed to reaching the budgeted deficit target this fiscal year despite significant revenue shortfalls in the first quarter (a decline of about 45 percent compared to the same period last year).
“They are confident that, if needed, the various contingency measures could result in additional revenues and savings of up to $300m. The Ministry of Finance has begun hosting quarterly meetings with line ministries to prevent unfunded commitments.”
The Government is also more optimistic than the IMF about The Bahamas’ rebound prospects even though it is predicting a deeper recession than the Fund. “They have a lower growth projection for 2020 (-19 percent), but a higher forecast for 2021 (3 percent),” the Article IV report added.
“The authorities agree that the recovery will likely be gradual, with real GDP back at pre-pandemic levels by 2024. Confident about the Bahamian tourism sector’s attractiveness given the close proximity to the US, they see risks as tilted to the upside and are hopeful that the recent reopening could result in a significant pick-up in tourist arrivals over the next few months.”
“In tax administration, the Government should prioritise the review of the Department of Inland Revenue’s (DIR) organisational structure, completing the DIR Bill and appropriate amendments to existing tax laws to support the integration of the departments, develop strategic and operational plans, focusing on results-based management, and modernise core administration functions,” the IMF added.
“For Customs, priorities include establishing an effective exemption monitoring and verification unit, strengthening risk management functions, and developing capacity in post-clearance audit, while establishing a trusted trader programme that gives defined benefits to programme members.”