Commenting on public policy issues requires careful and determined effort given that these are always fluid and dynamic, while positions taken often draw scrutiny. Over this series of articles looking at the Bahamian tax regime, I am always mindful there are things I do not know, but with careful analysis there are important matters that can be explored. This, the final of four pieces, looks at developing issues that have the potential to move the needle while sharing a few cautionary points.
In the third article, while attempting to show the urgent need for tax reform and arguing against being wedded to any one strategy, I outlined the following: “Consider the 2021-2022 budget projections. Revenue was projected at $2.244bn, and expenditure $3.198bn. Without any deep analysis, there is a $951m deficit that is unfunded by taxation and therefore must be covered by debt financing. This provides a glimpse into the fact that the country’s tax revenue is not sufficient to meet its obligations. One could argue that fiscal 2021-2022 is in the midst of the greatest revenue downturn experiences by The Bahamas, and this would be accurate. However, let us remind ourselves that pre-pandemic we also had significant deficits (2017 - $660m; 2018 - $415m; 2019 - $215m) and, in fact, had them for many decades prior. The numbers show that over a sustained period revenue has never been sufficient.” This clearly shows where we are as a country. The level of recurrent revenue being generated by the tax system is inadequate to cover recurrent and capital expenditure.
The article then further elaborated: “This [the above] is supported by the narrow percentage of revenue-to-GDP, which over the last five years has been as low as 15.3 percent (COVID impacted), and is projected to be only at 18 percent in the current fiscal year. These low percentages must be assessed against the ideal revenue-to-GDP ratio of 25 percent that was declared by the Prime Minister. We are currently, at best, 7 percentage points below that benchmark based on projections, not actual performance. Thus the very process of budgeting before anything goes wrong, before targets are missed, before any potential shocks, anticipates insufficient revenue. Therefore, in my opinion, the appropriate starting point for any discussion is to ask why it has been impossible for government to collect more of the revenue it needs to run the country.”
It is obvious that the Davis administration has started to seriously ask this question, and formulate strategies to fix the problems identified. According to recent statements by the Simon Wilson, the Ministry of Finance’s financial secretary, there are plans underway to shift the level of revenue-to-GDP from the historical averages to 25 percent. Part of this strategy includes increasing real property tax collections to 3.5 percent of annual GDP. It includes undertaking a gap analysis on VAT to determine where there are sectors or businesses that are not paying what is due. There are plans to take a careful look at compliance for Customs duties; the formation of the Revenue Enhancement Unit; and “a study on corporate tax, given global pressures for such a levy with a 15 percent rate”. The sum of these strategic initiatives is expected to get The Bahamas to that important revenue benchmark.
The cautionary note here is that the historical trends are actual results realised against much higher forecasts. The direction of the thinking is spot on. However, will actual performance hold true? The administration is confident that these measures will address the issues faced by The Bahamas. We would all be happy to see this come to fruition, but careful assessment would show this is not going to be easy. I believe we should all work hard in supporting the country in this direction, and be committed to play whatever role is possible to meet these targets or get as close as possible thereto. The current stance, I believe, bears out the positions I have consistently taken, which are that the Government needs additional revenue and, to achieve that, it will require us to pay more. The pronouncement that there will be no new taxes seems to take us in the direction of increases in existing ones, as evidenced by the declaration around real property tax.
However, will this approach of broadening the tax base and improved compliance be sufficient to achieve our goals? This is the main question that drove this brief analysis in my third article. “At 12 percent, VAT was projected to produce $800m. This will likely yield more with the recent changes. However, applying fuzzy mathematics, consider that a doubling at that level, to 24 percent, would have been insufficient to eliminate the projected deficit of $951m. Such is the gravity of what we face. Juxtaposed against $10bn in debt, $512m in interest expenses, and $700m for government salaries and emoluments (collectively 38 percent of revenue and 54 percent of the non-deficit funded revenue), we should appreciate the need to carefully look within to determine the need for tax reforms”. Making up a near-$1bn gap without any new taxes will be challenging. Securing this level of additional revenue is certainly not impossible, but such an argument becomes more convincing where there is openness towards increasing taxes in some areas or to reform existing ones, creating revenue positive outcomes as seen recently with VAT.
The 25 percent revenue-to-GDO, and the strategies being employed by the Government, as outlined above, are positive and a step in the right direction. Twenty-five percent, achieved consistently, and assuming no fundamental increases in spending, will lead to a near-balanced Budget but not solve core economic and development challenges. The proper context for assessing optimal tax solutions, including the sufficiency thereof, has to be set against a comprehensive suite of economic reforms. A proper understanding of the depth of the challenge must be set against the solutions that will be brought to address The Bahamas’ debt burden. As the financial secretary outlined, the Government will be taking this on in short order. An interest burden of $512m and counting, and the unknown cost from other areas needing reforms, will impact the extent to which there will be resources to turn the debt growth around and open up greater potential for investments and economic growth. Getting to 25 percent revenue-to-GDP in a growing economy is the ideal solution. But an economy giving up 25 percent in taxes with no or very low growth; continued increases in the national debt; and unchanged structural impediments will eventual fall back into the current existing state.
In the piece I wrote in March, I outlined a course of thinking that I believe should be employed as the country takes on the challenge of finding solutions for its tax regime. I reprint those points with some adjustments. These first are general:
Initiate a clear and focused conversation, especially within the financial services industry, on what the issues are and the options facing the country. Outside that narrow sector, selling the idea of any form of tax directly affecting income will be an uphill climb, and therefore the conversations with - and messaging to - citizens will require careful attention.”
“Create [or complete] a full study of the tax system with a clear focus on alternatives and the need to address inequities [and sufficiency]”
“Make taxation systems, tax revenue and space a critical and intricate part of the economic recovery discussion. Conversations to-date have adopted a rather abstract and disjointed approach. As an example, the ability of the Government to meet its interest payments on debt is directly influenced, at some level, by what taxes are collected.”
• “Depending on the economic climate, growth or decline, the sufficiency of taxes changes. Therefore, as we look to secure a more resilient economy, the country must come to grips with the need for greater funding [the stated 25 percent revenue-to-GDP ratio is consistent here]. Refuse therefore the temptation to not link all important elements of the economic landscape, and ensure that the issue of equity and sufficiency is more than rhetoric”.
The following three points were offered as it relates to the potential adoption of some form of income tax. Given the financial secretary’s statements on a minimum corporate income tax, I would anticipate that the following would be incorporated in the current or any other study:
There are potential risks to the certainty of government revenue having regard for the potential impact of tax plannin in an income tax system, especially corporate income tax. The ability to use group losses as tax credit, for example, could result in volatility in collected revenue. The country must therefore actively start looking for potential gains from any changes, voluntary or forced.
Any consideration of corporate income tax must be allied with benefiting in a fundamental way from double taxation treaties, opportunities to expand in the headquartering segment of the financial services sector, and assessing opportunities to gain strategic advantage over regional competitors with “settled” income tax systems. If there is ever such a change, the best approach is to squeeze out every possible advantage that positions the country to earn more.
[Give consideration to] fundamentally rethink tax administration, understanding that it gets much more complex with income taxes. The general regressive nature of the current tax system has the advantage of checking itself. The tax administration infrastructure and enforcement will need to be ready to address new and unfamiliar complexities.
The above is not intended to be comprehensive or exhaustive, but instead indicative of the thinking that I believe is necessary. The public admission of, and actions toward, addressing the sufficiency of tax revenue is an important and fundamental starting point. The admission that there is potential tax capacity, untouched by the most effective local tax, VAT, is an important element of the national discussion. I will therefore repeat a portion of the conclusion from the March piece: “The country is ailing from the financial crisis. The main task is to strategise a path to recovery and resiliency. I make the argument that, given important shifts in the economy and potential lingering effects, an unfortunate build-up of debt, and the performance of government revenue, the time [appears to be here where] a shift to a more progressive taxation system will serve the country better. It is an important matter. A matter demanding the attention of every business and organisation, citizen and resident. It is a matter of sufficient national strategic importance that argues for the suspension of the usual adversarial debates and beckons a sober, practical and collective discourse for the benefit of the country.”
The approach so far, in not initiating broad discussions on taxation, is lacking. Going forward this must be comprehensive, fundamental, and have an eye on external impact and implications, but always focused internally on sustained resilience.
NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at firstname.lastname@example.org. He specialises in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management; internal audit and policy and procedures development; regulatory consulting; anti-money laundering; accounting; and strategic planning.