Friday, May 31, 2019
By NEIL HARTNELL
Tribune Business Editor
The government gave up more than $1.3bn in customs duties during the 2015-2016 fiscal year due to the multiple tax breaks afforded investors and corporate entities.
The auditor-general’s report for that period, tabled in Parliament on Wednesday, revealed that Customs collected just $4.138m on more than $6bn worth of imports covered by investment incentive legislation.
Without these concessions, the report discloses that some $1.333bn would ordinarily have been payable to Customs on these imports via a combination of excise tax and import duties.
“Conditionally, duty-free goods with a ‘landed cost’ of $6.093bn would have generated $1.333bn duty and excise tax revenue had it not been for the concessions granted,” the auditor-general’s report found.
“Of this amount, $4.139m was charged as revenue collection, and the remaining balance of $1.329bn recognised as ‘revenue foregone’.”
The auditor-general’s revelations are likely to ignite debate over the breadth and extent of investment incentives granted to both Bahamian and foreign-owned entities and investments at a time when the cash-strapped Public Treasury needs every cent it can get to alleviate The Bahamas’ fiscal crisis.
The report identifies the sectors bringing in the highest-valued goods, and thereby enjoying the greatest tax breaks and concessions, as the hotel industry and Bahamas Power & Light (BPL).
Some $2.6bn worth of petroleum products were imported duty-free, with the auditor-general identifying the beneficiaries as BPL “and any licensed entity”. BPL customers would likely face a much higher fuel charge without this incentive, but it effectively means Bahamian taxpayers pay the price in terms of foregone taxes at the front end.
The report adds that more than $2.5bn worth of imported goods came in duty-free under the Hotels Encouragement Act, while another $360m benefited from the terms of the Family Island Development Act that was extended for a further two years in Wednesday’s budget.
“Other trade sources”, which ranged from charities and religious organisations to tax breaks provided to farmers, manufacturers and government housing projects, enjoyed tax breaks on some $287.96m worth of imports.
It is unclear whether 2015-2016 represents a typical year for foregone Customs revenue, but the period did not include any impact from the $4.2bn Baha Mar project which was then in the throes of Chapter 11 bankruptcy protection and the dispute between Sarkis Izmirlian and his former Chinese partners.
The Auditor General’s disclosures came in a report that was tabled on the same day as K P Turnquest, deputy prime minister and minister of finance, revealed that the Ministry of Finance has hired a consultant to assess The Bahamas’ investment incentives regime to determine if it is providing value for money and attracting the right type of investment.
Speaking during the 2019-2020 Budget debate, he told the House of Assembly: “In assessing revenue compliance and strengthening tax administration, it is particularly pertinent to evaluate the role that concessions play and their impact on the tax gap.
“Under its trade sector facility with the IDB (Inter-American Development Bank), the Ministry of Finance has contracted a consultant to review the current concessionary regime in The Bahamas to provide input on how these concessions impact economic growth, and how this translates into our fiscal policy needs, given the requirements of our fiscal responsibility legislation.
He added: “This engagement began in January of this year, and is still in the information gathering stage. However, when contemplating policy action, it is imperative to consider the impact foreign direct investment has on the domestic economy - not just for tourism but in the monetary sector as well - and how changes to our current concessionary regime may affect that.
“Nonetheless, while this administration is not opposed to the concept of concessions to drive and foster positive investment in The Bahamas, we must undertake the proper study and analysis to ensure that the concessionary regime is fit for purpose - and that it actually drives the right kinds of investment.
“We must measure the tenure and scope of these concessions - their investment impact, so that we are not simply giving away freebies that add no value to The Bahamas and its citizens.”
The Auditor General’s report highlights a disjointed investment incentive regime, focusing on 14 separate Acts that range from the Hotels Encouragement Act and Industries Encouragement Act to the Bridge Authority Act and a host of other tax break-granting legislation.
Calls for a review of this framework have been made at infrequent intervals over the past decade, amid suspicions - albeit lacking empirical evidence - that The Bahamas has effectively created a welfare system for some industries and corporate entities able to stand on their own two feet without needing tax breaks.
There have also been concerns that The Bahamas is deriving too little benefit from some FDI projects, with the value of incentives exceeding the impact on the economy and local populations. However, there is also the argument that is this economy was more efficient and productive, with labour and electricity costs much lower than they are currently, the Government would not need to offer so many valuable tax breaks to entice local and foreign investors.
The Auditor General’s report also revealed that VAT collected on these $6bn-plus imports, at the old 7.5 percent rate, amounted to some $456.551m in fiscal 2015-2016. “From this amount, $130.433m revenue was collected and $326.118m deferred,” it said.
“Deferred VAT is approved by the Ministry of Finance and reported on the taxpayer’s filing return in the period incurred.”