Nassau, Bahamas - Remarks by The
Honourable Michael Halkitis, Minister
of State for Finance (Second
Reading) of the Value
Added Tax Bill on August
19, 2014:
Introduction
Mr. Speaker,
I wish at this time to move for second reading and committal of the
Value Added Tax Bill.
To that end, I will in this contribution make observations on a number
of vitally important matters in respect of the Bill that I trust will serve to
promote an enlightened and effective discussion of the Bill.
I will, specifically, touch on the following issues:
1.Setting the new VAT
and tax reform more generally within the context of the Government’s
overarching national development plan;
2.Outlining our
concerted efforts to reform and modernize the administration of the major,
existing taxes in order to enhance revenue collection performance;
3.Reviewing, once
again, the many initiatives that we have
launched to better contain and control public expenditure;
4.Expanding on the
key elements of the VAT policy and administrative framework that are featured
in the VAT Bill;
5.Elaborating on the
reductions that have been announced for various tariff and excise rates and
plans for the future in these areas; and
6.Updating Honourable
Members on progress to-date on the VAT implementation plan and our state of
readiness for VAT introduction on January 1 of next year.
The Government
’
s National Development Plan
Mr. Speaker,
The
VAT Bill before us is about the introduction of a new broad-based tax on
consumption in The Bahamas. However, it
is critically important to properly situate this initiative in the broader
context of the Government’s overall plan for national development. This plan, appropriately so, is about much
more than tax reform and the introduction of a new source of taxation.
Indeed, as the
Government moves ahead with the fundamental reforms that it was elected to
implement, including fiscal and tax reform, focus must be maintained on our
overarching plan for economic renewal, job creation and social progress. And
very importantly all of these within the context of a nation of islands;
citizens in all the islands and in the smallest settlements have a right and an
expectation of access to government services.
The details of that
plan were presented in the Government’s Charter for
Governance and, subsequently, the Speech from the Throne. In it, we explained that our country’s
need for change is widespread and that we simply cannot afford to continue with
business as usual. We spoke of our
commitment to a national development plan grounded in a vision of a stronger
and more prosperous Bahamas of the future.
Our plan offers new
and innovative solutions for the wide range of economic
and social
challenges facing the nation. To that
end, we have charted a course of change with the specific goals and targeted
actions that we will implement over the full course of our mandate.
Our plan is
multi-faceted and it is targeted to fighting crime and bolstering national
security, strengthening the economy and creating jobs, enhancing health and
education and social development generally as well as promoting the further
development of our Family Islands.
We fully recognize
that the challenges that confront us are numerous and complex. Our plan of action is commensurate with those
challenges. We are steadfastly committed
to its full implementation for the sake of a better life and future for all
Bahamians.
The achievement of
the objectives that I mentioned above clearly is clearly dependent on stronger
economic growth going forward. To that
end, our plan encompasses a variety of measures including strengthening our key
tourism industry; promoting additional foreign direct investment across the
country, and particularly in Grand Bahama and the Family Islands; exploring
avenues for further diversifying our economy, especially in the agricultural
area through science and technology to improve our competitiveness in food
production. We are also committed to
further diversifying our financial services sector; the further development and
expansion of our yachting and shipping registries; expanding our investments in
education; and strengthening national training through the National Training
Agency to establish a competency based training and job placement system that
is flexible and responsive to the requirements of the workplace.
We have focused our attention on these and the other major areas of our
change and growth agenda and we will persist in planning and further developing
initiatives that will get our economy growing more strongly in the years ahead.
From the outset, we
have been guided by the hard reality that the finances of the Government need
to be returned to a position of sustainability if we are to strengthen
confidence in the Bahamas as an attractive and secure place for investment, not
only by foreigners but by Bahamian entrepreneurs as well.
If confidence is
eroded by lax fiscal policies, we all bear the consequences: credit downgrades
and higher interest rates for the Government and Bahamian businesses and
citizens, as well as the potential for further downgrades and higher interest
rates if we fail to act decisively and stop mortgaging the future to support
today’s
spending. History of deficit financing.
We have made it
clear that we will implement priority initiatives within our plan to the extent
that we can do so in a fiscally responsible manner while remaining faithful and
focused on the commitments made in our Charter for governance.
We have also
stressed that we will strive to reform and rebuild the basic structure of the
public finances such that, over time, we return them to a self-sustaining basis
with no need for continued annual deficit financing and borrowing.
At the same time,
by putting the level of government debt on a downward path back toward more
desirable and appropriate levels, we will recreate the fiscal room necessary to
finance the full complement of our national development plan, including
economic renewal and stronger job creation.
Seen in this light, fiscal reform is at the heart of the Government’s
plan for national economic and social development.
In turn, tax reform
is a critical component of fiscal reform.
These reforms are critically necessary to allow the Government to follow
through in making its national development plan a reality.
For the sake of
complete transparency, full disclosure, accountability and credibility, we set
out the details of the various components of our fiscal reform strategy in the
form of a Medium-Term Fiscal Consolidation Plan through 2016/17. This plan was published in February 2013. The
plan consists of four key parts: growing the economy; restraining expenditure;
enhancing revenue administration; and securing new sources of revenue. Many who
still persist in the view that the government is focusing only on taxation.
Through this plan,
and in combination with our actions to strengthen economic growth, we are
fundamentally and, in a
balanced way, reforming the structure of both
Recurrent and Capital Expenditure as well as the structure of Government
Revenues. This will allow us to:
•
eliminate the unsustainable imbalance between Recurrent Expenditure
and Revenue with a target of 2015/16;
•
significantly reduce the GFS Deficit and set it on course to complete
elimination; and
•
arrest the growth in the Government Debt burden and move it onto a
steady downward path to more prudent and sustainable levels.
Reform
and Modernization of Major Existing Taxes
The Government’s
actions on the revenue front begin with measures to improve the collection of
existing taxes in line with what is rightfully due to the Government. We are fully cognizant that our revenue
system is seriously deficient and we are moving to remedy this situation
through a number of targeted reform and modernization measures. As I spoke at length to our actions in
respect of Customs and Real Property Tax at the time of the 2014/15 Budget
debate, I will merely recap these at this time.
Customs
Operations
Mr. Speaker,
Since coming to
office, we have been pursuing an aggressive plan of action in respect of
Customs, to bring its practices and procedures up to best international
standards.
Business Process
Re-engineering
In the area of
business process re-engineering, the final Inception report has been prepared
and monthly reports have commenced. A cloud-based project management software
has been set up to monitor activities, timelines and milestones.
Enforcement
As for enforcement,
the consultants conducted their first mission and are developing preliminary
findings for the “
As Is” reports. This work should
conclude by September 12, 2014.
Customs Network
Infrastructure
The final report
assessing the Customs Network has been reviewed. As well, the Terms of Reference for the new
Customs Network have received approval from the IDB, which is providing
financial support. Work is underway on
the RFP to solicit bids for the new customs network inclusive of IP phones,
Network Topology, Network Equipment, Installation, Maintenance, Warranty and
Standardization.
Mobile
Communications Equipment
The procurement of
some of the mobile communications instruments, such as handheld radios, Wifi
solutions in port zone and PDA’s, is underway.
Marine Unit
Mobilization of the
Marine Unit is proceeding with the RBDF guiding the procurement of the boats
and maintenance management.
K9 Unit
Mobilization of the
K9 Unit has been agreed and the RBPF/HMP will guide the procurement of the
canines and maintenance management.
Portable Scanners
Customs is
proceeding with the procurement of portable scanners and has identified several
Family Island sites for deployment.
Human Resources
Consultancy
The RFP for the HR
consultancy is in development and bids will be solicited with a view to
engaging a firm.
Training Sites
Renovation
Customs is
proceeding with the training sites renovation.
They have identified several training sites for key Customs Operations
on the Family Islands.
Audit
In the audit area,
proposals are being reviewed and evaluated.
Modernization
of the Real Property Tax System
As for progress
being made on the modernization of the Real Property Tax system, concerted
efforts are being focused on the following major initiatives in the Property
Tax Unit of the Department of Inland Revenue:
• Introduction of a
new Property Tax Management and CAMA System that will enable the RPT Unit to improve
the coverage ratio of the tax system, provide accurate tax information, manage
arrears and collections and lead to an overall enhancement in the efficiency of
the department; the Government recently signed the contract with Tyler
Technologies with respect to replacing the Real Property Tax System;
•
Development and implementation of a General Re-assessment of
properties on the register in the Fall of 2014, in order to get property values
up to date, by either indexing or trending existing valuations to achieve
better horizontal equity;
•
Implementation of an Arrears Action Plan utilizing private collectors
to assist with the collection of outstanding property taxes;
•
Delivery of an effective programme of Taxpayer Education to inform
taxpayers on the various aspects of the Real Property Tax; and
•
Amendments to the Property Tax Legislation to ensure that it is in
line with best practices.
Enhanced
Containment and Control of Public Expenditure
As for measures to contain and control public expenditure, Honourable
Members will recall that I spoke at length, during the Budget debate, on the
numerous concrete actions that this Government has initiated since it came to
office and which it is actively pursuing.
In summary fashion, on the Recurrent Expenditure front, we are taking a
variety of measures to restrain the growth of spending and make that spending
more efficient and effective. The
overall framework for strengthened public financial management is taking place within
the scope of the new Financial Administration and Audit Act. The Ministry of Finance is, in a determined
fashion, enforcing strict expenditure discipline and accountability across all
Government Ministries, Department and public corporations.
In this regard, the Government is committed to a fundamental review of
its operations and its expenditure and revenue control mechanisms, seeking to
instill best practices wherever feasible. The Ministry of Finance, in
particular, is being restructured and strengthened to enhance its capacity to more
effectively monitor the operations and expenditures of Government Ministries,
Departments and public corporations. We are vigorously striving for higher
levels of accountability and efficiency.
As regards public
corporations, the Ministry of Finance is exerting more direct oversight of
their financial affairs to ensure that they strive for greater levels of
efficiency and effectiveness and that they are subject to greater
accountability to the Government. This will allow our budgeting process to be
more comprehensively informed by the budgets of public corporations, such that
a truly comprehensive approach to fiscal discipline is achieved. The Government has asked subsidy dependent
corporations to better align their expenditure plans with the resources that
are available.
In addition, our
planning function is being strengthened such that new investments and projects
are reviewed in an economically and financially sound and effective
manner. The government is also
introducing new Public Sector Procurement procedures which impose greater
controls and greater efficiency on public spending for goods and services for
all public entities including public corporations.
Appeal for
cooperation.
As well, we have
bolstered our approach to the management of government debt. Through the Debt Management Committee
comprising representatives of Finance, the Treasury and the Central Bank; a new debt management policy framework has
been developed to minimize the financing costs of Government debt while also
minimizing risk.
Through these
actions, Recurrent Expenditure will be allowed to grow in dollar terms through
the medium- term to allow the financing of new and emerging priorities such as
the hiring of doctors and other staff for the new mini-hospitals. However, the plan does signal the Government’s
commitment to a reduction in Recurrent Expenditure relative to the size of the
economy; this will require the setting of clear spending priorities going
forward.
Having said this, I
believe it is important to delineate again the factors underlying the
year-over-year increase of $103 million projected for Recurrent Expenditure in
2014/15. For one thing, not unexpected,
debt servicing requirements next year will be up by $40 million from 2013/14,
with public debt interest payments up by almost $30 million and debt redemption
higher by $10 million. Of course, it
goes without saying that the large cost overruns, under our predecessors, on
the New Providence Road Project have been an important factor in the higher
interest payments for which we have had to make provision.
Capital Expenditure
over the last few years has been at exceptionally high levels relative to
historical trends. However, due to the
fiscal exigencies, our Medium-Term plan calls for these expenditures to be
returned to their more traditional level of 3% of GDP. Given emerging requirements, this will
require strict prioritization and timely profiling on the part of the
Government.
How long do we ask
people to wait?
Key
Policy and Administrative Elements of the VAT Bill
Mr.
Speaker,
As I stated at the time of the
tabling of the VAT Bill on July 23rd, we indeed find ourselves at an
historic moment in the history of our small nation. For, after seemingly countless years of
seemingly endless discussion, debate and study, we are finally moving forward
with fundamental reform of our system of taxation to bring it up to the modern
standards of the 21st century.
I would go further
in this vein and suggest that our intensive and extensive deliberations on the matter
have truly borne fruit in that we have settled on the very best option for our
country from both an economic and a fiscal perspective. In the words of Professor Richard Bird, an
internationally renowned expert on VAT and taxation in general, the implementation
of VAT has been, without a doubt, the most successful fiscal innovation since
1950. Allow me to repeat and stress the
key words in the previous statement: without a doubt,
the most successful fiscal innovation in over half a century.
More specifically,
he asserts that:
“
no other significant tax, not even the income
tax, spread so rapidly and quickly around the world to the point where VATs
currently exist in over 150 countries
”
.
And why has this
occurred? Professor Bird attributes this
phenomenal success to the fact that every country needs a tax on mass
consumption to finance government programmes and services. More importantly, he states that, in
addition, experience has shown that the VAT is the least distorting consumption
tax and it is the tax that can be administered most effectively. In other words, VAT is the most economically
efficient way to collect tax revenues and the cost of doing so is generally
lower than for other forms of taxation.
According to an IMF
tax policy mission that visited this country in March of this year, revenue
yields from VAT generally outperform other types of taxes and this has been
demonstrated in several Caribbean countries.
For example, following VAT introduction, indirect tax revenue increased
by at least 3 per cent of GDP in Antigua and Barbuda, Belize, Dominica and St.
Vincent and the Grenadines. In the case
of St. Kitts and Nevis, the increase was on the order of 6 per cent of GDP, on
the basis of a VAT imposed at a rate of 17 per cent.
We have now deliberated
on VAT for well over a year, since the release of the White Paper in February
2013. Following the issuance of the
draft VAT legislation late last year, we have had consultations with the
private sector. We have also had the
benefit of further in-depth studies of VAT in the
Bahamian context.
As well, our internal
deliberations have been informed by experience gained in numerous other
countries over the past many years. That
experience has been catalogued in a best-practice framework that is generally
acknowledged to be optimal.
Interestingly, of all the VAT nations around the globe, New Zealand is
the one country that has adhered as closely as possible to that so-called
optimal VAT framework and it is thus rightfully and widely recognized as having
the very best VAT system in existence.
It is for that very
reason that the Prime Minister sought concurrence from his New Zealand
counterpart for timely and focused policy and technical advice from VAT experts
from that country. I have previously
provided details on the findings and recommendations of the New Zealand tax
mission and their final report is available on the Government website. I would at this time merely recap the key
conclusions.
The success of the New Zealand VAT, and there are important lessons
for us here, was very largely due to:
➢ an extensive
education programme aimed at both the business sector and the wider public,
with the programme largely driven by respected members of the private sector;
➢ a Government
commitment to minimize the compliance costs involved with the new tax,
particularly by having virtually no exemptions; and
➢ a Government
commitment to offset the effect of VAT on the cost of living by reducing income
taxes and, for families not paying income tax, introducing a form of negative
income tax or cash transfer system.
As was explained in the Budget Communication, the government has
accepted the New Zealand recommendation to enlist the private sector in the
public education campaign. A three
person Task Force will oversee this process and will be tasked to assist in
explaining the VAT to the business community and the wider public. The Task Force will have a budget of $150,000
at its disposal to deliver the proposed campaign by the end of December 2014.
As for a VAT in The Bahamas, the New Zealand experts recommended that:
➢ while the Ministry
of Finance VAT Implementation Team could likely cope with implementation as
early as October 1, they are more likely to require time beyond then if there
are design and implementation changes made in response to the draft legislation
upon tabling.
➢ Moving to a single
rate of VAT, other than zero for exports, with very limited exemptions would
enormously reduce the compliance costs of the private sector and the
enforcement costs for the public sector.
This would also permit a potentially large reduction in the single rate
of VAT, almost certainly to 10 per cent and quite possibly to below that
figure.
➢ While the above
approach would minimize compliance costs and allow a lower rate, it could also
have negative effects on the well-being of low-income households. It would thus be vital to introduce
mechanisms to protect such households.
The team estimated that our proposed reforms to social assistance
programmes appear to provide a suitable delivery mechanism for such assistance.
The impact of VAT
structure and simplicity/complexity on private sector compliance costs is
indeed critical. The issue has been
documented in a study undertaken by Price Waterhouse Coopers on the basis of
data collected by the World Bank as part of its Paying Taxes 2010 project. The study concluded that it is very important
to streamline the compliance burden and reduce the time needed by business to
comply if a VAT system is to work efficiently.
The key underlying findings are that:
•
Where electronic filing and payment is available and is used, the
average time to comply with VAT is some 30 per cent lower;
•
The frequency of returns is also important; where bi-monthly or
quarterly returns are available, compliance time falls by some 35 per cent;
•
The requirement to submit invoices and other documentation with VAT
returns increases the time required to comply by a factor of 2; and
•
Prompt refunds tend to reduce the time required by businesses to comply.
I am pleased to report
that the VAT administrative framework that is in development for this country
features a number of measures that will ease the compliance burden on
business. We will, for instance, have
electronic filing and payment; three options for filing frequency based on the
size of a business; no invoices and supporting documentation will need to be
filed with VAT returns but merely retained for audit purposes; and refund
procedures have been accelerated.
Mr. Speaker,
The VAT policy and administrative
framework that is presented in the VAT Bill has been duly shaped to reflect the
very
best advice that we have had at our disposal. As I did at the time of tabling, I will now
briefly review the key features of the Bill for the benefit of Honourable
Members.
The VAT will be
administered by the VAT Department under the Ministry of Finance. This structure will function under an MOU
with the Department of Inland Revenue which will allow a relatively seamless
transition to the Central Revenue Administration that will in time emerge and
encompass both VAT and Inland Revenue.
I want to stress that
the Government clearly still adheres to its goal of creating the CRA but judges
that an interim move to a VAT Department is prudent in the near term in order
to secure the successful introduction and implementation of the VAT. A VAT
Appeal Commission will adjudicate on tax matters and appeals will be possible
to the Supreme Court on matters of law.
There will be one
single rate of VAT at 7.5 per cent across the board. As is done around the world, exports will be
zero-rated, thus allowing exporters to claim credits for VAT paid on inputs and
thereby maintaining their international competitiveness. We judge a lower VAT rate than originally
proposed to be desirable from both an economic and social perspective.
The importance of
simplicity has been demonstrated in Switzerland which undertook a fundamental
assessment of its VAT system in 2007.
One part of the proposed reform involved transforming its three-rate
structure of 2.4 per cent, 3.6 per cent and 7.6 per cent into a single rate of
6.1 per cent. It would also remove 20 of
the 25 existing exemptions. Independent
studies revealed that the introduction of a single VAT rate would be expected
to reduce business compliance costs by at least 20 per cent and up to 30 per
cent, and increase economic growth by 0.1 per cent to 0.7 per cent.
Zero-rating (i.e.
applying zero VAT and allowing credits for VAT paid on inputs) should
definitely be applicable to exports as a VAT is designed to tax domestic
consumption. Other than that,
zero-rating should be strictly limited, if utilized at all.
Adding other items
to the zero-rated list undermines the VAT as a broad-based, neutral tax on
consumption. It also adds to the
compliance costs of the private sector, as well as the administration costs to
government, by increasing the volume of VAT collections which are subsequently
refunded. Zero-rating also provides
opportunities for fraud.
VAT refunds have
been frequently referred to as the potential Achilles heel of a VAT system and,
accordingly, experts have argued against extensive zero-rating in order to
minimize the magnitude of refund claims and payments.
Items that are
exempted under a VAT are not subject to VAT but credit for VAT paid on inputs
is not allowed. As such, exemptions are
inconsistent with the fundamental logic of VAT and they break the VAT chain,
thus making enforcement more difficult.
Accordingly, the consensus view of tax experts is that a VAT should
exempt as few sectors as possible. As
seen in other countries, it is often the proliferation of exemptions that
over-complicates a VAT and thereby undermines its chances of success.
The
main drawbacks of exemptions are that they:
•
narrow the VAT tax base, thereby necessitating a higher standard VAT
rate to meet revenue requirements.
•
lead to cascading: if an
intermediate seller is exempt, it cannot claim credit for VAT paid on its
inputs. The upstream producer then ends
up charging VAT on VAT paid on those inputs.
•
increase administration costs to government and compliance costs to
the private sector, especially firms that sell both taxed and exempt goods and
services.
•
violate the destination principle for internationally traded items,
where exports embody exempted inputs (exports are thereby disadvantaged in a
competitive sense).
•
lead to exemption creep as non-exempt sectors lobby for exemptions,
which can quickly undermine the success of the VAT system.
Accordingly, we
have decided, along with the significantly reduced VAT rate, that the list of
exemptions should be pared substantially, compared to what was initially
proposed. Specifically, no goods will be
exempted. As for services, the list of exemptions has been tightened to include
only the following:
•
Financial services, i.e. credit and deposit/savings products. This covers all forms of lending and savings
products issued by banks, insurance companies and other financial institutions. For insurance, the products affected are, in
particular, life policies and annuities.
In order to give the industry time to prepare, exemptions on non-life
insurance and annuities (such as property, health and casualty) are to be
preserved until June 30, 2015.
•
The sale or rental of a dwelling.
•
Education services, specifically only for explicit tuition-funded
courses of study for enrolled students in pre-school, primary and secondary
school; and in programs of study leading to the award of graduate or
undergraduate degrees at the tertiary level.
This does not include services or goods paid for outside of the tuition
(such as meals, books, extracurricular activities), tutoring, professional
development and continuing education, seminars, or diploma and certificate
courses.
•
Thesale of vacant land; the stamp tax on transfers
remains in place.
•
A lease of land to the extent that such land is principally used, or
intended for use, for accommodation as a dwelling which is erected or to be
erected on such land.
•
Any services by a ministry, department, statutory body, agency, local
government council, or other entity of Government, in connection with a taxable
activity where the consideration for such services is —
o
(a)nominal in amount; or
o
(b) not intended to recover the cost of such goods or services.
•
Services rendered by a daycare business, including the provision of
after-school care.
•
Services provided directly by a facility to persons in need of care,
being persons who are —
o
aged;
o
indigent;
o
infirm;
o
disabled;
o
handicapped.
•
Health care, specifically for public services provided to “public
patients” receiving free care at public facilities including children of school
age or younger, the indigent, aged, government employees and other persons
identified by the Minister of Health.
•
Religious services by an institution of religious worship.
•
Services by a recognized charity to the extent that such services
relate directly to the charitable function of the charity.
•
Games of chance, gambling and lotteries.
The New Zealand mission also brought the spotlight back to exemptions,
an area on which we had a significant private sector lobby. Exemptions when they are socially motivated
are intended to reduce the burden of consumption taxes on persons with lower
incomes. The points that the mission
reinforced however, are the following:
➢ The first is that
it is a costlier method of trying to help the poor, because more revenue is
sacrificed in the process to those who are not poor. Take food for example. While a low-income family spends a higher
proportion of its income on food, a high-income family spends much more on food
in absolute terms. So exempting food
from VAT would provide a much larger dollar benefit to a high-income family
than to a low-income family. Having the
means to provide direct assistance to low-income families is thus a far more
efficient mechanism than exempting necessities from VAT.
➢ Studies done in New
Zealand at the time of VAT introduction showed that the bottom 20 per cent of
households spent up to 29 per cent of their budgets on food while the top 20
per cent spent up to 10 per cent.
However, upper income households spent twice as much on food as
low-income households. For every $100
spent on food, the least well-off spent $6.50 while the most well-off spent
$12. Thus taxing all food made more than
sufficient additional revenue available to redistribute and supplement the
incomes of the poor.
➢ In addition, as the
Ministry of Finance has emphasized in its education campaign, VAT-exempt items
can still experience a price increase under a VAT as sellers will not be able
to claim credits for VAT paid on inputs.
The New Zealand mission stressed that this increases the justification
for limiting the list of items that are exempted from VAT, because it gives the
businesses that are affected by such changes the opportunity to participate
fully in claiming credits for VAT paid on their operating inputs. It also allows such businesses to be more
transparent in undertaking the adjustments to explicitly include VAT in their
prices.
➢ The case of electricity
is instructive in this regard. As it
will not be exempt, BEC will be able to claim credit for all VAT paid on its
inputs which, for electricity, are significant as they represent fully 82.5 per
cent of gross output. That suggests that
value-added in the electricity sector is only 17.5 per cent of gross
output. BEC will then add 7.5 per cent
VAT to its bills. However, were
electricity to be exempt, BEC would not charge consumers the 7.5 per cent VAT
but, as VAT on its inputs would not be creditable, it would pass on the
equivalent of 6.2 per cent of VAT in the form of higher electricity
prices. BEC’s
commercial customers would be particular hard hit as they would face higher
electricity prices and would have no input VAT to claim as a credit. Their own selling prices, and the VAT that
they charge, would also be higher. This
clearly illustrates how tax cascading can result from VAT exemption.
We are now
proposing a regime of VAT-inclusive rather than VAT-exclusive pricing. This is to simplify price comparisons by
consumers, especially when navigating between VAT registrants and
non-registrants. The price consumers see
will always be the price they pay.
The registration
threshold for VAT will now be universal at turnover of $100,000 per year. As well, we will allow group registration for
related groups of companies, which will use a single VAT account and file a
consolidated VAT return. This will
eliminate the need to recognize input and output taxes on intra-group
transactions.
There will be three
filing periods for VAT which will be specified in the VAT rules rather than the
Bill. Businesses with annual taxable
sales exceeding $5 million will file monthly.
Businesses below that threshold and with taxable sales exceeding
$400,000 will be allowed to file quarterly.
Other registrants would be allowed to file on a semi-annual basis and
use more simplified cash accounting methods when compiling their VAT
returns. This cash rather than accrual
basis of accounting among small registrants would also eliminate working
capital concerns over the treatment of bad debts.
A simplified VAT return using a “flat rate scheme” is proposed for businesses with turnover below
$400,000. VAT due to Government would be
calculated either as a fixed percentage of cash sales, with no need to account
separately for input taxes paid; or the business would be allowed to calculate
both input and output taxes on the basis of cash receipts or cash payments.
As well, businesses
that qualify, including those that currently enjoy fiscal incentives on imports
(such as tourism and manufacturing firms), may be allowed to defer payment of
VAT until the return for the respective period is filed. At the time of filing,
such VAT registrants would be required to report the deferred taxes. They would simultaneously claim any allowable
input tax credit, and any cash flow impact of paying VAT would be minimized.
We will also
implement less complex procedures for tax credits against bad debts. The simplified method relieves small business
firms of the need for accrual accounting for VAT, and correspondingly all
complications relating to bad debts.
Large firms that must continue to use accrual accounting would face
fewer hurdles when claiming credits for bad debts. These credits would be allowed when bad debts
are recognized, as opposed to when collection efforts are exhausted.
As well, we have
reduced the timeline for the payment of VAT refunds. Administrative procedures in the VAT Bill
would allow businesses that file monthly returns to request refunds within two
months of the period in which the net credits arise. Previously, wait times could extend up to 6
months. VAT registrants that sell zero-rated
supplies and are always expected to be in a net credit position would not be
subject to such waits. Such refund
claims would be allowed at the same time as the VAT returns for the relevant
tax period. Registrants that are allowed
to file their returns on a less frequent basis would be able to claim refunds
at the time of filing.
We are also providing an additional week to file VAT returns. Businesses will have up to 28 days after the
end of each tax period to file their returns.
I would also flag section 64 of the VAT Bill in particular as it has
garnered some attention in recent days.
That section provides for the recovery of tax from persons leaving The
Bahamas. Specifically, where the
Comptroller has reasonable grounds to believe that a person liable to pay
outstanding tax under the Act may leave the country for an indefinite or
prolonged period without paying the tax, the Comptroller may issue a
certificate in the prescribed form to the Commissioner of Police or the
Director of Immigration requesting the Commissioner or Director respectively to
take such steps as may be necessary to prevent the person from leaving The
Bahamas until the person makes payment in full of all tax due and outstanding,
or an arrangement satisfactory to the Comptroller for the payment of the
outstanding tax.
I would wish to signal that such a provision is not unprecedented and
that it is in fact in effect in countries in the region such as Grenada,
Dominica, St. Kitts and Nevis, and Antigua and Barbuda.
Amendment.
Tariff and Excise Rate Reductions
It is evident that
a lower VAT rate will yield somewhat less revenue than we had originally
expected. As such, across-the-board
reductions in tariffs and excises will not feasible at the time of
introduction. There will, however, be
selective reductions in certain areas, as seen in the amendments to the Tariff
and Excise Acts that were tabled at the same time as the VAT Bill. Though not exhaustive, the following list is
indicative of the areas in which the reductions are primarily focused:
• building materials,
such as wood and wood strips, plywood, veneered panels, builders’
joinery and carpentry of wood, PVC lumber and composite wood, shingles and
shakes, Portland cement;
• articles of
apparel, clothing and footwear
• various food items
such as turkey, dairy products, soybean milk, vegetables, fruits and nuts,
fruit juices
• instruments and
appliances used in medical, surgical, dental or veterinary sciences
• refrigerators,
freezers, stoves and ranges, instantaneous gas water heaters, tableware and
kitchenware and
• selected so-called
tourist items such as jewellery, watches and clocks, cameras and trunks,
suitcases and briefcases.
As has been
stressed in the past, this is the first round of tariff and excise cuts that
is, at this time, compatible with the revenue targets that we are seeking to
meet with our programme of tax reform.
As we garner hard evidence on actual revenue collections in the first
part of 2015, we will be in a better position to assess the extent of
additional reductions that might be feasible going forward.
Progress to-date on the VAT Implementation Plan
Mr.
Speaker,
As we have
repeatedly stated, effective implementation of VAT is critical to its
success. We have therefore continued to
devote ongoing attention and substantial resources to the work of our VAT Implementation
Unit in the Ministry of Finance.
Honourable Members will recall that I provided an in-depth report on
the state of work on our VAT Implementation Plan at the time of the 2014/15
Budget debate. I will at this time recap
that progress and provide an update.
As was stressed in
the Communication, the VAT Unit is geared to be fully ready for the beginning
of implementation as of October 1 of this year, thereby securing our readiness
for January 1, 2015.
Communications
Since the release
of the draft legislation in November 2013, the VAT Implementation Team
spearheaded or participated in a comprehensive communications exercise to
educate various private and public stakeholder groups throughout the entire
Bahamas.
As discussions with
the various stakeholders evolved, the Ministry of Finance and the VAT
Implementation Team placed greater emphasis on delivering basic VAT education
to the wider public.
They have also
given priority to presentations in the various Family islands. All of the Family Islands will be visited
both in coordination with the Chamber of Commerce and the Family Island
Administrators.
Communication Policy and Broad Strategy
Obviously, it is
critical to the success of VAT implementation to establish a communication
policy to which all relevant parties are expected to adhere. Accordingly, the objective is to provide
effective, consistent and reliable communication, in a pro-active manner, on
all aspects of the VAT implementation.
Our broad
communications strategy includes plans to educate business registrants on how
to use the web based Revenue Management System (RMS) for the purpose of filing
returns and all routine transactions from businesses.
In addition, a
public awareness campaign will be launched via various media outlets to include
commercials, infomercials, town hall meetings, advisory visits, skits and a
variety of other educational exercises.
The public
awareness campaign to more fully advise the public on VAT commenced with the
tabling of the VAT Bill for 1st reading and several public
statements by myself and the Financial Secretary on various talk shows. The approach has been to give the general
public an overview of the evolution of the legislative process, taking into consideration a wide
cross-section of views from the private sector and international
consultants. The Bill reflects those
considered views and thus both the Financial Secretary and I have sought to
position the VAT launch by speaking to the critical changes to the Bill since
November 2013.
During the course of the debate, the VAT Unit will release educational
materials targeted specifically at consumers. We want the average consumer to
understand how VAT will impact him or her in their everyday lives, and those
things that they should be aware of when VAT is implemented in January
2015. In that regard, the VAT Unit will,
on a daily basis, utilize TV and radio commercials designed to give the public
quick facts on VAT. There will also be
weekly in-depth discussions on VAT.
Information will be released using our Facebook Page, Youtube and
Webpage.
Our intention is also to publish critical timelines for certain
deliverables, for example the
registration exercise. This exercise is expected to commence in the
month of September and the VAT team will announce those dates in late August.
Intensive training of the VAT team commenced this week and for a
period of two weeks the team will be introduced to the registration module of
the Revenue Management System (RMS) in preparation for registration. On the heels of this phase of the systems
training, the unit is expected to undergo four weeks of legislative training
from VAT experts from the Isle of Man and from England.
The training continues with focus placed on those persons expected to
engage business registrants in a tax advisory role. This training will be
conducted by CARTAC, the technical
assistance arm of the IMF in
the Caribbean, for a period of approximately 2 weeks in September. This training programme is designed to equip
those persons with the necessary skills to deal with a myriad of issues during
visits or other interactions with taxpayers.
This block of
training on the internal system and taxpayer services is expected to run from
the beginning of August until the third week in September. At the completion of this exercise, the team
will immediately launch into the registration of businesses for January 1 2015.
During all of these
activities the public will be informed through a targeted PR campaign on events
that will impact them.
The VAT Department
’s Taxpayer Services
Help Desk is now operational and calls are being managed by a team of five
persons. This headcount will expand as
training is complete.
The VAT operations are presently located in the Gladstone Road Freight
Terminal facilities.
In Grand Bahama, the VAT office will be located in the Regent
Center. This office should be
operational by the end of August with a full complement of staff, principally
from Grand Bahama with support from the headquarters office in New Providence.
The key Family
Islands will be supported by trained representatives of the VAT department
based in New Providence or Grand Bahama.
Registration Strategy
The VAT Team’s
registration strategy will involve the following steps:
• Corporate services
firms and the top 100 large taxpayers will be catered to, specifically for VAT
registration purposes, from September 2014;
• Workshops are being
planned from October 2014 for small and medium taxpayers in New Providence and
selected Family Islands;
• Permanent
registration venues will be set up in New Providence and Grand Bahama from
September 2014; and
• Taxpayers will be
able to register on the internet from September 2014.
As well, the
implementation team continues to support other Government departments that need
to prepare for VAT.
IT Support System
The VAT
Implementation Team is making good progress on the development of the IT system
and business processes that will support the administration of the VAT.
Business processes
for registration, filing and compliance are being finalized and currently being
tested.
Work on enforcement and audit procedures will commence on completion of the business
processes for registration.
Mr. Speaker,
We firmly believe that
the VAT Bill sets out a solid, world-class policy and administrative framework
for the new Bahamian VAT.
I am confident that our
programme of tax reform, including VAT, will be successful in moving our nation
to a system of taxation that is both economically efficient and adequate to
serve the needs of modern governance.
Remarks
by
The
Honourable Michael Halkitis
Minister
of State for Finance
Second
Reading of the
Value
Added Tax Bill 2014
August
19, 2014
Introduction
Mr. Speaker,
I wish at this time to move for second reading and committal of the
Value Added Tax Bill.
To that end, I will in this contribution make observations on a number
of vitally important matters in respect of the Bill that I trust will serve to
promote an enlightened and effective discussion of the Bill.
I will, specifically, touch on the following issues:
1.Setting the new VAT
and tax reform more generally within the context of the Government’s
overarching national development plan;
2.Outlining our
concerted efforts to reform and modernize the administration of the major,
existing taxes in order to enhance revenue collection performance;
3.Reviewing, once
again, the many initiatives that we have
launched to better contain and control public expenditure;
4.Expanding on the
key elements of the VAT policy and administrative framework that are featured
in the VAT Bill;
5.Elaborating on the
reductions that have been announced for various tariff and excise rates and
plans for the future in these areas; and
6.Updating Honourable
Members on progress to-date on the VAT implementation plan and our state of
readiness for VAT introduction on January 1 of next year.
The Government
’
s National Development Plan
Mr. Speaker,
The
VAT Bill before us is about the introduction of a new broad-based tax on
consumption in The Bahamas. However, it
is critically important to properly situate this initiative in the broader
context of the Government’s overall plan for national development. This plan, appropriately so, is about much
more than tax reform and the introduction of a new source of taxation.
Indeed, as the
Government moves ahead with the fundamental reforms that it was elected to
implement, including fiscal and tax reform, focus must be maintained on our
overarching plan for economic renewal, job creation and social progress. And
very importantly all of these within the context of a nation of islands;
citizens in all the islands and in the smallest settlements have a right and an
expectation of access to government services.
The details of that
plan were presented in the Government’s Charter for
Governance and, subsequently, the Speech from the Throne. In it, we explained that our country’s
need for change is widespread and that we simply cannot afford to continue with
business as usual. We spoke of our
commitment to a national development plan grounded in a vision of a stronger
and more prosperous Bahamas of the future.
Our plan offers new
and innovative solutions for the wide range of economic
and social
challenges facing the nation. To that
end, we have charted a course of change with the specific goals and targeted
actions that we will implement over the full course of our mandate.
Our plan is
multi-faceted and it is targeted to fighting crime and bolstering national
security, strengthening the economy and creating jobs, enhancing health and
education and social development generally as well as promoting the further
development of our Family Islands.
We fully recognize
that the challenges that confront us are numerous and complex. Our plan of action is commensurate with those
challenges. We are steadfastly committed
to its full implementation for the sake of a better life and future for all
Bahamians.
The achievement of
the objectives that I mentioned above clearly is clearly dependent on stronger
economic growth going forward. To that
end, our plan encompasses a variety of measures including strengthening our key
tourism industry; promoting additional foreign direct investment across the
country, and particularly in Grand Bahama and the Family Islands; exploring
avenues for further diversifying our economy, especially in the agricultural
area through science and technology to improve our competitiveness in food
production. We are also committed to
further diversifying our financial services sector; the further development and
expansion of our yachting and shipping registries; expanding our investments in
education; and strengthening national training through the National Training
Agency to establish a competency based training and job placement system that
is flexible and responsive to the requirements of the workplace.
We have focused our attention on these and the other major areas of our
change and growth agenda and we will persist in planning and further developing
initiatives that will get our economy growing more strongly in the years ahead.
From the outset, we
have been guided by the hard reality that the finances of the Government need
to be returned to a position of sustainability if we are to strengthen
confidence in the Bahamas as an attractive and secure place for investment, not
only by foreigners but by Bahamian entrepreneurs as well.
If confidence is
eroded by lax fiscal policies, we all bear the consequences: credit downgrades
and higher interest rates for the Government and Bahamian businesses and
citizens, as well as the potential for further downgrades and higher interest
rates if we fail to act decisively and stop mortgaging the future to support
today’s
spending. History of deficit financing.
We have made it
clear that we will implement priority initiatives within our plan to the extent
that we can do so in a fiscally responsible manner while remaining faithful and
focused on the commitments made in our Charter for governance.
We have also
stressed that we will strive to reform and rebuild the basic structure of the
public finances such that, over time, we return them to a self-sustaining basis
with no need for continued annual deficit financing and borrowing.
At the same time,
by putting the level of government debt on a downward path back toward more
desirable and appropriate levels, we will recreate the fiscal room necessary to
finance the full complement of our national development plan, including
economic renewal and stronger job creation.
Seen in this light, fiscal reform is at the heart of the Government’s
plan for national economic and social development.
In turn, tax reform
is a critical component of fiscal reform.
These reforms are critically necessary to allow the Government to follow
through in making its national development plan a reality.
For the sake of
complete transparency, full disclosure, accountability and credibility, we set
out the details of the various components of our fiscal reform strategy in the
form of a Medium-Term Fiscal Consolidation Plan through 2016/17. This plan was published in February 2013. The
plan consists of four key parts: growing the economy; restraining expenditure;
enhancing revenue administration; and securing new sources of revenue. Many who
still persist in the view that the government is focusing only on taxation.
Through this plan,
and in combination with our actions to strengthen economic growth, we are
fundamentally and, in a
balanced way, reforming the structure of both
Recurrent and Capital Expenditure as well as the structure of Government
Revenues. This will allow us to:
•
eliminate the unsustainable imbalance between Recurrent Expenditure
and Revenue with a target of 2015/16;
•
significantly reduce the GFS Deficit and set it on course to complete
elimination; and
•
arrest the growth in the Government Debt burden and move it onto a
steady downward path to more prudent and sustainable levels.
Reform
and Modernization of Major Existing Taxes
The Government’s
actions on the revenue front begin with measures to improve the collection of
existing taxes in line with what is rightfully due to the Government. We are fully cognizant that our revenue
system is seriously deficient and we are moving to remedy this situation
through a number of targeted reform and modernization measures. As I spoke at length to our actions in
respect of Customs and Real Property Tax at the time of the 2014/15 Budget
debate, I will merely recap these at this time.
Customs
Operations
Mr. Speaker,
Since coming to
office, we have been pursuing an aggressive plan of action in respect of
Customs, to bring its practices and procedures up to best international
standards.
Business Process
Re-engineering
In the area of
business process re-engineering, the final Inception report has been prepared
and monthly reports have commenced. A cloud-based project management software
has been set up to monitor activities, timelines and milestones.
Enforcement
As for enforcement,
the consultants conducted their first mission and are developing preliminary
findings for the “
As Is” reports. This work should
conclude by September 12, 2014.
Customs Network
Infrastructure
The final report
assessing the Customs Network has been reviewed. As well, the Terms of Reference for the new
Customs Network have received approval from the IDB, which is providing
financial support. Work is underway on
the RFP to solicit bids for the new customs network inclusive of IP phones,
Network Topology, Network Equipment, Installation, Maintenance, Warranty and
Standardization.
Mobile
Communications Equipment
The procurement of
some of the mobile communications instruments, such as handheld radios, Wifi
solutions in port zone and PDA’s, is underway.
Marine Unit
Mobilization of the
Marine Unit is proceeding with the RBDF guiding the procurement of the boats
and maintenance management.
K9 Unit
Mobilization of the
K9 Unit has been agreed and the RBPF/HMP will guide the procurement of the
canines and maintenance management.
Portable Scanners
Customs is
proceeding with the procurement of portable scanners and has identified several
Family Island sites for deployment.
Human Resources
Consultancy
The RFP for the HR
consultancy is in development and bids will be solicited with a view to
engaging a firm.
Training Sites
Renovation
Customs is
proceeding with the training sites renovation.
They have identified several training sites for key Customs Operations
on the Family Islands.
Audit
In the audit area,
proposals are being reviewed and evaluated.
Modernization
of the Real Property Tax System
As for progress
being made on the modernization of the Real Property Tax system, concerted
efforts are being focused on the following major initiatives in the Property
Tax Unit of the Department of Inland Revenue:
• Introduction of a
new Property Tax Management and CAMA System that will enable the RPT Unit to improve
the coverage ratio of the tax system, provide accurate tax information, manage
arrears and collections and lead to an overall enhancement in the efficiency of
the department; the Government recently signed the contract with Tyler
Technologies with respect to replacing the Real Property Tax System;
•
Development and implementation of a General Re-assessment of
properties on the register in the Fall of 2014, in order to get property values
up to date, by either indexing or trending existing valuations to achieve
better horizontal equity;
•
Implementation of an Arrears Action Plan utilizing private collectors
to assist with the collection of outstanding property taxes;
•
Delivery of an effective programme of Taxpayer Education to inform
taxpayers on the various aspects of the Real Property Tax; and
•
Amendments to the Property Tax Legislation to ensure that it is in
line with best practices.
Enhanced
Containment and Control of Public Expenditure
As for measures to contain and control public expenditure, Honourable
Members will recall that I spoke at length, during the Budget debate, on the
numerous concrete actions that this Government has initiated since it came to
office and which it is actively pursuing.
In summary fashion, on the Recurrent Expenditure front, we are taking a
variety of measures to restrain the growth of spending and make that spending
more efficient and effective. The
overall framework for strengthened public financial management is taking place within
the scope of the new Financial Administration and Audit Act. The Ministry of Finance is, in a determined
fashion, enforcing strict expenditure discipline and accountability across all
Government Ministries, Department and public corporations.
In this regard, the Government is committed to a fundamental review of
its operations and its expenditure and revenue control mechanisms, seeking to
instill best practices wherever feasible. The Ministry of Finance, in
particular, is being restructured and strengthened to enhance its capacity to more
effectively monitor the operations and expenditures of Government Ministries,
Departments and public corporations. We are vigorously striving for higher
levels of accountability and efficiency.
As regards public
corporations, the Ministry of Finance is exerting more direct oversight of
their financial affairs to ensure that they strive for greater levels of
efficiency and effectiveness and that they are subject to greater
accountability to the Government. This will allow our budgeting process to be
more comprehensively informed by the budgets of public corporations, such that
a truly comprehensive approach to fiscal discipline is achieved. The Government has asked subsidy dependent
corporations to better align their expenditure plans with the resources that
are available.
In addition, our
planning function is being strengthened such that new investments and projects
are reviewed in an economically and financially sound and effective
manner. The government is also
introducing new Public Sector Procurement procedures which impose greater
controls and greater efficiency on public spending for goods and services for
all public entities including public corporations.
Appeal for
cooperation.
As well, we have
bolstered our approach to the management of government debt. Through the Debt Management Committee
comprising representatives of Finance, the Treasury and the Central Bank; a new debt management policy framework has
been developed to minimize the financing costs of Government debt while also
minimizing risk.
Through these
actions, Recurrent Expenditure will be allowed to grow in dollar terms through
the medium- term to allow the financing of new and emerging priorities such as
the hiring of doctors and other staff for the new mini-hospitals. However, the plan does signal the Government’s
commitment to a reduction in Recurrent Expenditure relative to the size of the
economy; this will require the setting of clear spending priorities going
forward.
Having said this, I
believe it is important to delineate again the factors underlying the
year-over-year increase of $103 million projected for Recurrent Expenditure in
2014/15. For one thing, not unexpected,
debt servicing requirements next year will be up by $40 million from 2013/14,
with public debt interest payments up by almost $30 million and debt redemption
higher by $10 million. Of course, it
goes without saying that the large cost overruns, under our predecessors, on
the New Providence Road Project have been an important factor in the higher
interest payments for which we have had to make provision.
Capital Expenditure
over the last few years has been at exceptionally high levels relative to
historical trends. However, due to the
fiscal exigencies, our Medium-Term plan calls for these expenditures to be
returned to their more traditional level of 3% of GDP. Given emerging requirements, this will
require strict prioritization and timely profiling on the part of the
Government.
How long do we ask
people to wait?
Key
Policy and Administrative Elements of the VAT Bill
Mr.
Speaker,
As I stated at the time of the
tabling of the VAT Bill on July 23rd, we indeed find ourselves at an
historic moment in the history of our small nation. For, after seemingly countless years of
seemingly endless discussion, debate and study, we are finally moving forward
with fundamental reform of our system of taxation to bring it up to the modern
standards of the 21st century.
I would go further
in this vein and suggest that our intensive and extensive deliberations on the matter
have truly borne fruit in that we have settled on the very best option for our
country from both an economic and a fiscal perspective. In the words of Professor Richard Bird, an
internationally renowned expert on VAT and taxation in general, the implementation
of VAT has been, without a doubt, the most successful fiscal innovation since
1950. Allow me to repeat and stress the
key words in the previous statement: without a doubt,
the most successful fiscal innovation in over half a century.
More specifically,
he asserts that:
“
no other significant tax, not even the income
tax, spread so rapidly and quickly around the world to the point where VATs
currently exist in over 150 countries
”
.
And why has this
occurred? Professor Bird attributes this
phenomenal success to the fact that every country needs a tax on mass
consumption to finance government programmes and services. More importantly, he states that, in
addition, experience has shown that the VAT is the least distorting consumption
tax and it is the tax that can be administered most effectively. In other words, VAT is the most economically
efficient way to collect tax revenues and the cost of doing so is generally
lower than for other forms of taxation.
According to an IMF
tax policy mission that visited this country in March of this year, revenue
yields from VAT generally outperform other types of taxes and this has been
demonstrated in several Caribbean countries.
For example, following VAT introduction, indirect tax revenue increased
by at least 3 per cent of GDP in Antigua and Barbuda, Belize, Dominica and St.
Vincent and the Grenadines. In the case
of St. Kitts and Nevis, the increase was on the order of 6 per cent of GDP, on
the basis of a VAT imposed at a rate of 17 per cent.
We have now deliberated
on VAT for well over a year, since the release of the White Paper in February
2013. Following the issuance of the
draft VAT legislation late last year, we have had consultations with the
private sector. We have also had the
benefit of further in-depth studies of VAT in the
Bahamian context.
As well, our internal
deliberations have been informed by experience gained in numerous other
countries over the past many years. That
experience has been catalogued in a best-practice framework that is generally
acknowledged to be optimal.
Interestingly, of all the VAT nations around the globe, New Zealand is
the one country that has adhered as closely as possible to that so-called
optimal VAT framework and it is thus rightfully and widely recognized as having
the very best VAT system in existence.
It is for that very
reason that the Prime Minister sought concurrence from his New Zealand
counterpart for timely and focused policy and technical advice from VAT experts
from that country. I have previously
provided details on the findings and recommendations of the New Zealand tax
mission and their final report is available on the Government website. I would at this time merely recap the key
conclusions.
The success of the New Zealand VAT, and there are important lessons
for us here, was very largely due to:
➢ an extensive
education programme aimed at both the business sector and the wider public,
with the programme largely driven by respected members of the private sector;
➢ a Government
commitment to minimize the compliance costs involved with the new tax,
particularly by having virtually no exemptions; and
➢ a Government
commitment to offset the effect of VAT on the cost of living by reducing income
taxes and, for families not paying income tax, introducing a form of negative
income tax or cash transfer system.
As was explained in the Budget Communication, the government has
accepted the New Zealand recommendation to enlist the private sector in the
public education campaign. A three
person Task Force will oversee this process and will be tasked to assist in
explaining the VAT to the business community and the wider public. The Task Force will have a budget of $150,000
at its disposal to deliver the proposed campaign by the end of December 2014.
As for a VAT in The Bahamas, the New Zealand experts recommended that:
➢ while the Ministry
of Finance VAT Implementation Team could likely cope with implementation as
early as October 1, they are more likely to require time beyond then if there
are design and implementation changes made in response to the draft legislation
upon tabling.
➢ Moving to a single
rate of VAT, other than zero for exports, with very limited exemptions would
enormously reduce the compliance costs of the private sector and the
enforcement costs for the public sector.
This would also permit a potentially large reduction in the single rate
of VAT, almost certainly to 10 per cent and quite possibly to below that
figure.
➢ While the above
approach would minimize compliance costs and allow a lower rate, it could also
have negative effects on the well-being of low-income households. It would thus be vital to introduce
mechanisms to protect such households.
The team estimated that our proposed reforms to social assistance
programmes appear to provide a suitable delivery mechanism for such assistance.
The impact of VAT
structure and simplicity/complexity on private sector compliance costs is
indeed critical. The issue has been
documented in a study undertaken by Price Waterhouse Coopers on the basis of
data collected by the World Bank as part of its Paying Taxes 2010 project. The study concluded that it is very important
to streamline the compliance burden and reduce the time needed by business to
comply if a VAT system is to work efficiently.
The key underlying findings are that:
•
Where electronic filing and payment is available and is used, the
average time to comply with VAT is some 30 per cent lower;
•
The frequency of returns is also important; where bi-monthly or
quarterly returns are available, compliance time falls by some 35 per cent;
•
The requirement to submit invoices and other documentation with VAT
returns increases the time required to comply by a factor of 2; and
•
Prompt refunds tend to reduce the time required by businesses to comply.
I am pleased to report
that the VAT administrative framework that is in development for this country
features a number of measures that will ease the compliance burden on
business. We will, for instance, have
electronic filing and payment; three options for filing frequency based on the
size of a business; no invoices and supporting documentation will need to be
filed with VAT returns but merely retained for audit purposes; and refund
procedures have been accelerated.
Mr. Speaker,
The VAT policy and administrative
framework that is presented in the VAT Bill has been duly shaped to reflect the
very
best advice that we have had at our disposal. As I did at the time of tabling, I will now
briefly review the key features of the Bill for the benefit of Honourable
Members.
The VAT will be
administered by the VAT Department under the Ministry of Finance. This structure will function under an MOU
with the Department of Inland Revenue which will allow a relatively seamless
transition to the Central Revenue Administration that will in time emerge and
encompass both VAT and Inland Revenue.
I want to stress that
the Government clearly still adheres to its goal of creating the CRA but judges
that an interim move to a VAT Department is prudent in the near term in order
to secure the successful introduction and implementation of the VAT. A VAT
Appeal Commission will adjudicate on tax matters and appeals will be possible
to the Supreme Court on matters of law.
There will be one
single rate of VAT at 7.5 per cent across the board. As is done around the world, exports will be
zero-rated, thus allowing exporters to claim credits for VAT paid on inputs and
thereby maintaining their international competitiveness. We judge a lower VAT rate than originally
proposed to be desirable from both an economic and social perspective.
The importance of
simplicity has been demonstrated in Switzerland which undertook a fundamental
assessment of its VAT system in 2007.
One part of the proposed reform involved transforming its three-rate
structure of 2.4 per cent, 3.6 per cent and 7.6 per cent into a single rate of
6.1 per cent. It would also remove 20 of
the 25 existing exemptions. Independent
studies revealed that the introduction of a single VAT rate would be expected
to reduce business compliance costs by at least 20 per cent and up to 30 per
cent, and increase economic growth by 0.1 per cent to 0.7 per cent.
Zero-rating (i.e.
applying zero VAT and allowing credits for VAT paid on inputs) should
definitely be applicable to exports as a VAT is designed to tax domestic
consumption. Other than that,
zero-rating should be strictly limited, if utilized at all.
Adding other items
to the zero-rated list undermines the VAT as a broad-based, neutral tax on
consumption. It also adds to the
compliance costs of the private sector, as well as the administration costs to
government, by increasing the volume of VAT collections which are subsequently
refunded. Zero-rating also provides
opportunities for fraud.
VAT refunds have
been frequently referred to as the potential Achilles heel of a VAT system and,
accordingly, experts have argued against extensive zero-rating in order to
minimize the magnitude of refund claims and payments.
Items that are
exempted under a VAT are not subject to VAT but credit for VAT paid on inputs
is not allowed. As such, exemptions are
inconsistent with the fundamental logic of VAT and they break the VAT chain,
thus making enforcement more difficult.
Accordingly, the consensus view of tax experts is that a VAT should
exempt as few sectors as possible. As
seen in other countries, it is often the proliferation of exemptions that
over-complicates a VAT and thereby undermines its chances of success.
The
main drawbacks of exemptions are that they:
•
narrow the VAT tax base, thereby necessitating a higher standard VAT
rate to meet revenue requirements.
•
lead to cascading: if an
intermediate seller is exempt, it cannot claim credit for VAT paid on its
inputs. The upstream producer then ends
up charging VAT on VAT paid on those inputs.
•
increase administration costs to government and compliance costs to
the private sector, especially firms that sell both taxed and exempt goods and
services.
•
violate the destination principle for internationally traded items,
where exports embody exempted inputs (exports are thereby disadvantaged in a
competitive sense).
•
lead to exemption creep as non-exempt sectors lobby for exemptions,
which can quickly undermine the success of the VAT system.
Accordingly, we
have decided, along with the significantly reduced VAT rate, that the list of
exemptions should be pared substantially, compared to what was initially
proposed. Specifically, no goods will be
exempted. As for services, the list of exemptions has been tightened to include
only the following:
•
Financial services, i.e. credit and deposit/savings products. This covers all forms of lending and savings
products issued by banks, insurance companies and other financial institutions. For insurance, the products affected are, in
particular, life policies and annuities.
In order to give the industry time to prepare, exemptions on non-life
insurance and annuities (such as property, health and casualty) are to be
preserved until June 30, 2015.
•
The sale or rental of a dwelling.
•
Education services, specifically only for explicit tuition-funded
courses of study for enrolled students in pre-school, primary and secondary
school; and in programs of study leading to the award of graduate or
undergraduate degrees at the tertiary level.
This does not include services or goods paid for outside of the tuition
(such as meals, books, extracurricular activities), tutoring, professional
development and continuing education, seminars, or diploma and certificate
courses.
•
Thesale of vacant land; the stamp tax on transfers
remains in place.
•
A lease of land to the extent that such land is principally used, or
intended for use, for accommodation as a dwelling which is erected or to be
erected on such land.
•
Any services by a ministry, department, statutory body, agency, local
government council, or other entity of Government, in connection with a taxable
activity where the consideration for such services is —
o
(a)nominal in amount; or
o
(b) not intended to recover the cost of such goods or services.
•
Services rendered by a daycare business, including the provision of
after-school care.
•
Services provided directly by a facility to persons in need of care,
being persons who are —
o
aged;
o
indigent;
o
infirm;
o
disabled;
o
handicapped.
•
Health care, specifically for public services provided to “public
patients” receiving free care at public facilities including children of school
age or younger, the indigent, aged, government employees and other persons
identified by the Minister of Health.
•
Religious services by an institution of religious worship.
•
Services by a recognized charity to the extent that such services
relate directly to the charitable function of the charity.
•
Games of chance, gambling and lotteries.
The New Zealand mission also brought the spotlight back to exemptions,
an area on which we had a significant private sector lobby. Exemptions when they are socially motivated
are intended to reduce the burden of consumption taxes on persons with lower
incomes. The points that the mission
reinforced however, are the following:
➢ The first is that
it is a costlier method of trying to help the poor, because more revenue is
sacrificed in the process to those who are not poor. Take food for example. While a low-income family spends a higher
proportion of its income on food, a high-income family spends much more on food
in absolute terms. So exempting food
from VAT would provide a much larger dollar benefit to a high-income family
than to a low-income family. Having the
means to provide direct assistance to low-income families is thus a far more
efficient mechanism than exempting necessities from VAT.
➢ Studies done in New
Zealand at the time of VAT introduction showed that the bottom 20 per cent of
households spent up to 29 per cent of their budgets on food while the top 20
per cent spent up to 10 per cent.
However, upper income households spent twice as much on food as
low-income households. For every $100
spent on food, the least well-off spent $6.50 while the most well-off spent
$12. Thus taxing all food made more than
sufficient additional revenue available to redistribute and supplement the
incomes of the poor.
➢ In addition, as the
Ministry of Finance has emphasized in its education campaign, VAT-exempt items
can still experience a price increase under a VAT as sellers will not be able
to claim credits for VAT paid on inputs.
The New Zealand mission stressed that this increases the justification
for limiting the list of items that are exempted from VAT, because it gives the
businesses that are affected by such changes the opportunity to participate
fully in claiming credits for VAT paid on their operating inputs. It also allows such businesses to be more
transparent in undertaking the adjustments to explicitly include VAT in their
prices.
➢ The case of electricity
is instructive in this regard. As it
will not be exempt, BEC will be able to claim credit for all VAT paid on its
inputs which, for electricity, are significant as they represent fully 82.5 per
cent of gross output. That suggests that
value-added in the electricity sector is only 17.5 per cent of gross
output. BEC will then add 7.5 per cent
VAT to its bills. However, were
electricity to be exempt, BEC would not charge consumers the 7.5 per cent VAT
but, as VAT on its inputs would not be creditable, it would pass on the
equivalent of 6.2 per cent of VAT in the form of higher electricity
prices. BEC’s
commercial customers would be particular hard hit as they would face higher
electricity prices and would have no input VAT to claim as a credit. Their own selling prices, and the VAT that
they charge, would also be higher. This
clearly illustrates how tax cascading can result from VAT exemption.
We are now
proposing a regime of VAT-inclusive rather than VAT-exclusive pricing. This is to simplify price comparisons by
consumers, especially when navigating between VAT registrants and
non-registrants. The price consumers see
will always be the price they pay.
The registration
threshold for VAT will now be universal at turnover of $100,000 per year. As well, we will allow group registration for
related groups of companies, which will use a single VAT account and file a
consolidated VAT return. This will
eliminate the need to recognize input and output taxes on intra-group
transactions.
There will be three
filing periods for VAT which will be specified in the VAT rules rather than the
Bill. Businesses with annual taxable
sales exceeding $5 million will file monthly.
Businesses below that threshold and with taxable sales exceeding
$400,000 will be allowed to file quarterly.
Other registrants would be allowed to file on a semi-annual basis and
use more simplified cash accounting methods when compiling their VAT
returns. This cash rather than accrual
basis of accounting among small registrants would also eliminate working
capital concerns over the treatment of bad debts.
A simplified VAT return using a “flat rate scheme” is proposed for businesses with turnover below
$400,000. VAT due to Government would be
calculated either as a fixed percentage of cash sales, with no need to account
separately for input taxes paid; or the business would be allowed to calculate
both input and output taxes on the basis of cash receipts or cash payments.
As well, businesses
that qualify, including those that currently enjoy fiscal incentives on imports
(such as tourism and manufacturing firms), may be allowed to defer payment of
VAT until the return for the respective period is filed. At the time of filing,
such VAT registrants would be required to report the deferred taxes. They would simultaneously claim any allowable
input tax credit, and any cash flow impact of paying VAT would be minimized.
We will also
implement less complex procedures for tax credits against bad debts. The simplified method relieves small business
firms of the need for accrual accounting for VAT, and correspondingly all
complications relating to bad debts.
Large firms that must continue to use accrual accounting would face
fewer hurdles when claiming credits for bad debts. These credits would be allowed when bad debts
are recognized, as opposed to when collection efforts are exhausted.
As well, we have
reduced the timeline for the payment of VAT refunds. Administrative procedures in the VAT Bill
would allow businesses that file monthly returns to request refunds within two
months of the period in which the net credits arise. Previously, wait times could extend up to 6
months. VAT registrants that sell zero-rated
supplies and are always expected to be in a net credit position would not be
subject to such waits. Such refund
claims would be allowed at the same time as the VAT returns for the relevant
tax period. Registrants that are allowed
to file their returns on a less frequent basis would be able to claim refunds
at the time of filing.
We are also providing an additional week to file VAT returns. Businesses will have up to 28 days after the
end of each tax period to file their returns.
I would also flag section 64 of the VAT Bill in particular as it has
garnered some attention in recent days.
That section provides for the recovery of tax from persons leaving The
Bahamas. Specifically, where the
Comptroller has reasonable grounds to believe that a person liable to pay
outstanding tax under the Act may leave the country for an indefinite or
prolonged period without paying the tax, the Comptroller may issue a
certificate in the prescribed form to the Commissioner of Police or the
Director of Immigration requesting the Commissioner or Director respectively to
take such steps as may be necessary to prevent the person from leaving The
Bahamas until the person makes payment in full of all tax due and outstanding,
or an arrangement satisfactory to the Comptroller for the payment of the
outstanding tax.
I would wish to signal that such a provision is not unprecedented and
that it is in fact in effect in countries in the region such as Grenada,
Dominica, St. Kitts and Nevis, and Antigua and Barbuda.
Amendment.
Tariff and Excise Rate Reductions
It is evident that
a lower VAT rate will yield somewhat less revenue than we had originally
expected. As such, across-the-board
reductions in tariffs and excises will not feasible at the time of
introduction. There will, however, be
selective reductions in certain areas, as seen in the amendments to the Tariff
and Excise Acts that were tabled at the same time as the VAT Bill. Though not exhaustive, the following list is
indicative of the areas in which the reductions are primarily focused:
• building materials,
such as wood and wood strips, plywood, veneered panels, builders’
joinery and carpentry of wood, PVC lumber and composite wood, shingles and
shakes, Portland cement;
• articles of
apparel, clothing and footwear
• various food items
such as turkey, dairy products, soybean milk, vegetables, fruits and nuts,
fruit juices
• instruments and
appliances used in medical, surgical, dental or veterinary sciences
• refrigerators,
freezers, stoves and ranges, instantaneous gas water heaters, tableware and
kitchenware and
• selected so-called
tourist items such as jewellery, watches and clocks, cameras and trunks,
suitcases and briefcases.
As has been
stressed in the past, this is the first round of tariff and excise cuts that
is, at this time, compatible with the revenue targets that we are seeking to
meet with our programme of tax reform.
As we garner hard evidence on actual revenue collections in the first
part of 2015, we will be in a better position to assess the extent of
additional reductions that might be feasible going forward.
Progress to-date on the VAT Implementation Plan
Mr.
Speaker,
As we have
repeatedly stated, effective implementation of VAT is critical to its
success. We have therefore continued to
devote ongoing attention and substantial resources to the work of our VAT Implementation
Unit in the Ministry of Finance.
Honourable Members will recall that I provided an in-depth report on
the state of work on our VAT Implementation Plan at the time of the 2014/15
Budget debate. I will at this time recap
that progress and provide an update.
As was stressed in
the Communication, the VAT Unit is geared to be fully ready for the beginning
of implementation as of October 1 of this year, thereby securing our readiness
for January 1, 2015.
Communications
Since the release
of the draft legislation in November 2013, the VAT Implementation Team
spearheaded or participated in a comprehensive communications exercise to
educate various private and public stakeholder groups throughout the entire
Bahamas.
As discussions with
the various stakeholders evolved, the Ministry of Finance and the VAT
Implementation Team placed greater emphasis on delivering basic VAT education
to the wider public.
They have also
given priority to presentations in the various Family islands. All of the Family Islands will be visited
both in coordination with the Chamber of Commerce and the Family Island
Administrators.
Communication Policy and Broad Strategy
Obviously, it is
critical to the success of VAT implementation to establish a communication
policy to which all relevant parties are expected to adhere. Accordingly, the objective is to provide
effective, consistent and reliable communication, in a pro-active manner, on
all aspects of the VAT implementation.
Our broad
communications strategy includes plans to educate business registrants on how
to use the web based Revenue Management System (RMS) for the purpose of filing
returns and all routine transactions from businesses.
In addition, a
public awareness campaign will be launched via various media outlets to include
commercials, infomercials, town hall meetings, advisory visits, skits and a
variety of other educational exercises.
The public
awareness campaign to more fully advise the public on VAT commenced with the
tabling of the VAT Bill for 1st reading and several public
statements by myself and the Financial Secretary on various talk shows. The approach has been to give the general
public an overview of the evolution of the legislative process, taking into consideration a wide
cross-section of views from the private sector and international
consultants. The Bill reflects those
considered views and thus both the Financial Secretary and I have sought to
position the VAT launch by speaking to the critical changes to the Bill since
November 2013.
During the course of the debate, the VAT Unit will release educational
materials targeted specifically at consumers. We want the average consumer to
understand how VAT will impact him or her in their everyday lives, and those
things that they should be aware of when VAT is implemented in January
2015. In that regard, the VAT Unit will,
on a daily basis, utilize TV and radio commercials designed to give the public
quick facts on VAT. There will also be
weekly in-depth discussions on VAT.
Information will be released using our Facebook Page, Youtube and
Webpage.
Our intention is also to publish critical timelines for certain
deliverables, for example the
registration exercise. This exercise is expected to commence in the
month of September and the VAT team will announce those dates in late August.
Intensive training of the VAT team commenced this week and for a
period of two weeks the team will be introduced to the registration module of
the Revenue Management System (RMS) in preparation for registration. On the heels of this phase of the systems
training, the unit is expected to undergo four weeks of legislative training
from VAT experts from the Isle of Man and from England.
The training continues with focus placed on those persons expected to
engage business registrants in a tax advisory role. This training will be
conducted by CARTAC, the technical
assistance arm of the IMF in
the Caribbean, for a period of approximately 2 weeks in September. This training programme is designed to equip
those persons with the necessary skills to deal with a myriad of issues during
visits or other interactions with taxpayers.
This block of
training on the internal system and taxpayer services is expected to run from
the beginning of August until the third week in September. At the completion of this exercise, the team
will immediately launch into the registration of businesses for January 1 2015.
During all of these
activities the public will be informed through a targeted PR campaign on events
that will impact them.
The VAT Department
’s Taxpayer Services
Help Desk is now operational and calls are being managed by a team of five
persons. This headcount will expand as
training is complete.
The VAT operations are presently located in the Gladstone Road Freight
Terminal facilities.
In Grand Bahama, the VAT office will be located in the Regent
Center. This office should be
operational by the end of August with a full complement of staff, principally
from Grand Bahama with support from the headquarters office in New Providence.
The key Family
Islands will be supported by trained representatives of the VAT department
based in New Providence or Grand Bahama.
Registration Strategy
The VAT Team’s
registration strategy will involve the following steps:
• Corporate services
firms and the top 100 large taxpayers will be catered to, specifically for VAT
registration purposes, from September 2014;
• Workshops are being
planned from October 2014 for small and medium taxpayers in New Providence and
selected Family Islands;
• Permanent
registration venues will be set up in New Providence and Grand Bahama from
September 2014; and
• Taxpayers will be
able to register on the internet from September 2014.
As well, the
implementation team continues to support other Government departments that need
to prepare for VAT.
IT Support System
The VAT
Implementation Team is making good progress on the development of the IT system
and business processes that will support the administration of the VAT.
Business processes
for registration, filing and compliance are being finalized and currently being
tested.
Work on enforcement and audit procedures will commence on completion of the business
processes for registration.
Mr. Speaker,
We firmly believe that
the VAT Bill sets out a solid, world-class policy and administrative framework
for the new Bahamian VAT.
I am confident that our
programme of tax reform, including VAT, will be successful in moving our nation
to a system of taxation that is both economically efficient and adequate to
serve the needs of modern governance.