By NATARIO McKENZIE

Tribune Business 
Reporter

nmckenzie@tribunemedia.net

A senior International Monetary Fund (IMF) executive yesterday effectively backed the Bahamas’ decision to implement a Value-Added Tax (VAT) regime, describing it as a “very efficient” form of taxation.

While touting the benefits of VAT, which the IMF had recommended this nation implement, Alejandro Werner, director of the Fund’s Western Hemisphere Department, acknowledged the concerns over such tax reform.

To mitigate this, Mr Werner said the Government could choose to direct some of its VAT revenues towards needy segments of society via conditional cash transfer programmes or specific spending programmes dealing with areas such as education.

Speaking with Tribune Business following a presentation at the College of the Bahamas, Mr Werner explained: “We have seen the benefits of VAT around the world. I think the VAT is very efficient in its implementation.

“Its characteristic is basically one in which you tax the value added on at each stage of the processing of a product. It generates a lot of incentives for self-enforcement. That makes it a very efficient tax. It’s a tax that most modern tax systems have today.”

Mr Werner added: “Then it’s an issue on how to deal with any side effects through expenditures, through targeted programmes etc. That’s how countries have dealt with these issues.

“We have countries that have programmes where part of the collection goes towards the impact of the tax on the most needy segments of society through conditional cash transfer programmes.

“We have had other countries that have dealt with the specific expenditure programmes that deal with education etc. I think that’s the most efficient way to manage the concerns people might have, and that is what people have seen in other countries’ choices when they implemented a Value Added Tax.”

Mr Werner said VAT’s potential impact on the country’s fiscal turnaround position would depend on how the tax is implemented, the rate and the coverage.

He added that there were many countries that had seen simultaneous increases in growth while increasing taxation. “When it comes to tax reform, politically it’s very hard.

“However, at the level we are at here, we need to try and steer the discussion in that direction. One direction is how do we design the best tax structure for whatever level of tax collection we have.

“What’s the best tax system in terms of its efficiency and its capacity to administer? I think in that sense the evidence is very clear that a VAT is a very good tax. Another question is: What is the level of tax revenues that a country wants to have? I think that’s a much more complicated question,” said Mr Werner.

The Government is proposing to implement a VAT on July 1, 2014, at a rate of 15 per cent, with the hotel industry to be subject to a lower 10 per cent rate.

Companies with an annual turnover of $100,000 or less will be exempt from having to pay VAT.