By NEIL HARTNELL -
Tribune Business Editor:



THE current Bahamian tax system is "not adequate to reduce the fiscal deficit on a long-term basis", a senior accountant told Tribune Business yesterday, urging the Government to broaden its revenue base by introducing a new structure in a "two-tiered" approach to lessen the impact on the business community.

Arguing that the Bahamas should have reformed its tax system 10-15 years ago, Raymond Winder, managing partner at Deloitte & Touche (Bahamas), said one way a new structure could be introduced was for the current system to be operated 'side-by-side' with its replacement.

In this scenario, the private sector could calculate the amount of tax they would have to pay under both the new and the old structure, and pay the lesser of the two. Mr Winder explained that the advantage from this was that the business community would not sink under the weight of new taxes, while the Government would not lose revenues during the transition period.

"What I would recommend is that the Government look at putting in a new system, but have a two-tier type situation where businesses can look at alternatives," Mr Winder told Tribune Business.

"This would capture taxes under the existing system and look at taxes under the new one, and businesses would pay the lesser of the two. It would give the Government the timeframe to put a new system in place, but not give businesses the problem of paying increased taxes. The Government would not lose anything through leakages, and businesses would not be burdened."

The other method suggested by Mr Winder was a 'credit system', where taxes under the new and old structure were again calculated, and Bahamian companies given a 'credit' to cover the difference if they ended up paying more under the new regime.

"Calculate the tax of the old regime and the new regime, and businesses could be given credit once again to make sure they're not paying additional taxes and government does not lose revenue," the Deloitte & Touche (Bahamas) managing partner explained.

Mr Winder disagreed with James Smith, former minister of state for finance, who had previously told Tribune Business that now was the time to "seriously consider changing this tax regime".

While arguing that no change should be introduced during a recession, Mr Winder said he did agree with Mr Smith on the notion that the current tax structure lacked buoyancy, and the Government was not earning enough revenues.

"A recession is the worst time to change the tax system because businesses are having problems trying to cope with the current taxes they have now," Mr Winder told Tribune Business.

"To change the tax system, and you're not sure of the impact it's going to have, could result in disaster. If it results in businesses paying more taxes, it's going to result in mass lay-offs. Businesses are not in a position to accommodate new or additional taxes. They're having huge challenges paying existing ones. They cannot expect to get more taxes from the business community today without putting lots of businesses out of business, and creating huge issues around employment.

"Changing the system now could also result in the Government losing revenues. The potential exists if no proper structure or system is put in place."

However, Mr Winder added: "The problem that we have, which is where I agree with James, is that the current level of revenues being generated under the existing system is not adequate to reduce, on a long-term basis, the deficits we currently see. We need a new system, because the current one is not wide enough.

"We have to look at a new system, because we can't wait for the economy to turn around." Mr Winder added that a broader tax structure was "the only way the Government is going to meet its new obligations and reduce the deficit".

Among those new initiatives, apart from the job creation schemes, were the unemployment benefit and National Drug Plan, both of which are proposed to be funded from an increase in the National Insurance Board (NIB) contribution rate.

The Deloitte & Touche (Bahamas) managing partner said the Bahamas should have implemented a new tax structure "10-15 years ago", exploiting the then-buoyant economy, as both the Government and the private sector were then "in a better position" to implement what was required, and deal with any errors and leakages from a new structure.

Numerous studies conducted in recent years have called for the Bahamas to ultimately introduce a sales or value-added (VAT) tax to replace the import/Stamp duty-dependent system, arguing that the present structure is too heavily linked to international trade and the global economy, plus internal commercial activity, for revenue buoyancy.

In addition, the Bahamas' move to accede to full membership in the World Trade Organisation (WTO) and its decision to sign the Economic Partnership Agreement (EPA) means that it will be forced to restructure its tax system, given that customs duties/tariffs are seen as barriers to trade and targeted for elimination in a rules-based trading set-up.

A major difficulty in shifting to a sales or VAT tax is that an entirely new collection system will be required. While Bahamas-based companies and importers may benefit from the elimination of customs duties through not having such a large chunk of revenues/cash flow consumed in up-front tax payments, they will be the ones the Government will require to first collect, then pass on, taxes to it.

And, while VAT may lead to a broader tax base through capturing services (the major part of the Bahamian economy) and the value added at each stage of the production chain, its implementation would require a massive cultural shift and changes to many businesses' computer systems.

The potential for fraud and evasion/non-payment of VAT would be a further concern, and the business community would be unlikely to welcome the prospect of tax reform at this time, given that their companies are still grappling with the recession's effects.

Still, Mr Winder told Tribune Business that tax reform would not be a "one-type change" just involving VAT or a sales tax. A more comprehensive reform and assessment of the whole tax package, including the likes of business licence fees, would have to be undertaken, including an analysis of whether the changes could dampen investment.

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