By Colin Daniel From Caribbean360

BRIDGETOWN, Barbados, Thursday July 17, 2014 – I am concerned that most citizens of many countries do not seem to appreciate the critical objectives that should be taken into account when tax policy is devised for a country. In my mind, there are two broad objectives:

• Raise sufficient revenue to run the country

• Direct economic activity to desired objectives

The tax reform recommendations coming from the CARTAC/IMF study must keep these fundamentals in mind as they do their work. If the recommendations only address the issue of the efficiency in the collection of taxation by the Government and not the cost of compliance by the tax payer, the reform process will fail.

The Municipal Solid Waste Tax (MSWT) is a tax on accumulated wealth, that has been applied indiscriminately to all and sundry in Barbados.

The first issue is straight forward at first look, if you need $3 billion to run the country you should only raise $3 billion in revenue, plus enough to cover any debt service costs for investments that only the public sector can undertake in the initial stages of a project. Once this has been determined, countries are free to determine their own tax measures that work best for their economy. Hence it is incorrect to label countries like, Cayman, BVI, the Bahamas and others which levy no income or corporation tax as tax havens. They have chosen to fund their operations through duties, property taxes, company license fees as well as payroll taxes as in the case of Bermuda.

In the case of Barbados we have developed a more complex taxation system built somewhat along the lines of tax systems of more developed countries. Our system involves taxes on personal and corporate income, property, duties, excise tax and value added taxes. In addition, we have transaction taxes in the form of property transfer taxes and stamp taxes. Until recently, we had one tax which effectively taxed wealth rather than income or transactions, this of course is our property tax. The property tax system was designed to minimize the impact of taxing wealth accumulated in the form of real estate assets.

The Municipal Solid Waste Tax (MSWT) is a tax on accumulated wealth, that has been applied indiscriminately to all and sundry in Barbados. Unlike every other tax that exists today, it is a tax on the unrealized value of people’s assets with the sole objective to raise revenue to correct a fiscal imbalance which has resulted from high debt services cost and the expansion of employment in the public sector at a pace that could not be afforded by the country.

The second and more important consideration in developing the tax system is to direct spending and investment into areas of developmental priorities for the country. This is why many countries have developed exemptions, credits, waivers and accelerated deductions in their tax system. It is also the reason why certain activities are deliberately taxed at punitive rates. Unfortunately, in Barbados we suffer some of the highest duties in the world on cars. Some vehicles in Barbados now cost as much as low income housing, yet we have an inefficient public transportation system as well as significant urban sprawl which makes access to a vehicle a necessity to operate effectively.

Barbadians are being effectively played to take our eye off the ball regarding the two elephants in the room.

At the operational level, taxes must be easy to understand, easy to collect and at low enough rates making it more expensive to develop schemes to avoid the taxes than the value of the taxes a person may seek to avoid. Barbados has some of the lowest tax rates on personal and corporate income in the world, however, we have not done enough to broaden our tax bands over time. I however consider our indirect tax rates too high and are an impediment to developing business in Barbados without significant exemptions and waivers. While the framework exists, the process in my view takes too long and there are too many points of discretions in the system. I would prefer to see a clear rules-based system which requires an applicant to pay a fee of say 1% or 2% of the capital cost of a project where the wish waivers of duties, VAT and excise taxes on. The application should be adjudicated by technical staff within 30 days of the application and granted once the paperwork is in order. No need for a Minister to get involved in an administrative process. If the project violates the conditions of the incentives, they would be required to pay 500% of the taxes previously remitted. Hence on application, the project would have to lodge a bond or insurance policy for the value of the possible penalties.

A policy that says tax concessions are based on the value of proposed investment is inequitable and ultimately self defeating. Tax concessions are used to reduce the cost of capital and operational cost to market players. It therefore must be applied equally to all market participants.

In all the discussions that are swirling today about the MSWT, Barbadians are being effectively played to take our eye off the ball regarding the two elephants in the room. The fact is that additional tax measures targeted at curbing demand have worked and the economy has slowed significantly. There is also a significant overhang of debt and its debt service obligations which is driving a significant part of the current account fiscal deficit. The former results in a fall off of transaction taxes, hence the MSWT which attempts to extract from unrealized gains which can no longer be obtained from income and transactions.

Barbados will not realize its potential unless we have a broader transaction tax base with lower tax rates.

The Minister, barely addresses the second deeper issue of restructuring our debt profile in his recent interview with Barbados Today. He has indicated that there was merit in Dr. Estwick’s proposal. He and the Governor recognized that need when they attempted their own debt restructuring plan last October which failed because they misread the market and did not seem to appreciate the damage to outstanding debt issues by going to the market with new debt at significantly higher coupon rates to retire some long term debt and move it out only by one year in the case of the two tranches of debt they were seeking to retire. They apparently forgot the fundamentals of duration analysis which is a level one capital market concept. Increasing interest rates reduces the market value of fixed income securities if there is no change in maturity of the security.

The Minister needs to specific as to the actions that they are taking with regards to restructuring existing debt especially the $1.4 billion in interest and amortization that is due to be paid in this year and a similar amount that would be due next year. Unless this can be restructured by extending its term, Barbados’ credit ratings and all companies operating from Barbados will continue to be depressed.

The structure of our economy cannot sustain the pressure of this level of debt service in the short term. The measures introduced both on the spending and revenue side cannot generate sufficient fiscal room to fund our debt obligations since the tools being used have reduced aggregate demand and curtailed economic activity. As well, the policy of aggressively seeking Foreign Direct Investment into the island is a short term fix as investors ultimately have to be paid a return on our investment. There is a need for a policy shift for Barbadians to use their foreign currency and in fact local currency earnings to invest in our own foreign investment activity. That is the subject of another discussion.

Barbados will not realize its potential unless we have a broader transaction tax base with lower tax rates, improved business facilitation especially as it comes to accessing tax incentives and addressing the pressure on our current account to service debt.

Colin-Daniel-image-140x140The opinions expressed in this commentary are solely those of Colin Daniel. Colin Daniel (FCA, FCGA) works in Strategic Consulting & Advisory Services and is a Non-Executive Director of the Barbados Entrepreneurship Foundation.

For more on this story go to: http://www.caribbean360.com/business/colin-daniel-barbados-tax-policy-as-a-tool