Tax Policy Reform in the Bahamas Value Added Tax & Impact on Bahamian Economy

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1 Tax Policy Reform in the Bahamas Value Added Tax & Impact on Bahamian Economy Insurance Institute of the Bahamas 16 May 2013 Kevin Burrows, CFA CAIA

2 VALUE ADDED TAX

3 GRIM NUMBERS Our deficit has increased from $182m in fiscal year 2006/2007, hitting $361m in 2008/2009 and could be anywhere between $650 million to $1 billion for 2012/2013 including capital spending according to the new administration. Direct government debt has ballooned from $2.6 billion in 2007 or about 31% of GDP, to about $4.4 billion today. Including contingent liabilities e.g. among public corporations such as BEC, and our debt increases by at least another $592 million, pushing total debt to about $5 billion and our Debt/GDP ratio above 60%. Source: Central Bank

4 CURRENT SYSTEM - COMPARISONS The Bahamas ranks 167th out of 210 countries in terms of tax revenues paid to the government as a percentage of GDP. Our government takes about 19% in taxes versus the global average of 29%. By comparison, Jamaica takes 27%, Barbados 28%, Trinidad & Tobago 34%, Canada 39%, Brazil 40% and most of Europe between 40% and 60%. The United States, with the largest economy in the world, takes a tax haul of 15% of GDP. Source: CIA World Factbook

5 OTHER REASONS TO CHANGE SYSTEM Narrow tax base: By putting most of the tax burden on imports, our tax base is fairly narrow and completely leaves out our dominant service-based economy. It also requires merchants to pay their taxes upfront, prior to making the final sale to consumers, thereby tying up capital unnecessarily International trade agreements: including the Economic Partnership Agreement or EPA with Europe, and membership for the Bahamas in the World Trade Organization or WTO.

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7 VAT EXAMPLE

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9 BARBADOS EXPERIENCE VAT was introduced in Barbados at the beginning of 1997 at a standard rate of 15% (it has since been raised to 17.5%). Established a VAT Implementation Unit (VIU) in 1993 and entered a technical cooperation agreement with the Inter-American Development Bank (IDB) in The VIU started public relations outreach programs in May 1995, including the release of pamphlets and booklets, presenting at workshops, seminars, as well as via television and radio to further educate the public and business community.

10 SAINT LUCIA Implemented VAT on October 1 st 2012 Replaces consumption tax, hotel accommodation tax, motor vehicle rental fee, mobile cellular telephone tax and the environmental protection levy Standard VAT rate of 15% with zero charged on certain goods and services Concessionary rate of 8% on goods and services provided by hotels until April 30, 2013 VAT threshold of East Caribbean $180,000 or approx. US$67,000

11 TURKS & CAICOS Planned Implemented of VAT in April Replaces import duties (partly), hotel & restaurant accommodation tax, vehicle hire stamp duty, domestic financial service tax, telecommunication tax and the insurance premium tax. Proposed VAT rate of 11%, in line with the present Accommodation Tax rate and one of the lowest rates in the Caribbean. No concessionary rates on tourism. VAT threshold of US$200,000 other than businesses already registered for Accommodation Tax, where the VAT threshold will be set at $50,000.

12 BAHAMAS VAT WHITE PAPER Proposed VAT rate of 15% applicable to all goods and services (except zero-rated and exempted transactions). Offsetting import tariff reduction still to be determined. Excise taxes imposed on tobacco, petroleum, vehicles and certain luxury items are NOT covered by WTO and will simply be reduced by the VAT rate. Potential elimination of business license tax while current structure for Banks and Insurance companies will continue.

13 BAHAMAS VAT WHITE PAPER VAT registration threshold set at $50,000 in turnover, resulting in some 3,798 firms accounting for 98.6% of total economy turnover. Zero rate applicable only to exports and international transport of goods and passengers allows refund of VAT paid. Eliminate Hotel Occupancy Tax and substitute a 10% VAT on rooms, food and beverage sales.

14 BAHAMAS VAT WHITE PAPER Exempted transactions are not subject to VAT and no credit given for VAT paid on inputs. These include: Food, agricultural products & medicines currently duty free Health and Education services Transfers & Leases of land & residential buildings Financial services (excluding accounting and legal services) Social and community services

15 INSURANCE INDUSTRY PERSPECTIVE Life and Health Insurance premiums will be exempt but VAT will affect the insurance industry in other indirect ways: Paying claims on cars, personal effects, etc. potentially lower costs due to tariff reduction (or no change) versus current experience. Rebuilding of houses / home repairs: Uncertain. Higher costs due to VAT on labour service component e.g. architects, lawyers, contractors may or may not offset lower cost on materials. Adjustments to existing policies (pricing or coverage amounts) necessary??

16 INSURANCE INDUSTRY PERSPECTIVE Life and Health Insurance premiums will be exempt but VAT will affect the insurance industry in other indirect ways: If VAT raises the overall cost of living (i.e. is a new net tax) then citizen s cash flows may be even more constrained. This will lower both their ability and willingness to pay their premiums and may slow future insurance sales.

17 BAHAMIAN COMPLIANCE Our Government is owed some $400m in past due property taxes, almost 5% of GDP Auditor General

18 OFFENSES & PENALTIES VAT legislation will make provision for a number of offenses, including: Failure to apply for registration Failure to display the certificate of registration Issue of a false invoice Failure to pay VAT due Failure to file a VAT return Failure to maintain proper records Making false or misleading statements VAT evasion

19 CLOSING THE FISCAL GAP With the introduction of VAT, the Government expects a net 2.2% of GDP improvement in recurrent revenue annually. Other measure that are anticipated to boost the total tax yield include: Reforms of the property tax administration system to add 1% of GDP by 2016/2017 A comprehensive Customs reform and modernization assisted by the IDB to add 0.5% of GDP New excise stamps on tobacco products to enhance compliance and add 0.2% of GDP All told, these measures should increase the revenue yield by almost 4% of GDP by 2016/1017, resulting in a surplus of $80 million even after capital expenditure that fiscal year.?

20 CORPORATE TAXES From Tax Information Exchange Agreements or TIEAs... To Double Taxation Agreements or DTAs... To Corporate Taxes.

21 DIRECT TAXATION Are Income Taxes and other forms of direct taxation on the table? Employed labour force is currently about 163,000 should we increase the tax burden on this segment (or a portion of this segment) of the population in order to lower/eliminate the VAT? What about those who reside/visit the Bahamas but who don t receive a taxable Bahamian income? Free riders on an income tax system?

22 GOVERNMENT SPENDING Barbados Redux: 17.5% VAT 20-35% personal income taxes 12.5% withholding on income and dividends 15-25% local corporate taxes and import taxes on vehicles, spirits, tobacco and petroleum products. Yet they still have a central government deficit of -4.4% of GDP and total government debt over 103% of GDP!* * 2012 estimates

23 Kevin Burrows, CFA CAIA, Senior Vice President