‘We’ll Lose The Plot’ If Eu/Wto Dictate Taxation Reforms

The Bahamas will have “lost the plot” if it allows external pressures to dictate tax reform, a top accountant yesterday warning against any “knee jerk” changes.

Gowon Bowe, the Bahamas Institute of Chartered Accountants (BICA) president, told Tribune Business that this nation must avoid reform merely for the sake of complying with demands from the likes of the World Trade Organisation (WTO) and European Union (EU).

He argued that tax reform should instead be driven by the Bahamas’ national interests and how it “wants to play in the global village” for trade and financial services created by these regimes.

Calling for the Bahamas to “look out 25 years” and enact tax reforms that will last for a generation, Mr Bowe said any changes needed to be governed by economic competitiveness, bolster this nation’s ability to attract foreign direct investment (FDI) and ensure the Government has sufficient revenues to provide necessary public services.

The BICA president warned against simply increasing the 7.5 per cent Value-Added Tax (VAT) rate to cover the near-$200 million in import tariff revenue likely to be lost in a “realistic scenario” for WTO accession, describing this as a “knee jerk”.

He said the details, as yet unknown, in the report that produced the $200 million estimate required careful study, and praised the Ministry of Finance’s efforts to establish a Tax Working Group – comprised of all relevant stakeholders – to review the Bahamas’ tax reform options.

“I wouldn’t say external forces are making us change our tax structure,” Mr Bowe told Tribune Business. “What’s happening externally is saying how do we want to play in the global village.

“There’s no forcing of us. We have to decide what our identity will be, and how we’re going to play in the village. We have to have a tax structure that makes us competitive.”

The BICA president, though, suggested that the Bahamas will have less time to phase-in import tariff cuts/eliminations upon joining the WTO when compared to the Economic Partnership Agreement (EPA) with the European Union (EU), as the latter provided for a longer transition.

Mr Bowe said the WTO provided for an average three to five-year tariff transition, but he argued that compensating for foregone Customs duties and the liberalised trading regime’s demands should not be the sole or dominant factor driving Bahamian tax reform.

He added that the same applied to the EU, and suggestions that the Bahamas should adopt low-rate corporate taxation to protect its financial services industry and shed the ‘tax haven’ label. This, Mr Bowe said, was one of several key consideration, with both WTO and EU-related issues deserving equal weighting alongside the need to ensure the Government has sufficient revenue to cover expenses and provide essential services.

“Our lethargy has forced us into more rapid decision-making, but that’s our history of waiting till crunch time to make decisions,” Mr Bowe told Tribune Business. “That has forced us to look at things more holistically and in a more rapid manner.

“But if we bow to external forces we’ve lost the plot. It’s our decision, and our decision to play in the global arena. We should at least be looking 25 years out, so at least it [tax reform] carries us through generational change. We need to see what our tax structure is for the future, so that it’s not a knee-jerk reaction to WTO concerns, the EU or both.”

Mr Bowe credited the creation of a Working Group to assess the tax reform options as “the most appropriate approach”, given the “multiple issues” bound up with tax reform.

He added that while the estimate of $200 million in foregone import tariff revenues would trigger discussion, the report giving rise to this estimate needed to be released in its entirety.

“While the report indicates that by reducing tariffs we will need to replace a significant amount of revenue, the details in the report are going to be critical as the devil is in the details,” Mr Bowe explained.

“We have to look at compliance rates, tax incentives for foreign direct investment and our competitiveness as a jurisdiction for financial services and investment.

“Whatever we do is not going to happen overnight. The accession is supposed to be in 2019, and the only way to immediately replace that revenue is to increase the VAT rate,” the BICA president added. “That’s a knee jerk.

“If we don’t have a strategic plan for the medium and long-term, the knee-jerk reaction is to increase taxation, which will be VAT. That will send mixed messages about VAT, when we say we’re trying to reduce the burden at the same time as using it as a lever to replace import duties.

“We shouldn’t be reacting to one policy issue. We should be collating all of them, and then sitting down and making sure we methodically work through.”

Mr Bowe said tax reform needed to be handled especially carefully, given how emotional Bahamians are over the subject.

“Bahamians are emotional about tax,” he told Tribune Business. “If you speak to them about income tax, the lines are drawn. But if you say to them that tax rates are 22 per cent of GDP now, and we’re looking to keep them there while shifting the burden and looking for compensating revenue, and making it more progressive, the reaction is largely without objection.”