‘Don’t jeopardize’ citizens on tax reforms

• ORG leader: “fake” income tax is the panacea

• Warns of ‘cultural bias’ against these types of taxes

• The Bahamas are poorly served if hasty, “superficial” change

By NEIL HARTNELL

Editor-in-chief of the Tribune

[email protected]

Tax reform must “not jeopardize” the private sector and Bahamian citizens, warns a governance reformer, adding that the income tax is not in itself a panacea to the country’s fiscal and economic problems.

Hubert Edwards, head of the economic development committee for the Organization for Accountable Governance (ORG), told Tribune Business in a recent interview that the Bahamas needs to “be careful down this road” of income tax – businesses and/or individuals – because that nation has no history of taxing such levies.

Arguing that such reform options require “very careful, deliberate and thorough study”, he argued that the Bahamas must at all costs avoid a hasty and “superficial” approach given the culture shock that income taxes will inflict. both to businesses and to the population as a whole. taxpayer public.

With education and training being “paramount” to the success of any tax reform, Mr Edwards said the outcome must “serve the interests of all parties” – citizens from a fairness and equity perspective, while ensuring that businesses maintain their competitiveness and that the government generates enough revenue to run the country and provide essential public services without overburdening taxpayers.

Praising the Davis administration for its willingness to consider tax reform, the ORG executive nevertheless urged caution amid longstanding calls from the private sector to convert annual business license fees into a tax on the corporate income which is instead levied on net profits rather than gross income.

The Prime Minister, in unveiling the mid-year budget, confirmed that such reform is being considered and assessed by the government given the global push for a corporate tax rate of at least 15 % to fight tax arbitrage by large multinational companies. “I think we generally understand that this is one of the areas the country is struggling with right now,” Edwards told this tax reform newspaper.

“Some people think the business license fee as it currently exists is unfair because it taxes gross income, and there are people who are in favor of taxing net income.” Business license fees, which are expected to generate some $101 million in revenue for the government in fiscal year 2021-22, are expected to increase to $150.376 million by 2023-24.

However, despite being an important source of revenue for the government, many private sector actors view business license fees as distortions. They are seen as penalizing high-turnover/low-margin businesses, such as grocery stores and gas stations, while favoring low-turnover/high-margin service businesses, as they are deducted from gross income.

Many companies also complain that they regularly pay more in business license fees than they earn in profits, or that it drives them into a loss-making position. Philip Davis’ mid-year budget position indicates his administration picked up where his predecessor Minnis left off by continuing Deloitte & Touche’s study of options for tax reform, including imposing a tax on corporate income.

“As you are well aware, this is an approach that requires very careful, deliberate and careful study,” Mr. Edwards said of income taxes and other options. “As far as it’s going to be done, then it’s [reform] definitely worth pondering.

“I would like to mention that this is a very deliberate and complicated path, especially given the Bahamas’ experience with income tax and corporation tax. We have to be very careful on this road. It is not, as some say, a panacea that, if done, will solve all our problems. I don’t think that’s true.

“They may be viable, but careful, continuous and deliberate study is what is ultimately needed. The main thing is that it should be a very studied and not superficial approach. Moving to a corporate income tax is not only fundamental for business people; he has his cultural bias,” the ORG executive continued.

“So far, Bahamians are not used to this type of thinking, so there is ground work to be done for people to understand it, accept it and work with it. I don’t believe it will be a easy task. Education is going to be paramount, and training as well. I don’t think this is an issue to implement at high speed as speed can have its own set of disadvantages.

“To the extent that we can come up with a substantial system that serves the country’s purposes, that is beneficial, that is fair and that is not disadvantageous to business, that is certainly a direction worth at least looking into. to determine if it serves the interest of all parties. It cannot be the whole government and commercial sector. There must be a balance. There are different stakeholders who have vested interests, and this must be carefully managed.”

There is a strong body of opinion that believes the Bahamas should seriously consider moving to an income tax-based system apart from global corporate tax pressures. Proponents believe it would create a more just, progressive and equitable tax system, with contributions tied to the taxpayer’s ability to pay, while generating sufficient revenue for the government.

Such a reform would also move the Bahamas away from its long-standing reliance on regressive consumption-based taxes, such as VAT and import duties, which cause low-income people to pay a disproportionate share of their income in taxes than their wealthier counterparts.

However, given the Bahamas’ relatively small population of 400,000 and a labor force of 235,000, it is doubtful that an income tax will generate enough revenue. This is especially true as many rich and high-income earners generate much of their income offshore, with the result that much of the tax burden remains on the middle and lower classes.

Income tax was rejected as a reform option in 2015 in favor of VAT largely due to the complexities associated with it and the costs involved in administering such a system to ensure that everyone pays their fair share. However, the International Monetary Fund (IMF), in its Article IV statement on the Bahamas, reiterated its previous recommendation that a corporate income tax – as well as a personal income tax for high earners – should be an option for reform.

“To the extent that the government is signaling very clearly its willingness to consider reform, it is commendable,” Mr Edwards said. “To the extent that it involves a review of corporation tax or any form of income tax, that is also commendable, because history has shown us that most administrations have walked away from it. .

“Whether it’s being here now and having limited options, or being very careful and serious about how we manage in the future, it’s a good step forward. The government should be commended for this, but as we move down this path, we must ensure that the outcome does not jeopardize the private sector and the private citizen on whom it relies to generate taxes and revenues required.