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Last Updated: Feb 6, 2017 - 2:32:04 PM |
Former Minister of Barbados, Rt. Hon Owen Arthur speaks to GB Chamber of Commerce. (Photo courtesy of the GB Chamber)
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Freeport, Bahamas - The following are remarks given by the Rt. Hon. Owen S. Arthur, M.P., Former Prime Minister of Barbados to the Grand Bahama Chamber of Commerce on June 15, 2013 at the Pelican Bay Hotel on the “The Value Added Tax, Its Impact Of The Bahamas: A Caribbean Perspective”. The Minister for Grand Bahama, Michael Darville was in attendance, as well as Former Minister and Ambassador Cornelius A. Smith and
Sarah St. George,
Vice Chairman of The Grand Bahama Port Authority and Group of Companies.
In my recent address, as part of the celebration of Bahamas’ 40th
Anniversary of its Independence, I called attention to the fact that the
environment within which the development of Caribbean societies takes
place has been subject to dramatic transformation.
I further stated that countries which failed or showed themselves as
being too slow to adapt to their changed environment run the risk of
falling behind in the race to development, and, at worst, of becoming
failed societies.
This address today draws upon that perspective in offering an opinion
on the likely impact of the introduction of a Value Added Tax on the
Commonwealth of the Bahamas.
While the focus will be on issues related to the possible impact of a
Value Added Tax, it would seem that justice can only be done to this
subject if it is discussed within the context of a broader and
interrelated set of issues.
That context was set out with wonderful clarity in an Article by A.
Gabrielle Frasier at the 2001 Conference of the Caribbean Centre for
Monetary Studies:
“Can the Sir Stafford Sands Model of the Bahamian Economy Survive Today’s Global Economy?”
To be sure, the Global Economy within which Bahamas now has to operate
is remarkably different from that which obtained when many of the
structural and institutional characteristics which make up the Bahamian
model were put in place in the late 1940s.
The Bahamas has now to find its way in a globalised economy which is
governed, in large measure, by a body of international trade law which
has been devised to give effect to a number of specific principles.
Among these is the principle that countries should as far as possible,
reduce protection to domestic industries by reducing tariffs and
removing other barriers to trade.
Another important principle is one that requires that tariffs and
economic policies and regulations should be applied without
discrimination among countries.
Of special interest to the Bahamas is the National Treatment rule in
international trade law which prohibits the application of domestic
taxes and regulations which discriminate between domestic and imported
products and enterprise.
Such rules are now enforced and are enforceable by an international
institution, the WTO, which has mechanisms for the settlement of
disputes, and for the enforcement of penalties when countries are in
breach of the rules.
Bahamas is the only country in the Western Hemisphere which is not a member of the WTO.
For a country whose economic activities and performance are influenced,
to an extraordinary degree, by its participation in the global economic
arena, it is inconceivable that the Bahamas will be able to
indefinitely maintain this “odd man out” status where relating to a
rules-based international economy is concerned.
The relevant issue therefore is not that as to whether Bahamas should
become a member of the WTO. It is that as to how best the nation should
prepare for and negotiate the terms of its participation in this
critical institution, and how it should do so while giving equal
priority to the other reforms that the forging of such a relationship
with the global economy are sure to trigger.
The introduction and potential impact of a VAT in the Bahamas, have in,
my judgement to be discussed in that broader context. It has to be
viewed as an essential part of a broader suite of economic reforms which
have to be implemented as a single, coherent undertaking.
In offering this broader framework, I do not seek to minimize the
purely fiscal issues which have to addressed in the analysis of the
proposal to introduce a Value Added Tax in the Bahamas.
In fact, the introduction of a Value Added Tax can be viewed as a
necessary response to an evolving fiscal situation which derives from
Bahamas’ special domestic circumstances.
This country has a very narrow tax base that allows it to compete
effectively with territories in its immediate neighbourhood, which are
still colonies of Britain, and which have economic structures similar to
that of the Bahamas.
However, unlike them, the Bahamas is evolving a pattern of expenditure
associated with its assumptions of all of the obligations of nationhood.
This is beginning to be reflected in the emergence of fiscal deficits,
and the growth of the public debt. Although these at present are within
international norms of acceptability, their projected trajectory is such
that fiscal reform is required now to ensure that Bahamas does not
eventually have to confront the kinds of fiscal challenges that are
currently bedeviling so many of its neighbours in CARICOM.
Former Minister of Barbados, Rt. Hon Owen Arthur speaks to GB Chamber of Commerce. (Photo courtesy of the GB Chamber)
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This must constitute part of the rationale for fiscal reform, including a VAT in the Bahamas.
The introduction of a Value Added Tax in Bahamas, no matter how well
intended or designed it is, will be sure to generate its own controversy
largely because it will bring into the tax net activities that are not
now such to indirect tax.
Indeed the 1774 statement of Edmund Burke continues to be true:
“It is not given to men to tax and to please, no more than to love and to be wise.”
If I can however be allowed to draw from the Barbadian experience, I
would judge that its successful introduction is not beyond the people of
the Bahamas.
For a VAT was introduced in Barbados under more challenging
circumstances that currently faces the Bahamas as you contemplate its
introduction.
The VAT was introduced in 1997 at the same time as Barbados started to
apply the programme of trade liberalization which had been agreed to
when it acceded to membership of the WTO in 1994. Its introduction also
coincided with the implementation of its obligations, as part of the
CSME, to reduce its extra-regional tariffs from a high of 45% to 20%. It
coincided with the OECD Harmful Tax Initiative threat to the
functioning of our International Business and Financial Sector that
helped to reduce the growth prospects of our economy.
Above all, the scale of fiscal adjustment that was intended to be
accomplished by the move to a VAT by Barbados, far exceeded that now
intended in the Bahamas. In Barbados, the VAT was used to replace 11
forms of indirect taxes, and 44 kinds of fees as a means of raising
revenue.
Despite the challenges, the IMF’s publication, “The Modern VAT”, in
evaluating the performance of the VAT in small countries, at page 168
cites Barbados as a success story.
On the face of it, the proposals set out in the Government of Bahamas’
White Paper “A VAT within a Reformed Tax System”, on balance suggests
that this country is giving itself a reasonable change to successfully
introduce a VAT.
Indeed the design features proposed for the VAT and the purposes it is
intended to serve meet best standards and practices to be found in a VAT
across the wide range of countries in which it is now the major form of
taxation.
First, it is intended to be a broad based tax, levied at multiple
stages of production, with the crucial essential feature that taxes on
input will be credited against taxes on output.
It is in that capacity intended to be designed to ensure that the final
base of the tax is consumption. In this regard deliberate provision is
being made to shield exports and investments from the incidence of the
VAT in a bid to use it, as elsewhere, as an instrument to promote
greater efficiency and competitiveness in the domestic economy.
In conformity with best practice elsewhere, there is a clear commitment
to use the invoice credit/method which should both help to discourage
fraudulent reporting for tax purposes, and to more deeply embed proper
accounting practices as a widespread feature of the Bahamian business
community.
The concepts of exempt supplies and zero rating which are intended to
be applied in the Bahamas are in keeping with the ordinary and
widespread meaning of the terms as applied to the tax regime
internationally. So too is the proposal to set a sales threshold to
exclude much of the genuinely small businesses of Bahamas from the
incidence of the tax.
Among its design features, there seems to be the intention to provide
the VAT with a broad base, since there is intended provision for only a
very narrow range of zero rated and exempt activities.
Another important proposed design feature is for a standard rate of
15%, and a lower rate of 10% for the Tourism Industry, with a view to
making the tax easy to administer while at the same time benefitting the
leading sector of the economy.
In addition, some of the purposes that clearly seem to have motivated
the proposal to introduce the VAT, such as the prevention of cascading,
which are given expression in the proposed design of the VAT, are to be
found almost everywhere the VAT is applied.
In the case of Bahamas, there is a very special issue that has to be
explicitly taken into account in the design of this VAT. Like the VAT
elsewhere it has, for purposes of administration, to have a relatively
simple structure, with only two rates, few exemptions and a relatively
high threshold. It is intended to replace a tax regime characterized by
very high rates of import duties. There is at the same time no intention
to introduce taxes on income or corporation taxes as exists in other
jurisdictions in the Caribbean.
The resulting new tax regime will therefore only succeed in generating
an equivalent amount of revenue to that which it replaces if great care
is first taken to accurately estimate, and then even greater discipline
is exercised in maintaining the proposed broad base.
To be precise, the introduction of a VAT in the Bahamas will broaden
the tax base especially by bringing a number of activities, particularly
services into the tax net.
But in so far as income and profits will continue to be free of taxes,
the overall tax base against which revenue is raised in the Bahamas will
be smaller, in relative terms, that that of other CARICOM countries
which have a VAT as well as taxes on income. The proposed rate of the
VAT in the Bahamas will be the same as in most other Caribbean
countries. With the proposed lowering of the rates of import duties, a
VAT at the standard 15% rate will only serve its revenue generating
objectives if discipline is exercised to maintain its base that it is
given to begin with.
The size of the base will be such a critical determinant of the
eventual impact of the VAT in the Bahamas that two essential actions
need to be carried out before the new tax is introduced.
The first relates to the need for the conduct of appropriate studies
and simulations to gauge and to measure the proposed base, and to derive
estimates of the likely impact of proposed design features of the new
tax on prices, revenues and the productive sectors.
Former Minister of Barbados, Rt. Hon Owen Arthur speaks to GB Chamber of Commerce. (Photo courtesy of the GB Chamber)
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The Barbados experience emphasizes that this necessary research is a
vital first step which must be mastered to ensure that the best
decisions about the design features of the tax are made on the basis of
the very best information.
Initially, decisions were intended to be made in Barbados regarding the
VAT based on two reports of 1992 and 1993 which were basically baseline
studies and which proposed a tax with single rate of 15% to replace the
taxes to be abolished.
On coming to office in 1994, the administration I led decided to defer
the date for the implementation of the VAT to enable a more intensive
study to be undertaken to simulate the VAT empirically and
scientifically, and to derive better estimates of its likely impact on
the productive sectors, prices and on revenue.
The scope of the research that had to be undertaken in both the private
and public sectors proved to be formidable. The research however
yielded the empirical evidence which supported the structure and design
of the VAT that was eventually introduced in 1997.
Secondly, the successful introduction and operation of a Value Added
Tax require high levels of compliance. To deal with this, a very special
challenge has to be recognized and mastered. The challenge is that the
VAT is intended to simplify the tax system; but it is itself a complex
tax to design and to administer.
To address this challenge, no effort should be spared to design and to
have in place a fully competent VAT implementation unit before the VAT
is introduced. In addition, the most comprehensive public relations
outreach programme has to be undertaken to address the specific and
legitimate concerns of the main target stakeholders and to solicit and
secure their support for an initiative which carries its own intrinsic
complications.
The drafting of the legislation for the VAT also has to draw from best
practice. In particular, drafts have to make the subject of extensive
discussion and refinement and the legitimate concerns of stakeholders
have to be embraced and reflected in the Bill to be presented to
Parliament to secure strong stakeholder sense of ownership of the new
tax.
A systematic effort also has to be made to deal with the registration
of those liable to pay the tax, and to iron out the transitional
problems which are sure to arise as one tax regime is replaced by
another. One major transitional issue is sure to concern the procedures
that are put in to be in place to enable businesses to manage
inventories as one tax regime is replaced by another.
The point in all of this is that no matter how sound may be the reasons
for the introduction of a VAT, and no matter how perfect its features
are in their conceptual design, the success of the new tax will depend
on the strength and sensitivity surrounding the planning and
administration of its introduction.
In the Bahamas, as elsewhere, where the introduction a VAT is
accompanied by the abolition of a member of pre-existing taxes and the
reduction of the rates of some that are allowed to remain in place, I
cannot overemphasize how important it is to establish and prove the base
of the tax before making adjustments.
A VAT on a large base that yields more revenue than required can always
be adjusted and right-sized. But it is almost politically impossible to
start with too narrow a base and to hope thereafter to expand it.
The case of Barbados and Belize is very instructive in this regard
since the two countries introduced a VAT at virtually the same time.
The Government of Belize started with a tax with a base characterized
by many exemptions. It could not meet the revenue or other requirements.
The subsequent effort to attempt to broaden the base by reducing the
number of exemptions brought the VAT into disrepute and led to its
abolition.
In the case of Barbados, we started with as broad a base as possible
and I gave the commitment to the public to review it after sufficient
empirical evidence existed that the tax could get the job done in
relation to the raising of revenue and its beneficial effects on the
economy.
The VAT in Barbados was intended to yield the same revenue as the taxes
it replaced. It yielded significantly more. Its yield and buoyancy
having been established and verified, the fine tuning of the scope of
its base was subsequently undertaken.
Policymakers in the Bahamas will have to contend with and to deal
successfully with a number of other issues relating to the incidence and
effects of a VAT.
First, a properly designed VAT is intended to be a tax on consumption,
and to bring into the tax net a number of services which hitherto have
not been liable to tax.
The case will be put that the relative burden will fall more heavily on
the poor or those at the lower end of the income scale. The argument is
therefore certain to be advanced that the tax is regressive in its
effect and incidence, and that features should be built into its rate
and base to offset any pain it inflicts on the disadvantaged and the
genuinely poor.
Experience has shown that it is very difficult to address issues
concerning the effects of the VAT on the poor by building special
discriminatory features into the structure of the tax itself. It is
better to collect the tax and distribute part of the proceeds through
carefully targeted support programmes to the poor and the disadvantaged.
A number of special measures were used in Barbados to accomplish this end.
First, on the introduction of a VAT, a new Reverse Tax Credit was
created. This new credit enabled persons below a specific income
threshold to receive, on application, a tax refund even though they were
not paying income tax. By this means, it was possible to refund part of
the VAT to the poor.
Secondly, a new Poverty Eradication Fund was created and annually
capitalized from the proceeds of the VAT to deal with poverty at the
individual level. A new Social Enterprise Investment Fund was also
established and capitalized to support the creation and operation of
enterprises at the community level.
The opportunity was also grasped in Barbados, on the introduction of a
VAT, to amend the income tax regime by increasing the threshold below
which tax is payable, and by increasing the range of concessions and
incentives to spur savings and investments by both the private sector
and the individual tax payers.
Indeed, as a result of the buoyancy of the yield from the VAT, it was
possible in Barbados to reduce the corporation tax from 40% to 25% and
to introduce even lower tax rates on the small business sector.
Giving thanks to Rt. Hon Owen Arthur was former GB Chamber Director Carey Leonard (right) he is pictured with Former Prime Former Minister of Barbados, Owen Arthur and President of the GB Chamber of Commerce,
Giving thanks to Rt. Hon Owen Arthur was former GB Chamber Director Carey Leonard (right) he is pictured with Former Prime Minister of Barbados, Owen Arthur and President of the GB Chamber of Commerce, Barry Malcolm. (Photo courtesy of the GB Chamber)
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The design and implementation of a VAT must also be undertaken in a
manner that enable the leading sectors of the economy to lead and to
ensure that the VAT helps to create conditions for the economy to grow.
In the case of Barbados, this was accomplished in part by applying a
special concessionary rate of 7.5% to tourism and the hospitality
industry, at a cost of $7 million to the Treasury.
The Offshore Financial and Business sectors were treated as the Export
sectors they are, and were the beneficiaries of a zero-rating on their
inputs under the Third Schedule of the Act. The domestic Financial
Sector was accorded the status of an Exempt Supply, since, of course its
output is savings and investment and the intention of a VAT is to tax
consumption.
As said earlier, the purpose behind the introduction of a VAT is to
evolve a tax regime which features a broader base with lower rates of
taxes than that which it replaced.
The experience however is that such a worthwhile intention is
frustrated by the practice of weakening the base of tax by the
introduction of a number of exemptions over time.
I plead guilty in this respect. For having introduced the VAT and fine
tuned its base to create conditions for fiscal sustainably and economic
efficiency, I was subsequently persuaded to zero-rate the supply of
computer hardware and software to support the country’s move to a higher
level of information technology sophistication.
The base of the VAT in Barbados has since then been further weakened by
the introduction of a wider and wider range of zero-rated exemptions.
It is to be expected that in the Bahamas, there will be a similar
clamour for any original base of the proposed VAT to be narrowed to
support the perceived or expressed needs of sectors and groups.
As far as practicable, this should be resisted.
A related problem that must also be satisfactorily addressed with the
introduction of a VAT is that of maintaining expenditure discipline.
Because of its very nature, the VAT tends to introduce a higher level
of buoyancy to the tax system. The growth in revenues will tend to
outstrip the growth of the GDP. There will be the appearance that the
State is flush with cash, and that extraordinary expenditure claims on
the Treasury can be made and sustained. Fiscal disorder can in
consequence ensue, triggering in turn a need for adjustment to the VAT
rate.
In many instances, in the Caribbean and elsewhere, where the original
standard rate of the VAT has subsequently been increased, it has not
been due to the revenue underperformance of the tax. It has been due to
the lack or lost of expenditure discipline and control.
The recent experience regarding Barbados’ fiscal affairs is a classic case in point.
It should also be borne in mind that the increase in the basic VAT rate
to support the growth in expenditure can eventually prove to be
counterproductive, for any tax that is set at too high a rate will
suppress domestic demand and yield diminishing revenues.
In the final analysis, A Value Added Tax will only be successful in
achieving the purposes of brining efficiency, simplicity and buoyancy to
the tax regime, and helping to create the conditions for the sustained
growth and development of the general economy if it is allowed to be
vested with and retain the special characteristics it must have. These
are a broad base, a relatively low standard rate, few exemptions, and a
strong set of institutional arrangements to ensure high levels of
compliance.
I said earlier that the outcome and effect of the introduction of a VAT
in the Bahamas will be dependent not only on how the tax is designed,
structured and implemented, but also on the terms and conditions
attendant on the Bahamas accession to membership of the WTO.
The two matters ideally should be addressed as a single undertaking from a conceptual and planning perspective.
It is beyond the purview of the subject of this address for me to go
into extensive discussion on matters relating to Bahamas’ accession to
the WTO. I would cite the following as meriting priority attention.
First, accession to membership of the WTO will require that the
Bahamas, in respect of the trade in goods, agree to a programme to
reduce the existing level of tariffs and to dismantle the non-tariff
barriers. Its market access commitments can and will bear upon the base
of the VAT, and influence the extent of the revenue a VAT on services
has to raise.
It has to be carefully negotiated, with appropriate transition
arrangements agreed to in order to pre-exempt fiscal and economic
dislocation.
The application of the principle of national treatment across the board
to enterprises producing commodities is also a matter to which the
Bahamas will have to pay close attention in relation to its negotiations
under the GATT.
It is also, of course, well known that the GATT makes provision for an Agreement on Subsidies and Countervailing Duties.
This Agreement has special relevance for countries which have Special
Economic Zones (SEZs), and has been the subject of a Special World Bank
Policy Research Working Paper: “Implications of WTO Disciplines for
Special Economic Zones in Developing Countries” by Creskoff and
Walkenhorst.
Under this Agreement, direct subsidies that are contingent in law or in
fact on the export performance of enterprises are prohibited.
However, the WTO Agreement on Subsidies and Countervailing Duties
exclude from the definition of subsidies the core fiscal benefits
provided by Special Economic Zones – exemptions from duties and taxes on
goods exported from such zones.
The World Bank Study indicates that in addition to direct subsidies on
export performance, there are a number of Government incentives related
to the operation of SEZs which will be regarded as prohibited.
These include preferential transport and freight charges for export
shipment, exemption or remission of indirect taxes on exports in excess
of those on goods sold for domestic consumption, provision of export
credit guarantees, and subsidies contingent on the use of domestic over
imported goods, to name a few.
These matters should be the subject of close and careful attention in the Bahamas.
Barbados faces the challenge of having to make its concessions to
international business operating in Barbados that are contingent on
export performance WTO compatible by 2015. The Bahamas may wish to learn
from this experience.
Happily for the Bahamas, there is no commensurate Agreement relating to
subsidies under the General Treaty on Trade in Services of the WTO.
Equally, in negotiating a relationship with the WTO through the GATs,
as a predominantly service producing economy the Bahamas, will find that
it has more leeway than under the GATT because there is no requirement
for across the board national treatment to be applied in relation to the
trade in services.
Nonetheless, the GATTs make provision for the liberalization of the
trade in services across 12 sectors, over 150 subsectors, and through 4
modes of services delivery.
The Bahamas will have to undertake careful research to negotiate the
best terms of engagement across such a wide field of economic activity.
For, the terms of conditions under which Bahamas accede to the WTO by
way of its GATTs commitment will bear very heavily on the future
prospects of the Bahamian economy more than any other single
undertaking.
In the final analysis, the ultimate effect of the introduction of a VAT
and the accession of the Bahamas to membership of the WTO will be
determined in large measure on whether a spirit of Governance can be
brought to bear to develop a consensus on the critical aspect of the
these two matters that can best promote the Bahamas’ best interest.
The building of such a national consensus goes beyond the need for the
adoption and support for sound technical positions, based on empirical
findings. It requires that where common ground exists on the stated
positions of otherwise contending parties, such common ground is
recognised and held.
But above all, it requires recognition of the fact that if all agree
that you cannot stand where you are, then all should simply have agree
that you have to move.
This is the challenge facing all concerned in the Bahamas.
It is the common challenge from whose solution none should resile.
The decisions which have to be taken by the Government and people of
the Bahamas in the near future will, in all probability, change the
structure of the economy for ever.
It will be a great cause. But it is a cause which I am sure the
Government and people of the Bahamas are more than capable of winning.
Former Barbados PM and G.B. Minister look at the VAT system
© Copyright 2013 by thebahamasweekly.com
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