‘At least’ 25% of VAT hike not new monies

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ chief WTO negotiator yesterday warned that “at least” 25 percent of the extra VAT revenue is “replacement” income rather than new money.

Raymond Winder, the Deloitte & Touche (Bahamas) managing partner, told Tribune Business that between $100m to $200m of the projected $400m in additional VAT income will ultimately be required to replace Customs tariffs lost when this nation becomes a full World Trade Organisation (WTO) member by end-2019.

Acknowledging that “no tax would make the Bahamian people happy”, Mr Winder said: “This $400m they’re anticipating with VAT [at 12 percent], at least 25 percent of that is just a replacement of Customs duties in the future.

“We’re not sure from our negotiations what that number will be in relation to tariff reductions. That number could vary from $100-$200m. The government is paving the way for the transition from Customs duties to VAT as we move towards the WTO accession. All of that is not new taxes.”

Mr Winder’s comments indicate the VAT rate was always likely to increase at some point, given that rules-based trading regimes such as the WTO view Customs tariffs/border duties as “barriers to trade” and typically demand their removal.

The government has engaged Deloitte’s UK affiliate to conduct a comprehensive review of the Bahamian tax structure, including the feasibility of introducing a corporate income tax, as part of the WTO accession process but also to achieve the twin objectives of generating sufficient revenue and position the economy for sustained future growth.

Mr Winder said The Bahamas would be able to phase-in the elimination and/or reduction of some tariff lines upon joining the WTO, usually over a four to five-year period, and he reiterated: “That’s coming.

“The government is just preparing itself because they know at some point in time Customs duties have to be reduced or replaced,” he reiterated, “and a significant portion of the VAT increase is due to this replacement.

“It’s not a new tax. People should not assume that the entire 12 per cent represents a new tax. Some of it represents a shift to VAT as a revenue stream.”

Mr Winder, meanwhile, said he - like the majority of Bahamians - disliked the imposition of any new or increased taxes, no matter what form they took.

He added that the Government’s projection of a $400 million revenue increase from the 60 per cent VAT rate hike was likely to be “challenged” by the level of exemptions it was granting, while agreeing that sucking such a huge sum out of the Bahamian economy was likely to slow economic growth.

“I think the Government is going to be challenged to increase it [revenue] by $400 million considering all the other concessions and exemptions they’re giving,” Mr Winder told Tribune Business.

“I don’t like new taxes; no one likes new taxes, and I agree that the net result of this tax increase will result in the slowing down of the economy. It’s my hope that, with Baha Mar coming on stream and growth in tourism, we will have reasonable growth in the economy that will offset these changes and revenue increases the Government is putting through.

“I don’t think we’d be happy with any kind of taxation. There’s no tax at this particular stage that will make the Bahamian people happy.” Mr Winder said the Government would also have to “go slow” in reducing the size of the civil service, given that cutting too quickly and deeply would result in increased unemployment and a further economic slowing.

“It cannot overnight reduce the public sector by a significant amount of employees as that will have a greater impact on the economy than the taxes,” the Deloitte & Touche (Bahamas) managing partner said.

Mr Winder added that the Government’s desire to pay-off $360 million in unfunded arrears over the next three fiscal year was motivated by a desire to clean up its balance sheet and financials in preparation for the introduction of accrual-based accounting in 2022, thereby ending the Bahamas’ “lag” behind international standards.

“This is a one-time adjustment because the prior numbers are not in accordance with international accounting standards,” he explained. “The $360 million that the Deputy Prime Minister talks about relates to prior years, and should not be shown in the financial statements going forward.”

The Government’s current cash-based accounting does not reflect spending commitments when they are incurred, and Mr Winder added: “A big part of this adjustment is to realign the financial statements so that, on a go forward basis, we will have accurate financial statements in accordance with proper accounting standards and principles for governments, like other countries and regions that use the modified accrual basis.

“For too long we have been lagging on a yearly basis to reflect the true level of revenue and expenditures that were incurred for that period.... This all ties into the major project the Government is doing in the Ministry of Finance to realign and bring up to date the whole quality of accounting in the Government sector. That’s the key.

“This should be a one-time deal to reflect, on a forward-looking basis, that we can more accurately rely on the details of revenue and expenditure.”