The executive board of the International Monetary Fund (IMF) released its Article IV Consultation on The Bahamas yesterday, in which it continued to push the government to revamp and reform its tax policy to build greater income equality and achieve a more progressive tax regime.
The consultation document explained that this country could better achieve its public policy objectives if changes in tax policy are made.
“Global trends in taxation present an opportunity for a comprehensive approach to reform the tax system with a view to increasing its efficiency and enhancing progressivity,” the IMF document states.
“For the medium term, income taxation can help achieve more equitable income distribution, reduce distortions arising from a tiered business license fee system (especially if applied in the context of the VAT), and contain the increasing non-residents’ profit repatriation.
“The Bahamas does not levy taxes on income, capital gains or inheritance. Instead, the VAT and business license fees are the main tax policy tools, with property taxation playing a small role. The government is removing the preferential tax treatment of offshore entities by unifying the business fee licensing framework. The Bahamas is also seeking membership in the World Trade Organization (WTO) by 2020, a process which is expected to reduce revenue from trade.”
The IMF document also encourages the government to follow through with its comprehensive land/property registry, while recommending it builds in comprehensive real estate price indices “to provide a basis for market value-based property taxation, and consider an increase in its tax rate or rate structure.”
The IMF warned that while growth is projected to reach 1.8 percent this year, medium-term growth will likely continue at around 1.5 percent.
“New FDI (foreign direct investment)-financed tourism projects and airport upgrades will sustain growth in the near term,’ the IMF states.
“However, tourism arrivals growth will be dampened by slowing global growth, especially in the U.S., Canada and the U.K, which together account for 90 percent of tourists.”
The IMF document adds that tax increases have constrained domestic demand and unemployment is expected to decline gradually, “as a growing labor force competes for limited jobs, primarily in the low-wage service industry”.
According to the IMF consultation, reputational risks could continue to heighten despite the government’s efforts to strengthen regulatory and transparency standards.
“In the international sector, reputational risks could intensify despite the recent strengthening of regulatory and transparency standards, possibly challenging existing business models, and could pressure correspondent banking relationships (CBRs). Sustained credit contraction could slow the recovery,” the IMF document points out.