• Fund selected 15% as ‘example’; not cast-iron

• Added that system’s efficiency ‘matches’ peers

• Minister: VAT’s efficiency fell to 84% with hike

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ soon-to-be-repealed 12 percent VAT rate was branded “the lowest in the Caribbean” by the International Monetary Fund (IMF) in its much-debated report to the Government.

The Fund, in its assessment of tax policy reform options delivered to the Minnis administration just prior to the September 16 general election, also appeared to give something less than a cast-iron recommendation to raise the VAT rate to 15 percent to sustain the system of ‘zero ratings’ and exemptions.

It gave 15 percent as an “example”, seemingly selecting that number on the basis that this was the Caribbean region’s average VAT rate. The Fund suggested that raising VAT to 15 percent would generate extra revenue equivalent to 1.7 percent of gross domestic product (GDP) - around $170m to $180m per annum.

And the IMF also said VAT’s efficiency, under a regime set to be replaced in the New Year with a broad-based, lower 10 percent rate, was “in line” with tourism-dependent peers The Bahamas is typically compared to. It added that the tax breaks afforded to so-called ‘breadbasket’ food items and medicines could be reviewed once the COVID-19 pandemic eased.

“Raising the VAT rate, for example, to the regional average of 15 percent is estimated to increase revenue by up to 1.7 percent of GDP,” the IMF said in an excerpt of its report seen by Tribune Business. “The current VAT rate of 12 percent in The Bahamas is the lowest in the Caribbean, and on the lower end of comparator countries.

“The efficiency of the VAT in The Bahamas is generally in line with peers that are highly reliant on tourism. Still, zero rates and exempted items can be reviewed post-pandemic. Their estimated tax expenditure is about 1 percent of GDP.”

The IMF, while appearing in that excerpt to suggest that The Bahamas had scope to increase the VAT rate further, does not appear to have given a set-in-stone recommendation that the country must implement a rate hike to 15 percent if the structure implemented by the Minnis administration was to be sustained.

While the section seen by this newspaper raises questions as to whether the Davis administration placed the IMF report’s findings in context, and properly represented them when accusing its predecessor of planning a VAT hike to 15 percent if it won re-election, this is impossible to properly judge as neither side has released the full document despite this newspaper’s requests.

Both possess the IMF report, and Michael Pintard, the Opposition’s leader, read out word-for-word in the House of Assembly the same section detailed today by Tribune Business. However, he did not take the bait offered by government MPs, who challenged him to lay the full IMF report in Parliament. Mr Pintard argued that the Ministry of Finance already has a copy.

Still, the IMF report was again yesterday used as a stick with which to beat the former Minnis administration. Ryan Pinder, the attorney general, alleged ex-prime minister, Dr Hubert Minnis, assertion that he had not seen the document showed he was “not fit for the job” of leading The Bahamas.

He argued that the former Minnis administration held a snap election because it was not prepared to take on the tax increase recommended by the IMF without getting a fresh mandate from the electorate. This was despite the former prime minister’s denials that a 15 percent VAT rate was ever planned.

“The way they managed the VAT administration of this country would have resulted in having to raise the rate again to 15 percent,” Mr Pinder said.

“The former Prime Minister commissioned a report from the IMF to study the VAT regime of this country in response to how they were managing it with multiple exemptions and multiples in the zero-rating category. That IMF report came back with a recommendation to raise the rate to 15 percent.”

The IMF’s actual thinking emerged as Senator Michael Halkitis, minister of economic affairs, told the Senate during the supplemental Budget debate that VAT’s collections/compliance efficiency had dropped from 99 percent, when the rate was at 7.5 percent with few exemptions, to 84 percent in 2018-2019 once it rose to 12 percent with multiple zero ratings and tax breaks.

Pointing out that revenue collected had only risen by 28 percent, despite the rate being hiked by 60 percent, Mr Halkitis said the Government had not “got the full effect” of the increase. “We are on the right track,” he added of the reversion to a lower rate, broad-based model.

“According to detailed studies conducted by the University of The Bahamas (UB) and the Ministry of Finance, the reduction of VAT from 12 percent to 10 percent, alongside a permanent elimination of zero-rated categories, will allow the Government to provide immediate tax relief, induce minimal contraction in GDP estimates over the medium term, and is likely to improve tax revenue collection by 2.3 percent by 2024.”

Arguing that the VAT rate cut will “have a positive effect” on consumer spending and savings, Mr Halkitis argued that the Minnis administration increased the rate to 12 percent to help pay for the zero ratings and exemptions imposed on breadbasket food items and medicines.

He added that the VAT breaks on food such as rice, for example, had benefited hotels, restaurants and high income earners - those who did not need the benefit of a tax cut - as well as the low income families it was designed to assist.

“In order to have the VAT free items, the rate on everything else must be higher,” Mr Halkitis said. “Our view, supported by research, is that it is better, more effective, to have a lower rate with minimal exemptions, and for those vulnerable in society they be given direct cash assistance.

So, in seeking to give relief to lower income households by making an item VAT free, you are giving that that same relief to higher income households and businesses that do not need or want the relief. The best policy is to keep a flat, low rate, and provide direct assistance to the most vulnerable.”

He was challenged by Darren Henfield, former foreign affairs minister and leader of Opposition business in the Senate, who argued it was “patently unfair” to suggest the former administration hiked the VAT rate to 12 percent to afford zero ratings for the likes of grits, flour and rice.

The Minnis administration said at the time that the VAT hike was necessary to pay-off $360m in arrears and bills for which no funding was allocated. However, Mr Halkitis argued that the broad-based rate cut to 10 percent will reduce taxes and costs on a much wider range of items than those previously enjoying zero ratings, thus resulting in net benefits and savings to consumers.