## _cr1417

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### Preface and Executive Summary — mission scope and high-level diagnosis
- Technical assistance mission on tax policy to Nassau, April 2−16, 2013; mission comprised Selcuk Caner (head), Martin Grote, and Russell Krelove (all FAD).
- Evaluated design aspects of introducing VAT and other major taxes (property tax, excises, trade taxes), revenue risks from tax expenditures (concessions), and untapped revenue potential from base broadening.
- Mission met with senior government officials, tax and customs authorities, financial sector and tourism representatives, National Insurance Board, The Bahamas Chamber of Commerce and Employers Union, The Bahamas Port Authority, and The Bahamas National Statistics Department.
- Key diagnosis:
  - Government target: raise the revenue/GDP ratio to 21.5 percent by FY2016/17 from current level around 17.5 percent (an increase of 4 percentage points).
  - Major intended measures: introduction of VAT and other base-broadening measures; property tax reform; excise tax rate change on cigarettes from ad valorem to specific; introduction of stamps.
  - Structural weaknesses: lack of buoyancy; dependence on fees and levies (94 fees) that are distortionary and cascading; narrow tax bases through exemptions and concessions; decline in property tax collection efforts; over‑taxation of goods relative to services; lack of adaptation to changing market conditions.

### Fiscal and quantitative highlights
- Revenue/GDP target: 21.5 percent by FY2016/17 (current around 17.5 percent).
- Business License Fee current registration threshold: US$50,000.
- Considered VAT registration threshold: about US$150,000 (subject to further data collection and analysis).
- VAT revenue potential (single-rate introduction recommended): 6.0 to 7.0 (percent of projected 2011 GDP).
- Revenue foregone from import duty concessions (last fiscal year): close to 3.6 percent (of GDP).
- Stamp duty on conveyance of immovable property generates close to 1.4 percent—in some years even well above 2 percent—of GDP.
- The Bahamian economy is projected to grow at about 2.5 percent in 2013/14.
- Public debt to GDP ratio projected to reach 62 percent of GDP by FY 2016/17.
- Fiscal balance expected to be at 6.5 percent in FY 2012/13.
- Expected contributions to the tax/GDP target: VAT about 2.2 percentage points; property taxes an additional one percent; improvements at the customs will add another 0.5 percent; higher excises on cigarettes and anti-smuggling measures will contribute another 0.2 percent.

### VAT design and implementation guidance
- General design principles:
  - Choose a base as widely as possible.
  - Keep rate structure simple.
  - Minimize exemptions.
  - Introduce VAT with a single rate (mission notes a defensible regional case for a second, lower rate for hotel accommodation).
- Specific recommendations and treatments:
  - Include hotels and other tourism businesses in the VAT base; include all room charges at hotels.
  - Tax fee-based financial services under VAT; for exempt financial services, maintain the Business License tax and consider defining the BLF base as wages plus salaries plus profit.
  - Tax property and casualty insurance under VAT; consider taxing life insurance; eliminate the BLF on policies taxable under VAT.
  - Tax gaming under VAT; eliminate at least the portion of the Casinos tax levied as a percent of winnings.
  - Tax telecommunications services under VAT (except possibly the cost of basic telephone service); maintain the BLF on mobile telecommunications.
  - Include surcharges, gratuities, and hotel levy in VAT base for hotel accommodation. If hotel accommodation is taxed at a lower rate, tax other hotel supplies at the standard rate.
  - Consider replacing the real property transfer tax on transfers between VAT non-taxpayers with a tax on the increased value-added of the property.
- Rates and thresholds cited:
  - White Paper expected standard rate: 15 percent.
  - Hotel accommodation rate under consideration: 10 percent or 12.5 percent (regional practice and proposals cited include both 10 percent and 12.5 percent for hotels).
  - Gaming rate cited: 10 percent on gaming in some proposals.
  - VAT registration threshold guidance: US$100,000 to US$150,000; mission suggests about US$150,000 subject to further data.
- Transitional and administrative notes:
  - Introducing VAT by July of 2014 will be a challenge.
  - Make adequate provision for voluntary registration of businesses below the threshold.
  - Preserve the BLF on businesses below the VAT threshold as a simplified tax; unify the rate structure for these businesses.
  - Consider temporarily preserving the BLF on all businesses subject to VAT (except for insurance policies that are taxed under VAT) during VAT introduction.

### Revenue potential and international comparisons
- VAT raises over 7 percent of GDP on average in the region.
- Data on VAT productivity suggest that on average 1 percentage point of VAT rate collects about 0.5 percent of GDP.
- With a VAT base equal to 40 percent–45 percent of GDP and a 15 percent rate, a 15 percent VAT would raise revenue equivalent to 6.8 percent of GDP (2002 FAD base estimate 40 percent; MoF estimate 45 percent).
- BLF raised about US$111 million (or 1.4 percent of GDP) in 2010/11.
- CT plus hotel guest tax raised about 0.7 percent of GDP.

### Single versus multiple VAT rates — guidance and safeguards
- Principle: single positive rate preferred for simplicity and to avoid distortions; multiple rates can distort markets.
- Pragmatic regional concession: a second, lower rate for hotels/tourism is defensible; if applied:
  - Lower rate should apply to full accommodation charge (including hotel levy, gratuities, surcharges).
  - Restaurant food and other hotel supplies should be taxed at the standard rate.
  - Allocation rules needed for all-inclusive pricing to prevent excess-credit positions.

### Property taxation — recurrent tax and transfer taxes
- Recurrent property tax findings:
  - Property tax responsible for about 9 percent of tax revenues.
  - Collections as percent of GDP have doubled within a decade despite multiple reliefs.
  - Exemptions include blanket exemption for Bahamians on Family Islands owner-occupied properties; US$250,000 tax-free threshold; recent cap of US$50,000 on tax liabilities.
  - Coverage and reassessment problems: tax is based on market value but periodic reassessments are ignored; enforcement weak with low compliance and collection ratios.
- Key property tax recommendations:
  - Maintain a single-rate property tax without differentiation for property use or value.
  - Remove the cap of US$50,000 as it benefits high-net worth individuals.
  - Reduce or eliminate the property tax threshold of US$250,000 and scrap the property tax exemption for Bahamians on the Family Islands.
  - Limit all other exemptions to an absolute minimum.
  - Property tax relief for elderly and poor should be granted on application and be means-tested; consider mortgaging of outstanding property tax liabilities.
  - Replace the first-time homeowner’s exemption with a generally applicable tax threshold.
- Target revenue range and rate guidance:
  - Suggested Bahamas target (post-reform): higher end of global revenue range of 0.6–2 percent (of GDP).
  - Typical global tax rates for market-value systems: 0.5–2 percent.
- Stamp duty on real estate transactions:
  - Graduated rates cited (examples): Transactions under $20,000: 4 percent; $20,000–$50,000: 6 percent; $50,001–$100,000: 8 percent; Over $100,000 to $250,000: 10 percent; Over $250,000: 10 percent.
  - First-time homeowner exemption: stamp duty exemption up to US$500,000 per dwelling; relief expires end of June 2013; potential for abuse.
  - Revenue history:
    - Total stamp duty revenue in 2007/08 from real estate transactions: US$183.9 million or 2.41 percent of GDP.
    - 2002/03: US$39.1 million or 0.67 percent of GDP.
    - 2010/11 real estate transfer duties: US$108.3 million or 1.35 percent of GDP.
    - For period FY2003–11, transfer duties revenues averaged 1.56 percent of GDP.
  - Recommendations on transfer taxes:
    - Maintain stamp duties in near term until enhanced collections from reformed recurrent property tax allow gradual rate reductions.
    - Reduce stamp duty rates as recurrent property tax collections improve.
    - Replace first-time homeowner exemption with a general tax threshold (example suggested in text: US$35,000—indexed periodically).

### Motor vehicle license fees and circulation taxes
- Structure and levels:
  - Class A (0–5,000 lbs): US$150/annum.
  - Class B (5,001–15,000 lbs): US$550/annum.
  - Class C (15,001 lbs and over): US$700/annum.
- Revenue and performance (Table 9):
  - MVL collections (Millions $): 2002: 15.70; 2003: 14.03; 2004: 17.29; 2005: 19.31; 2006: 19.56; 2007: 22.49; 2008: 21.92; 2009: 20.02; 2010: 26.63; 2011: 28.36.
  - MVL collections as percent of GDP (selected): 2002: 0.27; 2005: 0.29; 2010: 0.34; 2011: 0.35.
  - Fiscal GDP (Millions $): 2002: 5,812.00; 2003: 5,900.00; 2004: 6,166.20; 2005: 6,564.70; 2006: 6,896.40; 2007: 7,644.50; 2008: 8,033.60; 2009: 7,854.30; 2010: 7,880.30; 2011: 8,010.80.
- Recommendations:
  - Increase vehicle licenses by 20 percent, with higher rates for heavy vehicles such as SUVs; indexed to keep constant in real terms.
  - With improved registration and enforcement, circulation tax revenue could attain over the short term 0.5 percent of GDP; a 20 percent rate increase could push collections to 0.41 percent of GDP.

### Tax concessions, tax expenditures, and incentive reform
- Extent and fiscal cost:
  - The Bahamas has an elaborate regime of discretionary tax expenditures: tax holidays and concessions across sectors, multiple stand-alone incentive acts and discretionary Heads of Agreement.
  - Revenue foregone from import duties alone is close to 3.6 percent (of GDP) for the last fiscal year; recent estimate: revenue foregone from duty concession alone equal to 21.96 percent of total collections in 2011/12 (or 3.6 percent of GDP), up from 13.2 percent of collections in 2009/10.
- Critical assessment:
  - Tax incentives are often cost-ineffective, invite abuse, create deadweight loss, and erode the tax base.
  - Empirical evidence suggests limited effect of tax incentives on investment; FDI as share of GDP averaged 15.23 percent over 11 years in The Bahamas.
- Recommended reforms:
  - Consolidate individual concession acts into a single fiscal omnibus act with published objective eligibility criteria and sunset clauses (suggested no more than five years).
  - Withdraw discretionary powers to grant additional concessions beyond legislation; maintain already granted investment incentives under contract where necessary.
  - Prepare an annual tax expenditure report attached to the Budget using the initial revenue loss approach; classify tax expenditures by tax instrument (excises, stamp duties, import duties, real property tax, BLF, and VAT).
  - Integrate tax expenditure reporting in budget documents and publish annual lists of beneficiaries and costs.
  - Rationalize concessions, review long-duration concessions (e.g., terms > 50 years), and avoid renewing long-term hotel concessions.

### Excises and trade taxes — structure, collection, and reform priorities
- Role and shares:
  - Tariffs, excises and stamp duties on international trade account for more than 50 percent of total tax revenues; customs and excises account for 58 percent of tax revenues in one summary.
- Key aggregates (selected figures):
  - Grand Total (Taxes on Trade): 2002/03: 538,279,316; 2011/12: 723,640,615.
  - General Import Duties (levels): 2002/03: 421,019,197; 2011/12: 347,913,382.
  - Excise Taxes (levels): 2008/09: 187,170,734; 2011/12: 331,291,179.
  - Stamp Tax - Imports (levels): 2002/03: 95,764,551; 2011/12: 17,556,397.
  - Grand Total as share of Total Tax Revenues: 2002/03: 64.68; 2011/12: 52.26.
  - Total Tax Revenues (levels): 2002/03: 832,252,507; 2011/12: 1,384,662,237.
- Excise design and recommendations:
  - Excises are low-cost to collect and effective on goods with price-inelastic demand.
  - Consolidate excise taxes around standard products: cigarettes, alcoholic beverages, petroleum products; place all excisable goods under one act.
  - Tobacco: current highest excise 220 percent on tobacco products; recommendation to tax tobacco products at specific tax rates with periodic adjustment and introduce an excise stamp on cigarettes to reduce smuggling.
  - Alcohol: move beer from the Tariff Act and wine/spirits from the Stamp Duty Act into the Excise Act; tax by alcohol content via specific rates; adjust specific rates periodically.
  - Petroleum: gasoline currently 7 percent ad valorem plus US$1.06/gal specific; diesel 34.5 percent plus US$0.25/gal specific; recommend limiting excise exemptions, increasing rates, and indexing specific excises.
  - Luxury goods: narrow list; consider shifting some items to Tariff Act and increase excises on luxury passenger cars, yachts, and aircraft.
- Trade liberalization and VAT interaction:
  - Authorities considering lowering weighted average tariff to 10 percent from about 25 percent; illustrative estimate: lowering tariffs by 15 percentage points would reduce tariff revenue by about US$275 million or 3.5 percent of GDP (based on aggregate elasticities and GDP 7873 million; imports subject to tariff 2891 million).
  - Recommendation: synchronize tariff reductions with VAT introduction so VAT revenue compensates tariff revenue losses; consolidate tariff rates into three to five classes; request long transition period in WTO accession negotiations.

### Stamp duties on imports and alcoholic beverages
- Stamp Act on alcoholic beverages:
  - Wine and sparkling wine: 50 percent stamp duty (imports).
  - Imported spirits: 7 percent ad valorem duty.
  - Stamp duties on alcoholic beverages raised about US$14.6 million in 2011/12 (about 0.2 percent of GDP).
- Issues and recommendation:
  - Differences in treatment favor domestic production; recommend consolidating alcoholic beverages and tobacco under the Excise Act and consider increasing stamp duties on alcoholic beverages during transition.

### Institutional and administrative reforms
- Establish a Central Revenue Agency (CRA) to centralize collections (currently 31 different ministries and agencies collect taxes and fees).
- Establish a Tax Policy Unit (TPU) to conduct revenue analysis, revenue forecasting, tax design, international tax treaty analysis, and legal drafting; recommendation classified as "Neutral" revenue impact in summary.
- Operational and data needs for TPU:
  - Cooperation between MoF/TPU and CRA with memorandum of understanding for privileged data exchange.
  - Develop micro-simulation models and improve staff training in revenue forecasting and distributional analysis.
  - Data requirements include national accounts, consistent taxpayer data, and periodic tax-return statistics (income by size, turnover by industry and size, input purchases and output sales for VAT analysis).

_Italic: Preface and Executive Summary, IMF technical assistance mission report, April 2−16, 2013._

### Preface ................................................................................................................

### _cr1417 - Preface

### Mission, scope, and contacts
- Technical assistance mission on tax policy to Nassau, April 2−16, 2013.
- Mission comprised Selcuk Caner (head), Martin Grote, and Russell Krelove (all FAD).
- Evaluated design aspects of introducing VAT and other major taxes (property tax, excises, trade taxes), revenue risks from tax expenditures (concessions), and untapped revenue potential from base broadening.
- Mission met with senior government officials, tax and customs authorities, financial sector and tourism representatives, National Insurance Board, The Bahamas Chamber of Commerce and Employers Union, The Bahamas Port Authority, and The Bahamas National Statistics Department.

### Key diagnosis (from Executive Summary)
- Government target: raise the revenue/GDP ratio to 21.5 percent by FY2016/17 from current level around 17.5 percent (an increase of 4 percentage points) to address rising public debt and fund infrastructure.
- Major intended revenue mobilization measures: introduction of VAT and other base-broadening measures; property tax reform; excise tax rate change on cigarettes from ad valorem to specific; introduction of stamps.
- Identified structural weaknesses:
  - Lack of buoyancy of the tax system.
  - Dependence on fees and levies (94 fees) that are distortionary and cascading.
  - Narrow tax bases through exemptions and concessions.
  - Decline in collection efforts in property taxation.
  - Over-taxation of goods relative to services.
  - Lack of adaptation to changing market conditions.

### Fiscal and tax environment highlights (numeric values preserved)
- Revenue/GDP target: 21.5 percent by FY2016/17 (current around 17.5 percent).
- Business License Fee current registration threshold: US$50,000.
- Considered VAT registration threshold: about US$150,000 (subject to further data collection and analysis).
- VAT revenue potential (single-rate introduction recommended): 6.0 to 7.0 (percent of projected 2011 GDP).
- Revenue foregone from import duty concessions (last fiscal year): close to 3.6 percent (of GDP).
- Stamp duty on conveyance of immovable property generates close to 1.4 percent—in some years even well above 2 percent—of GDP.

### VAT design and implementation guidance
- Strongly welcome introduction of VAT alongside comprehensive tariff liberalization and adjustments to the Business License Fee (BLF).
- General VAT design principles recommended:
  - Choose a base as widely as possible.
  - Keep rate structure simple.
  - Minimize exemptions.
  - Introduce VAT with a single rate (the mission notes a defensible regional case for a second, lower rate for hotel accommodation).
- Specific sectoral recommendations:
  - Include hotels and other tourism businesses in the VAT base; include all room charges at hotels.
  - Tax fee-based financial services under VAT. For exempt financial services, maintain the Business License tax; consider defining the BLF base as wages plus salaries plus profit.
  - Tax property and casualty insurance under VAT; consider taxing life insurance.
  - Eliminate the Business License Tax on policies taxable under VAT.
  - Tax gaming under VAT; eliminate at least the portion of the Casinos tax levied as a percent of winnings.
  - Tax telecommunications services under VAT (except possibly the cost of basic telephone service); maintain the Business License Fee on mobile telecommunications.
  - Include surcharges, gratuities, and hotel levy in VAT base for hotel accommodation. If hotel accommodation is taxed at a lower rate, tax other hotel supplies at the standard rate.
  - Consider replacing the real property transfer tax on transfers between VAT non-taxpayers with a tax on the increased value-added of the property.
- Registration and thresholds:
  - Subject to further data collection and analysis, consider adopting a turnover threshold of about US$150,000.
  - Make adequate provision for voluntary registration of businesses below the threshold.
  - Preserve the Business License Tax on businesses below the VAT threshold as a simplified tax; unify the rate structure for these businesses.
  - Consider temporarily preserving the Business License Tax on all businesses subject to VAT (except for insurance policies that are taxed under VAT).
- Transitional/administrative notes:
  - Introducing VAT by July of 2014 will be a challenge.
  - For successful introduction, a sufficiently high registration threshold is needed (likely above current US$50,000 BLF threshold).
  - Voluntary registration and simplified regimes for small businesses should be provided.

### Property taxation and transaction taxes
- Recurrent property tax:
  - Collections as percent of GDP have doubled within a decade despite multiple reliefs: blanket exemption for Bahamians on Family Islands owner-occupied properties; US$250,000 tax-free threshold; recent cap of US$50,000 on tax liabilities (creates distributional fairness issues).
  - Tax is based on market value but required periodic reassessments are ignored, creating perceived unfairness between long-registered and newly acquired properties.
  - Enforcement is weak: low compliance, coverage, and collection ratios; recent administrative efforts and an amnesty aim to improve self-assessment and coverage.
  - To increase property tax revenue: adjust rates, reduce exemptions, lower the tax-free threshold, and withdraw the cap on tax liabilities for high-value properties.
- Stamp duty on real estate transactions:
  - Imposed at graduated steep rates; generates close to 1.4 percent—in some years well above 2 percent—of GDP.
  - Transaction taxes create lock-in effects and promote aggressive tax planning through understatement of transaction values.
  - Mission recommends maintaining stamp duties on real estate transactions in the near term until enhanced collections from a reformed property tax regime allow gradual rate reductions.

### Other tax instruments and suggestions
- Motor vehicle license fee:
  - Fuller use recommended as it taxes visible, identifiable wealth; basic license fee system is sound if rate structure is adjusted by vehicle weight.
  - Increased vehicle license tax burden is a priority for environmental and congestion objectives.
- Excises and trade taxes:
  - As part of WTO accession, tariff rates will be lowered; revenue losses expected to be compensated by VAT.
  - Reduce non-basic exemptions from trade taxes as their value falls with tariff reductions.
  - Consolidate excise taxes around standard products: cigarettes, alcoholic beverages, petroleum products.
  - Eliminate current petroleum product exemptions (e.g., leaded gasoline) as inconsistent with excise principles.
  - Place all excisable goods under one act to facilitate administration.
- Institutional and administrative reforms:
  - Creation of a Central Revenue Agency (CRA) is expected to improve efficiency of tax collections and compliance.
  - Establish a Tax Policy Unit (TPU) to analyze revenue and tax policy development (recommendation classified as "Neutral" revenue impact).

### Tax concessions and tax expenditures
- The Bahamas has an elaborate regime of discretionary tax expenditures granting tax holidays and concessions across sectors.
- Revenue foregone from import duties alone is close to 3.6 percent (of GDP) for the last fiscal year—deemed fiscally unsustainable.
- Mission prepared steps toward tax expenditure budgeting, arguments against rent seeking in the tourism industry, and a blueprint for rationalizing incentives.
- Recommendations emphasize rationalization of incentives and improved tax expenditure reporting.

### Recommendations — summary (with stated revenue impact where provided)
- Chapter I: Establish a TPU to analyze revenue and tax policy development. Revenue impact: Neutral.
- Chapter II: Introduce VAT with a single rate. Revenue impact: 6.0 to 7.0 (percent of projected 2011 GDP).
- Tax fee-based financial services under VAT; for exempt financial services, maintain the Business License tax and consider defining its base as wages plus salaries plus profit.
- Tax property and casualty insurance under VAT; consider taxing life insurance.
- Eliminate the Business License Tax on policies taxable under VAT.
- Tax gaming under VAT; eliminate at least the portion of the Casinos tax that is levied as a percent of winnings.
- Tax telecommunications services under VAT (except possibly basic telephone service); maintain BLF on mobile telecommunications.
- Include surcharges, gratuities, and hotel levy in VAT base; if hotels are taxed at a lower VAT rate, tax other hotel supplies at the standard rate.
- Consider replacing real property transfer tax between VAT non-taxpayers with a tax on increased property value-added.
- Consider a VAT turnover threshold of about US$150,000; provide for voluntary registration below threshold.
- Preserve the Business License Tax on businesses below the VAT threshold as a simplified, unified-rate tax.
- Consider temporarily preserving the Business License Tax on all businesses subject to VAT (except insurance policies taxed under VAT).

_Italic: Preface and Executive Summary, IMF technical assistance mission report, April 2−16, 2013._

### Chapter III: Real property taxation

### Chapter III: Real property taxation

### Key policy recommendations on property taxation
- Maintain a single-rate property tax without differentiation for property use or value.  
- Remove the cap of US$50,000 as it benefits the high-net worth individuals without any indication that the exemption encourages activity in the construction industry. (+)  
- Reduce or eliminate the property tax threshold of US$250,000 and scrap the property tax exemption for Bahamians on the Family Islands as they are being provided with public services for which some payment is due. (+)  
- If and when low-income residential properties deserve relief, this could be achieved by granting a tax-free amount only for properties located in suburbs commonly inhabited by low-income households. Neutral  
- Limit all other exemptions to an absolute minimum. (+)  
- Property tax relief for the elderly and the poor should be granted on application and be means-tested. (+)  
- Alternatively, introduce ‘mortgaging’ of outstanding property tax liabilities. (+)  
- Replace the first-time homeowner’s exemption with a generally applicable tax threshold. (+)  
- Limit property tax reliefs that disproportionately favor high-net-worth taxpayers (implicit in recommendations above). (+)

### Complementary revenue and distribution measures
- Increase the vehicle licenses by 20 percent, but for distributional reasons differentiate more carefully by introducing higher rates for heavy vehicles such as SUVs. 0.1  
- Index the charge to keep it constant in real terms. Neutral

### Related fiscal-reform context and quantitative targets
- The Bahamian economy is projected to grow at about 2.5 percent in 2013/14.  
- The public debt to GDP ratio is projected to continue to rise reaching 62 percent of GDP by FY 2016/17.  
- The fiscal balance is expected to be at 6.5 percent in FY 2012/13.  
- The government plans to raise the tax/GDP ratio to 21.5 percent by FY2016/17 from its current level around 17.5 percent, a four percentage point increase, with the tax/GDP ratio increasing by about one percent each year until FY2016/17.  
- Expected contributions to the tax/GDP target: VAT about 2.2 percentage points; property taxes an additional one percent; improvements at the customs will add another 0.5 percent; higher excises on cigarettes and anti-smuggling measures will contribute another 0.2 percent.

### Fiscal rationale and issues with current property tax practice
- Property tax is responsible for about 9 percent of tax revenues.  
- Property tax exemptions extending as much as 20 years substantially reduce the tax base.  
- The declining collection efforts in property taxation resulted in low compliance in property taxes and collections remained well below their potential level even though tax collections increased over the period of last ten years.  
- The recommendation to remove thresholds and limits targets broadening the tax base and improving equity by ensuring beneficiaries of public services contribute.

### Interdependencies with other tax reforms (excerpted context)
- Introduction of a VAT is central to the medium-term revenue mobilization plan and will be complemented by property tax improvements.  
- The tax system historically relied on a very narrow tax base: without a personal income tax, no corporate profits tax and a comprehensive consumption-based tax, the system is susceptible to external shocks and restricts policy options.  
- One third of the tax revenues are from customs duties. Customs and excises account for 58 percent of tax revenues. Stamp taxes (23 taxes) are about 15 percent of tax revenues while the tourist tax generates another 12 percent of tax revenues.  
- The government’s revenue mobilization strategy emphasizes tax base broadening (including property tax reform) alongside expenditure reduction to reverse rising public debt levels.

_Italic: Source: Chapter III: Real property taxation, _cr1417 - Chapter III: Real property taxation_ (PDF)._

### 12.      The government’s reform agenda includes the introduction of VAT in order to

### 12.      The government’s reform agenda includes the introduction of VAT in order to

### Reform principles and immediate tax-policy priorities
- Reform strategy should include the following principles:
  - (1) Keep it simple, pursue administrative feasibility, and lower collection cost;
  - (2) Broaden the tax base by eliminating exemptions and tax preferences over a medium term;
  - (3) Tax policy reform should reduce reliance on stamp duties and fees;
  - (4) Tax immobile bases efficiently including, land and property, natural resources (including tourism after the hotels have been built);
  - (5) Tax environmentally harmful activities;
  - (6) Simplify taxation of small business and informal sector; and
  - (7) Taxpayer consultation will enhance understanding of the system and improve tax compliance.

- Unimplemented recommendations from the 2002 IMF tax policy report that remain significant:
  - (1) stopping the erosion of the tax base due to continued expansion of concessions;
  - (2) reduction in real estate transfer taxes as property tax revenues improve; and
  - (3) simplification of business license fees, and rationalization of excise taxes.

### Recent reform actions and status
- The VAT will be introduced in 2014 as the 2002 report recommended.
- Tariff rate consolidation and reductions have been implemented starting July 2013; previously the number of tariff and excise rates was reduced from 29 to 23 in FY 2008/09 and to 17 in 2009/10.
- The government is pursuing property tax reform by updating market values and improving administration as recommended in the 2002 report.
- Some 2002 recommendations remain to be implemented and are readdressed in this report.

### Improving tax policy design: Taxpayer consultation and procedures
- In managing tax reforms the authorities should forge a social compact with taxpayers.
- Recommended refinements to consultation and legislative procedures:
  - (1) consulting early with taxpayers and practitioners on policy changes before legislative cycle begins;
  - (2) publishing legislative drafts for greater scrutiny with a three-month comment period;
  - (3) adopting a strategic approach to tax avoidance by addressing avoidance risks with additional provisions that entrench clarity of the law through inclusion of clear definitions, practice and interpretation notes, and explanatory memorandums;
  - (4) when announcing changes to tax laws, explaining their reasons and compliance impact.
- By imposing new anti-avoidance measures, consider publicly negotiating with taxpayers that some revenue gains will be returned via tax relief or improved service delivery to enhance taxpayer morale.

### Establishing a Tax Policy Unit (TPU)
- Rationale: Good tax policy design needs to be supported by the establishment of a specialized and capable tax policy unit (TPU).
- TPU key functions (four):
  - (1) Revenue analysis, revenue forecasting and economic impact analysis—monitor whether revenue outcomes are achieved and cooperate with the macroeconomic division responsible for establishing collection goals for the revenue administration.
  - (2) General tax design—specialist groups dealing with policies relating to direct taxes and indirect taxes; ongoing evaluation of effectiveness and efficiency of tax laws; research on international trends and emerging tax design issues.
  - (3) International tax treaty negotiations—analysis of effects of tax policies on inbound and outbound investments.
  - (4) Legal drafting—translate policy design into transparent law; drafting language must be informed by interpretations of a jurisdiction’s tax courts.
- Operational recommendations and data needs:
  - Cooperation between the MoF/TPU and the CRA (or inclusion of TPU within CRA as second best option) with a formal memorandum of understanding for exchange of privileged taxpayer information without disclosing taxpayer identities.
  - Develop micro-simulation models to analyze distributional effects of the current tax system and economic effects of tax proposals given the small size of corporate and individual taxpayers.
  - Further training of staff in MoF and CRA to develop models of revenue forecasting, tax expenditure estimates, and distributional analysis.
  - Data requirements: national accounts data on income and expenditure components of GDP; consistent taxpayer data from the CRA over an extended period; periodic tables/statistics extracted from tax returns including:
    - Sources of income and tax by size of income for individuals;
    - Sources of income and expenditures by industry, sales and asset size for businesses;
    - Turnover by size and industry for indirect taxes;
    - For VAT in particular, all input purchases as well as output sales by industry and size are needed for assessing the tax gap.

- Recommendation:
  - Establish a TPU to conduct revenue analysis and tax policy development.

### Role of tax administration and centralization
- Current fragmentation: taxes, fees, and duties are collected by 31 different ministries and agencies, leading to costly and inefficient collection and difficult record keeping.
- Government action: establishing a centralized revenue administration (CRA) that will include the Inland Revenue Department and revenue staff from other revenue collecting agencies.
- Benefits of CRA and modernization:
  - New IT systems would simplify record keeping and updating.
  - Introduction of CRA would improve revenue yield and is essential for implementation of VAT and reforming property taxes and business license fees.
  - CARTAC is coordinating efforts in reforming the tax administration.
- Observation: Success of tax reform depends on the structure of the tax system and the revenue administration’s ability to collect expected tax revenues.

### Introducing the VAT — background and policy process
- Government intends to implement a broad tax reform package that includes introduction of a Value Added Tax (VAT) in July 2014.
- A draft law is currently being prepared; the authorities intend to undertake a public consultation process and prepare a revised draft for cabinet and parliament.
- Target: circulate draft legislation by the end of 2013.
- The White Paper policy proposals are broadly sound and represent provisions found internationally, but not all proposals comport with best VAT practices; several outstanding design issues require further consideration, including interrelation with BLF, Stamp duties, and the CT.

### Rationale for VAT
- Introduction of VAT is a compelling option for revenue improvement given limited scope for increasing current domestic tax rates and commitment to reducing tariffs for trade liberalization.
- VAT can raise higher and more sustainable tax collections and contribute to economic development if implemented correctly.
- VAT as a broad-based general consumption tax can broaden the tax base by taxing domestic sales and services that are currently lightly taxed.
- VAT avoids tax cascading caused by the BLF through a crediting mechanism allowing recovery of input tax against output tax.
- VAT facilitates exports via zero-rating of exports, ensuring exports can compete in world markets.
- VAT is compatible with trade liberalization and is not regarded as a tariff under WTO guidelines; replacing tariffs with VAT compensates for revenue loss from import duties and mobilizes additional revenue.
- Advantages for businesses:
  - Business inputs carry no tax as they may be credited against output tax.
  - Registered businesses do not face cumulative taxation (unlike BLF).
  - The system is transparent and does not involve excessive compliance costs.

### Current indirect tax situation and proposed VAT design features
- Indirect taxation currently relies mainly on import levies; BLF (a cascading turnover tax), the hotel guest tax, and the CT together raise additional revenue.
- The VAT will replace tariff collections foregone on account of trade liberalization and to some extent revenue from other taxes.
- White Paper expected VAT characteristics (as stated):
  - The standard rate would be 15 percent.
  - The BLF would be eliminated, except for banks and insurance companies, which would be exempt from VAT.
  - The Hotel Guest Tax would be eliminated, and hotel rooms would be brought into the VAT, at a lower, 10 percent, rate (mirroring the current guest tax rate).
  - Excisable goods would be taxable under VAT, but the excise tax rates will be reduced to keep the overall burden of taxation for these goods constant.
  - Other exempt goods would include:
    - (1) food and agricultural products whose import currently benefit from duty-free status under the Tariff Act;
    - (2) other imports that benefit from the same status and that can be justified on social grounds (e.g., medicines);
    - (3) health and education services;
    - (4) social and community services; and
    - (5) transfers and leases of land and residential buildings.
- Treatments under consideration (inter alia):
  - Casinos would be exempt, and the current CT would be retained.
  - The first 800 watts per month of residential electricity and the first 500 gallons per month of residential water would be zero-rated. The minimum rental fee for telephone service and overseas calls and internet services would be exempt.
  - A VAT registration threshold of US$100,000 to US$150,000.
  - The BLF on telecommunications would be retained.

- Key statistics on existing collections:
  - The BLF raised about US$111 million (or 1.4 percent of GDP) in 2010/11.
  - CT plus hotel guest tax raised a further amount equivalent to about 0.7 percent of GDP.

### Issues in VAT design (high level)
- Successful implementation requires proper design of core VAT elements; mission identifies several important elements for comment.
- Standard rate:
  - The proposed standard rate of 15 percent is comparable to those in the region and remains broadly appropriate; final determination depends on desired revenue goal, VAT base design, and measures with respect to tariffs and other domestic taxes.
- Lower rate for hotel accommodation:
  - Hotel accommodation is usually taxed under VAT; definitional issues arise distinguishing hotels from boarding houses, homes for the aged, etc.
  - Some countries provide an end-use exemption for longer-term accommodation; a straightforward time period exemption (e.g., accommodation provided for a stretch of time in excess of one month or six weeks) may be the best rule.

_Italic: IMF staff report content unit as provided in the source PDF._

### 12.5 percent for hotels and 10 percent on gaming.

### _cr1417 - 12.5 percent for hotels and 10 percent on gaming.

### VAT rates and targeted levies
- Proposed or cited specific rates:
  - 12.5 percent for hotels and 10 percent on gaming.
  - 20 percent for mobile telecoms and 7.5 percent on certain construction (temporary rate).
  - 10 percent rate equivalent to the current hotel guest tax rate in The Bahamas.
  - Hotel/restaurant preferential treatment applied "until April 2013."
- Casino Taxation Act (current structure):
  - Fixed annual fee by casino size (three categories) plus an ad valorem charge on gross winnings.
  - Tax rate varies by gross winnings: 10–15 percent for smaller casinos.
  - For larger casinos, a declining variable rate between 25 percent and 5 percent (the latter rate applying to winnings in excess of US$20 million).
  - Casinos are exempt from the BLF.
- Stamp duty on property transfers cited at rates up to 10 percent.

### Single vs. multiple VAT rates — analysis and guidance
- Principle:
  - A desirable characteristic of a VAT is to have a single positive rate.
  - Single rates applied uniformly facilitate compliance and administration and avoid disputes about classifications and credit claims.
  - Multiple rates can distort markets and have impeded VAT functioning historically.
- Regional practice and pragmatic concession:
  - Many countries use a second, lower rate for hotels and tourism services.
  - A 10 percent hotel rate is comparable to regional practice; the mission nonetheless recommends against a second rate as a general principle, but concedes that in the current environment adopting a lower rate is defensible.

### Design and safeguards if a lower hotel/tourism rate is introduced
- Scope and base rules to control negative impacts:
  - The lower rate should be applied to the full charge for accommodation—including hotel levy, gratuities, and any surcharges added to the room rate.
  - The scope of the lower rate should be restricted to accommodation; restaurant food and other tourism services offered by hotels should be taxed at the standard rate.
  - For all-inclusive pricing businesses, allocation rules must be reviewed to ensure accuracy and fairness relative to other businesses.
- Rationale:
  - Applying the lower rate to full accommodation charges prevents adverse incentives and frequent excess-credit positions for hotels.
  - Taxing hotel restaurants at the standard rate levels the playing field with non-hotel businesses and protects revenue.

### Domestic zero-rating and targeted relief
- Electricity and water:
  - Proposed zero-rating of limited quantities of residential sales of electricity and water; straightforward to administer because utilities are public.
  - Caveat: zero-rating is a second-best measure—since all taxpayers benefit, total revenue cost will be much larger than the benefit to targeted households; zero-rated quantities should therefore be restricted.
- General point:
  - If total purchases of these items were taxed, it would generate more than enough revenue to compensate targeted households through expenditure policy.

### Exemptions — principles and sector-specific recommendations
- General principle:
  - The tax base should be chosen as broadly as possible, preferably with no exemptions and ideally with zero-rating limited to exports only.
  - Broad base protects revenues and reduces compliance complexity; exemptions, especially on intermediate products, result in tax cascading and distort downstream businesses.
- Food:
  - Preferential treatment of basic food items is understandable, but reduces regressivity at high revenue cost because higher-income households spend more absolutely on food.
- Financial services:
  - Exempting financial services is defensible, with the proviso that all banking services for which a fee is charged should be subject to VAT, especially services provided to VAT-registered taxpayers.
  - Hire-purchase agreements and financial leases should be taxed in full.
- Insurance:
  - Authorities contemplate maintaining the BLF (3 percent of gross premium from local policies) and otherwise exempting insurance from VAT; this is administratively complex and distortionary.
  - Recommendation: consider bringing insurance (at least property and casualty) into the VAT, taxing premiums and allowing a presumptive tax credit for VAT imputable to payouts (plus a credit for VAT paid on purchases).
  - Accompanying recommendation: abolish the separate BLF on insurance.
  - Note: exemptions might remain for health-related and life insurance; if so, consider maintaining the BLF on insurance policies exempt from VAT.
- Gaming:
  - Principle: spending on gambling should be subject to VAT like other consumption.
  - Options with VAT introduction:
    - Exempt casinos and maintain the CT.
    - Bring casinos into the VAT using gross winnings as the tax base, apply the standard VAT rate to gross winnings, allow credits for VAT paid on purchases, and eliminate or significantly reduce the CT.
  - The mission recommends considering bringing casinos into the VAT net at the standard rate and reducing or eliminating the CT (approach used in Australia and South Africa).
  - Observation: taxing gambling at the standard VAT rate could yield revenue comparable to the CT (analysis required to verify).
- Real estate:
  - Interaction with stamp duty (rates up to 10 percent) not adequately addressed; stamp duty behaves like a cascading turnover tax and introduces distortions and lock-in effects.
  - Proposed alternative: tax the change in value of property at transfer (the increase or decrease in value realized) at the standard VAT rate, rather than taxing the full transfer value.
  - Implementation suggestion: continue enforcement via the registrar’s office; retain modified stamp duty legislation enforced by property registrar to avoid requiring nonregistered sellers/buyers to register for VAT.

### Registration threshold and treatment of small businesses
- Purpose of threshold:
  - Limit taxpayer population while minimizing revenue sacrifice; balances administrative and compliance costs.
- Recommended threshold levels:
  - Previously proposed level: US$50,000.
  - Mission concurs that the optimal threshold is likely to be somewhat in excess of US$50,000.
  - Authorities estimate the threshold should be upwards of US$100,000, likely in the range of US$150,000.
  - A threshold at this level will almost certainly capture businesses accounting for an overwhelming percent of total turnover in The Bahamas.
- Voluntary registration:
  - Provisions for voluntary registration are necessary, particularly for smaller businesses that export or sell mainly to registered businesses; voluntary registration allows credits for VAT paid on purchases.
  - Tighter provisions for voluntary registration may be appropriate at introduction and relaxed as administration matures.
- Treatment of businesses below the threshold:
  - Businesses below the threshold should not be required to register; they are treated as exempt entities (pay VAT on purchases, cannot collect VAT, cannot claim credits).
  - Authorities proposed a flat annual fee for below-threshold businesses (example given: US$100, the amount of the BLF on businesses with turnover below US$50,000).
  - Mission recommends an alternative to raise more revenue:
    - Continue BLF for businesses below the VAT threshold.
    - Micro-businesses (turnover below say US$50,000) would pay a flat annual fee.
    - Businesses above micro level but below VAT threshold would pay an annual tax based on turnover.
    - Tax rate on turnover for these businesses should be unified (current sector-specific BLF rates should be unified for simplicity).

### Revenue potential and broader context
- VAT is efficient at raising revenue by taxing consumption (both domestic and imports).
- Tourism expands the VAT base in countries with significant nonresident consumption.
- International experience with VAT in island countries has generally been positive; small economies rely relatively more on international trade, but VAT still functions effectively because it taxes consumption including imports.

*IMF staff analysis as presented in the chapter.*

### 55.      VAT raises over 7 percent of GDP on average in the region. There are small

### VAT raises over 7 percent of GDP on average in the region

### VAT performance and revenue potential
- VAT raises over 7 percent of GDP on average in the region.
- Data on VAT productivity (percentage of GDP collected per percentage point of the standard VAT rate) suggest that on average 1 percentage point of VAT rate collects about 0.5 percent of GDP.
- Example projection for The Bahamas:
  - If the above productivity held, a VAT with a standard rate of 15 percent would raise in excess of 7 percent of GDP.
  - Actual performance would depend on: the VAT rate chosen; number of exemptions and domestic zero-rated goods; administration capacity.
- Preliminary VAT base estimates:
  - 2002 FAD mission conservatively estimated a VAT base equal to 40 percent of GDP.
  - Ministry of Finance estimated a base equal to 45 percent of GDP.
  - With this base, a 15 percent VAT would raise revenue equivalent to 6.8 percent of GDP.
- Authorities are collecting more detailed information and data to refine estimates of VAT revenue potential.

### Role for the Business License Fee (BLF) — analysis and proposals
- Principle: BLF is an inefficient tax on consumption and has no role where an efficient consumption tax—a VAT—is in place.
- Authorities are considering eliminating the BLF except for sectors that would be exempt under VAT; the mission recommends refinements:
  - Maintain the BLF as a simple substitute tax on businesses below the VAT threshold.
  - Maintain the BLF as a type of excise tax on mobile telecommunications; review the tax rate to determine optimality.
  - Maintain the BLF on banking services that remain outside the VAT, but reconsider the base (e.g., tax value added in margin-based businesses estimated as wages and salaries plus pure profit).
  - Maintain the BLF on insurance policies that remain exempt from VAT; current base is gross premiums and current rate is 3 percent—this base may be appropriate but review scope to adjust the rate.
  - Consider maintaining the BLF on all other businesses for a temporary period after VAT introduction, perhaps at a uniform lower rate, as insurance during VAT implementation.

- BLF revenue and transition estimates:
  - BLF raised revenue equivalent to 1.4 percent of GDP in 2010/11.
  - About half of this was raised from telecommunications, banks, and insurance; this portion is recommended to be maintained with VAT introduction or made taxable under VAT.
  - If the BLF is maintained for businesses with turnover below the VAT threshold, this may preserve revenue equivalent to about 0.1 percent of GDP.
  - Rough estimate of potential revenue lost by eliminating BLF for all other businesses: 0.6 percent of GDP. This revenue could be preserved temporarily during VAT implementation as insurance.
  - Insurance of 0.6 percent of GDP may be excessive; BLF rates could be adjusted downward when VAT is introduced if warranted.
  - Long-term: BLF has no legitimate long-term role once VAT is introduced; 2012 IMF Article IV mission recommended a long-term goal to introduce a business income tax as a replacement for the BLF.

- Threshold and registration guidance:
  - Subject to further data collection and analysis, consider adopting a turnover threshold of about US$150,000.
  - Make adequate provision for voluntary registration of businesses below the threshold.
  - Preserve the BLF on businesses below the VAT threshold as a simplified tax; unify the rate structure for these businesses.

### Mobile telecommunications excise guidance
- Airtime excises are increasingly used; often calculated on minutes of airtime usage.
- As of early 2011, over 20 countries imposed an airtime excise.
- Airtime ad valorem excise rates in African countries range from 3 percent (Niger) to 18 percent (Gabon).
- In the region, the Dominican Republic imposes a 12 percent special telecom tax on calls and Short Messaging System usage.
- For The Bahamas, an appropriate airtime tax rate is not known; guidance:
  - Rate-setting must account for pre-tax retail mobile usage rates, regulatory regime, competition, price elasticity of demand, and current pass-through rate of the BLF on final consumer prices.
  - A rate between 3 percent and 6 percent would appear reasonable, but more analysis is needed.

### Banking, insurance, and financial services taxing options
- Banks currently taxed based on gross assets; may be inappropriate if fee-based banking services are brought into VAT.
- One possibility: tax banks based on value added in margin-based businesses (sum of wages and salaries and pure profit).
  - IMF has advocated a “Financial Transaction Tax” approach for banking activities; examples given: Israel, Sri Lanka (adopted); Denmark, France (approximate value added by including only wages and salaries).
  - Note: using the addition method for financial sector VAT creates input VAT credit calculation issues for bank customers who are VAT taxpayers; therefore, the tax rate should remain somewhat less than the standard VAT rate.
- Insurance:
  - For policies exempt from VAT, BLF base is gross premiums and rate is 3 percent; review recommended.
  - Tax property and casualty insurance under VAT; consider taxing life insurance; eliminate the BLF on policies taxable under VAT.

### Stamp duties and bank transaction taxes
- Stamp duties on bank transactions raise significant revenue: US$88 million in 2010/11, equivalent to 1.1 percent of GDP.
  - Major items:
    - Mortgages (taxed at 1 percent): US$36 million.
    - Bank withdrawals, checks, and bank receipts (US$0.40 per transaction): US$14.6 million.
    - Other bank transactions (including international bills of exchange drafts, money order, mail, and cable transfers, traveller’s checks) taxed at 1.5 percent of value: US$38 million.
- Bank transaction taxes can discourage intermediation and holding money in banks; empirical evidence shows significant disintermediation effects (examples from Venezuela, Colombia, Ecuador).
- Recommendation: consider reducing and eventually eliminating the most distortionary of these duties.

### Consolidated recommendations (from source)
- Introduce VAT with a single rate.
- Tax fee-based financial services under the VAT.
- For exempt financial services, maintain the BLF; consider adjusting the base to wages plus salaries plus profit.
- Tax property and casualty insurance under VAT; consider taxing life insurance. Eliminate the BLF on policies taxable under VAT.
- Tax gaming under VAT. Eliminate at least the portion of the Casinos tax that is levied as a percent of winnings.
- Tax telecommunications services under the VAT (except possibly for the cost of basic telephone service). Maintain the BLF on mobile telecommunications.
- Include all surcharges, gratuities, and hotel levies in the VAT base on hotel accommodation. If hotel accommodation is taxed at a lower rate, other taxable supplies by hotels should be taxed at the standard rate.
- Consider replacing the real property transfer tax on transfers between VAT non-taxpayers with a tax on the increased value-added of the property.
- Subject to further data collection and analysis, consider adopting a turnover threshold of about US$150,000. Make adequate provision for voluntary registration of businesses below the threshold.
- Preserve the BLF on businesses below the VAT threshold as a simplified tax; unify the rate structure.
- Consider temporarily preserving the BLF on all businesses subject to VAT (except for insurance policies that are taxed under VAT) during VAT introduction.

*Source: Excerpt from IMF staff report chapter on taxation (VAT, BLF, stamp duties, and real property taxation) contained in the provided PDF content.*

### 70.       In this expression, the defined tax base refers to the properties identified in the

### _cr1417 - 70.       In this expression, the defined tax base refers to the properties identified in the

### Revenue identity, valuation, coverage, and collection ratios
- Defined terms:
  - Valuation ratio: the proportion of the fully defined value that is actually assessed for tax purposes.
  - Tax rate: the rate applied against the tax base expressed as a value or area (sq ft/m2).
  - Coverage ratio: the proportion of properties that should be included in the base which have actually been identified and are included in the cadastre.
  - Collection ratio: the proportion of assessed taxes that are actually collected.
- Ideal values: coverage, valuation, and collection ratios = one (100 percent). In practice, this is almost never the case.
- Illustrative example (as given):
  - Legally defined base: market value of all land and capital improvements (buildings).
  - Tax rate = 1 percent (0.01).
  - Coverage Ratio = 0.8.
  - Valuation Ratio = 0.9.
  - Collection Ratio = 0.85.
  - Revenue = Legally Defined Tax Base x Tax Rate (=0.01) x Coverage Ratio (=0.8) x Valuation Ratio (=0.9) x Collection Ratio (=0.85).
  - Revenue = Base *0.01*0.8*0.9*0.85 or just 61 percent of the theoretical revenue.
  - Earlier text indicates only 61.2 percent of the theoretical revenue will be collected (see below).

### Setting the statutory tax rate — considerations and international practices
- Three key considerations for rate-setting:
  1. Who should determine rates.
  2. Single rate or differentiation.
  3. How high should rates be.
- International rate-setting practices (summarized from Table 6):
  - Flat ad valorem rate: simplest way to tax property values.
  - Flat specific rate: simplest way to tax an area base.
  - Progressive ad valorem rate: taxes higher valued properties at higher nominal rates.
  - Differential rates by property type (non-residential usually higher; agricultural/residential lower).
  - Different rates applied to land/site and capital improvements/structures; surcharge used as penalty for sterilizing valuable land or underutilization (examples: Brazil, Senegal and Venezuela).
  - Progressive rate on total value of an individual's land holding (example: Peru).
  - Annual increase in tax rates to compensate for failure to revalue properties or adjust through indexing.
- Practices on who sets rates:
  - Property tax rates either set by central government (example: The Bahamas) or locally, often with central restrictions on rate ranges.
  - Setting rates locally is important for accountability; central restrictions on statutory ranges help minimize inter-jurisdictional distortions.

### Differentiation between flat and graduated rates — effects and evidence
- Common global practice: differentiated rates by property class (as in The Bahamas), potentially including full tax relief for some classes.
- Justifications cited:
  1. Fairness related to benefits received (property tax as a benefit tax).
  2. Efficiency: properties least elastic in supply could carry higher burden.
  3. Land-use objectives: higher rates on vacant buildable land to encourage development (examples: Botswana, Namibia, South Africa).
- Observed international patterns:
  - Many jurisdictions provide lower property tax rates for residential properties (examples: Australia, Canada, India, Pakistan, South Africa).
  - Some countries apply higher rates for commercial properties or lower rates for selected industries (manufacturing, tourism).
  - Differential treatment often inconsistent with benefit-tax concept and can distort land use and administration.
- The Bahamas-specific observations:
  - Rate differentiation and capping of absolute tax liability at US$50,000 adversely affects low- and middle-income owners and primarily benefits high-net worth individuals.
  - Mission proposes complete standardization and elimination of caps to improve vertical equity by raising tax burdens on property valued above US$5 million.

### Best-practice guidance on rate-setting
- Simplicity recommended:
  - Maintain single rate to minimize administration complexity and avoid taxpayer reclassification attempts.
  - Market valuations largely reflect ability-to-pay, reducing need for discriminatory rates.
  - In simplified value-based or area-based systems, differentiation may be more appropriate.

### Distributional impacts and specific Bahamas figures
- Table 7 findings (The Bahamas: capped tax liability):
  - Cap on tax liability: US$50,000.
  - Property tax threshold: US$250,000.
  - Recommendation target for improved vertical equity: raise tax burdens on property valued above US$5 million.
- Coverage/exemption statistics and consequences:
  - Current threshold for The Bahamas exempts more than 83.34 percent of all registered property owners on the fiscal cadastre from the real property tax.
- Recommendations (property tax):
  - Maintain a single-rate property tax without differentiation for property use or value gradients.
  - Remove the cap of US$50,000 as it benefits high-net worth individuals without indication of encouraging construction activity.
  - Reduce or eliminate the property tax threshold of US$250,000 and scrap the property tax exemption for Bahamians on the Family Islands.
  - If low-income residential properties deserve relief, grant a tax-free amount only for properties located in suburbs commonly inhabited by low-income households.
  - Limit all other exemptions to an absolute minimum.
  - Property tax relief for the elderly and the poor should be granted on application, reviewed annually, and be means-tested.
  - Alternatively, introduce ‘mortgaging’ of outstanding property tax liabilities.

### Level of rate — international ranges and Bahamas target
- International observation: property tax rates are mostly very low in developing countries, contributing to low revenue importance as a percent of GDP.
- Suggested Bahamas target (post-administrative reforms): higher end of current global revenue range of 0.6–2 percent.
- Typical global tax rates for market-value systems: 0.5–2 percent.

### Property tax relief, exemptions, and implications
- Exemptions/differentiation mechanisms observed: differentiated rates, deductions, exemptions, thresholds, tax holidays.
- Analytical questions when considering exemptions:
  1. What cost does the exempt property impose on government for service delivery?
  2. Should the property be billed by user-charging for the costs it imposes?
  3. Does the property owner create public good benefits that exceed the value of tax forgiveness?
  4. Would the tax exemption provide the owner with an unfair economic advantage?
- Consequences of wide-ranging exemptions:
  - Significant revenue loss and erosion of property tax base, triggering rate increases to maintain revenue neutrality and shifting burdens onto businesses or residential properties.
  - In The Bahamas, near non-taxation of the hotel industry appears to impose a higher tax burden on residential and other commercial property owners.
- Low-income and pensioner considerations:
  - Options: value threshold (chosen in some countries), area threshold (regressive), household-size threshold (administratively complicated and unfair).
  - Alternative: no exemption but tax deferment provisions or ‘mortgaging’ of property tax liability to collect outstanding amounts when property changes ownership.

### Stamp Duty on Real Estate Transactions — current law and revenue outcomes
- Stamp Duty Act: provides for a graduated stamp duty (transfer duty) on transfer or sale of immovable property.
- Sale of land connected to construction of a new dwelling house or building constitutes a single taxable transaction.
- Graduated ad valorem stamp duty schedule (Value of Realty Transaction — Ad Valorem Stamp Duty Rate (In Percent)):
  - Transactions under $20,000: 4
  - Between $20,000 to $50,000: 6
  - Between $50,001 to $100,000: 8
  - Over $100,000 to $250,000: 10
  - Over $250,000: 10
- Transaction costs:
  - Buyer and seller typically share the stamp tax (unless otherwise agreed).
  - Attorneys' fees (The Bahamas Bar Association): additional 2.5 percent of the gross sale price.
  - Small recording fee when title deeds recorded at the Public Registry.
- Revenue history and shares:
  - Total stamp duty revenue in 2007/08 from real estate transactions: US$183.9 million or 2.41 percent of GDP.
  - Total stamp duty revenue in 2002/03: US$39.1 million or 0.67 percent of GDP.
  - In 2010/11, real estate transfer duties: US$108.3 million or 1.35 percent of GDP.
  - For period FY2003–11, transfer duties revenues were on average 1.56 percent of GDP.
  - Since FY2008, stamp duties on realty conveyances generate on average more than 61 percent of all stamp duties.

### Economic issues with transaction (transfer) taxes
- Economic impacts:
  - Too-high transfer duty rates impede proper functioning of property markets.
  - Transfer taxes are applied to statutory title transfers and must be paid to complete title transfer.
  - High transfer rates can discourage business investment, lock in investors into immovable property, and produce suboptimal returns.
  - High rates encourage misrepresentation of sales prices, undermining tax morale and reducing property transfer registration (adverse impact on coverage ratio).
  - High rates require effective anti-avoidance legislation.
- Comparative patterns:
  - Common Law countries (Australia, Canada, New Zealand, United Kingdom, United States): typically stamp duty rates around 2 percent.
  - Civil Law countries (Belgium, France, Netherlands, Portugal, South Africa): stamp duties on realty transfers often exceed 6 percent.
  - The Bahamas’ stamp duty rates are characterized as high and the rationale for differentiating 4 percent to 10 percent is not clear.

### First-time homeowner exemption and recommendations on transfer taxes
- First-time homeowners exemption:
  - On application, stamp duty exemption for ‘first-time’ homeowners is granted up to a value of US$500,000 per dwelling or land for construction of a dwelling.
  - No anti-avoidance provision to prevent, for example, husband and wife both applying separately (potentially up to US$1 million relief).
  - This relief expires at the end of June 2013.
  - Alternative suggested: replace with a general tax threshold (suggested example: US$35,000—indexed periodically) that everyone automatically receives.
- Recommendations (stamp duty):
  - Reduce stamp duty rates as collections from a reformed recurrent real property tax compensate for resulting revenue losses—and only when fiscal consolidation has been achieved.
  - Replace the first-time homeowner’s exemption with a generally applicable tax threshold for all property conveyances.

*Italicized source: IMF staff report content from the supplied PDF chapter.*

### 85.      Currently, recurrent license fees are imposed on motor vehicle ownership. For

### 85.      Currently, recurrent license fees are imposed on motor vehicle ownership. For

### Motor vehicle license fees — structure, revenue, and compliance
- For the period FY2009–11, the annual motor vehicle license fee (or circulation tax) contributed on average 72.4 percent of total revenues on motor vehicle ownership.
- Other fees and charges include the annual fee for driver licenses, motor vehicle inspection fees, license plate fee, other licenses, and franchise fees for taxis and buses.
- License fee structure (graduated by vehicle weight):
  - Class A vehicles (0–5,000 lbs) attract US$150/annum.
  - Class B vehicles (5,001–15,000 lbs) are taxed at US$550/annum.
  - Class C vehicles (15,001 lbs and over) attract a license fee US$700.
- The vehicle license fee is sporadically adjusted, leading to modest collections.
- Authorities are concerned about incomplete registration records of the active vehicle population which undermines compliance and collections.
- Table 9 indicates the modest revenue importance for licenses, averaging for the last decade 0.29 percent of GDP.

### Table 9. The Bahamas: Vehicle License Collections, Fiscal Years 2002–11 (Collections in Millions $)
- Motor Vehicle Licenses (MVL):
  - 2002: 15.70
  - 2003: 14.03
  - 2004: 17.29
  - 2005: 19.31
  - 2006: 19.56
  - 2007: 22.49
  - 2008: 21.92
  - 2009: 20.02
  - 2010: 26.63
  - 2011: 28.36
- Total revenue:
  - 2002: 716.63
  - 2003: 851.45
  - 2004: 978.94
  - 2005: 928.72
  - 2006: 1,052.83
  - 2007: 1,209.03
  - 2008: 1,189.09
  - 2009: 1,293.78
  - 2010: 1,327.58
  - 2011: 1,080.86
- MVL collections as percent of total taxes:
  - 2002: 2.19
  - 2003: 1.65
  - 2004: 1.77
  - 2005: 2.08
  - 2006: 1.86
  - 2007: 1.86
  - 2008: 1.84
  - 2009: 1.55
  - 2010: 2.01
  - 2011: 2.62
- MVL collections as percent of GDP:
  - 2002: 0.27
  - 2003: 0.24
  - 2004: 0.28
  - 2005: 0.29
  - 2006: 0.28
  - 2007: 0.29
  - 2008: 0.27
  - 2009: 0.25
  - 2010: 0.34
  - 2011: 0.35
- Fiscal GDP in $ millions:
  - 2002: 5,812.00
  - 2003: 5,900.00
  - 2004: 6,166.20
  - 2005: 6,564.70
  - 2006: 6,896.40
  - 2007: 7,644.50
  - 2008: 8,033.60
  - 2009: 7,854.30
  - 2010: 7,880.30
  - 2011: 8,010.80

*Source: The Bahamian authorities; and IMF staff calculations.*

### Circulation taxes and taxing informality — rationale and design
- Authorities expressed concern that taxing the informal sector is difficult and that high income earners understate transaction values or turnover for BLF; tax compliance with real property tax is low and arrears are mounting.
- If widespread hiding of income persists and tax administration remains ineffective in certain areas, tax instruments that impose charges on all forms of visible wealth should be employed.
- Property tax bases are immobile and efficient; property taxes are progressive and useful for horizontal or vertical equity.
- Vehicles are visible forms of wealth and consumption; an annual circulation tax is an effective instrument to tax incomes in economies plagued by informality or where the tax system ignores income as a base.
- The annual vehicle license fee can be part of a comprehensive set of road use charges and environmental measures, justified from environmental and ability-to-pay perspectives.
- In the European Union (EU), annual motor vehicle taxes are characterized as environmental charges; according to tax literature, the minimum EU excise on gasoline is about the right amount for the pure road charge and green tax element in the EU.

### Comparative forms of motor vehicle taxation and policy considerations
- Forms of motor vehicle taxation vary widely internationally, including:
  - circulation tax on vehicle weight (the Bahamian practice),
  - registration tax,
  - road tax hypothecated to road maintenance,
  - motor vehicle weight taxes,
  - passenger and fuel consumption taxes,
  - road user charges in lieu of a toll fee,
  - heavy good vehicle tax,
  - tax on vehicle axles,
  - weight tax on diesel vehicles.
- Passenger vehicles are usually taxed differently than commercial vehicles.
- Annual ownership taxes are more common than acquisition taxes; annual taxes are preferred for predictability and stability.
- Annual tax bases may vary by motor size (cc), weight, fuel consumption, horse power, and CO2 emissions; acquisition taxes are mostly ad valorem levies on purchase price.
- The Bahamian circulation tax is simple and transparent; varying tax by weight approximates value and suggests further differentiation by weight and age could improve equity.
- Nearly an equal number of OECD member states differentiate vehicle registration or circulation taxes by cylinder capacity with a minimum charge irrespective of capacity.
- Vehicle circulation and fuel taxes in Europe and OECD are solid revenue earners; VAT is imposed on the final duty paid retail price and on fuels being the excise-inclusive price.

### Revenue potential and behavioral considerations
- Limited disaggregated data: Department of Road Traffic rough estimates indicate 85 percent of the total estimated vehicle population of 125,000 are Class A vehicles; 10 percent are Class B; and the rest are Class C.
- The projected revenue of US$27.2 million is close to vehicle license collections of US$28.4 million in 2011.
- By increasing circulation tax rates by 20 percent, collections could reach 0.41 percent of GDP.
- With improved registration and enforcement, the revenue importance of circulation tax could attain, over the short term, 0.5 percent of GDP.
- Illustration of affordability: increasing the recurrent vehicle license from US$150 to US$180 (20 percent increase) is equivalent to the gas pump price of one-third of a 60-liter tank filling in Nassau (approximate full-tank cost given as US$90).
- Motorists exhibit fairly price inelastic demand for gasoline, even with rising fuel prices.
- Increasing gasoline taxes together with higher circulation taxes may encourage motorists to switch to the proposed Unified Bus System in Nassau, reducing congestion and fuel import bills.

### Recommendations (vehicle circulation tax)
- Increase the vehicle licenses by 20 percent but for distributional reasons, differentiate more carefully by introducing higher rates for heavy vehicles such as SUVs.
- Index the charge to keep it constant in real terms.

### Tax concessions — prevalence, structure, and cost-ineffectiveness
- Throughout the Caribbean Region there is extensive use of tax incentives. Within CARICOM, The Bahamas stands out as the jurisdiction without an income tax on natural and legal persons (including the taxation of capital gains).
- Investment incentives in The Bahamas mostly include exemptions of tariffs on building materials, hotel fittings and furnishings, equipment, and approved raw materials (the Tariff Act of 2003).
- It is not uncommon to also exempt taxpayers from business license fees and real property taxes for periods of up to 20 years.
- Stand-alone incentive acts and key features:
  - The Hotels Encouragement Act (1954): customs duty exemptions on construction plant; 10-year exemption from real property tax from date of opening with possible further 10-year exemption to extent it exceeds BSD 20 per bedroom; Crown land may be provided for no consideration; incentives for new hotels, cottage colonies, residential clubs, and refurbishment; eligibility thresholds (50 bedrooms in developed areas, 20 elsewhere, 5 in Family Islands); fiscal stability clause for 20 years.
  - The Industries Encouragement Act (1970): exemptions for customs duties on equipment and intermediary inputs, business license fees, and real property taxes for 15 years; income and profits taxes (if introduced) will not be charged for 15 years.
  - The Bahamas Free Trade Zone Act (1984): zone companies permanent exemption from real property taxes, tariffs on goods and raw materials, stamp duties, business licenses except consumables; FTZs at Freeport and New Providence; national insurance contributions remain payable in FTZs.
  - The Export Manufacturing Industries Encouragement Act (1989): exempts qualifying manufacturers from customs and stamp duties and real property tax for 25 years.
  - The Agricultural Manufacturers Act (1913): exempts customs duties on machinery, tools, fixtures, and supplies for agricultural factories.
  - The Hawksbill Creek Agreement Acts: duty-free zone in Grand Bahamas with no taxation except social security contributions; concessions on property taxes extended to 2015 and customs duties exemptions to 2054.
  - The Spirits and Beer Manufacture Act (1963): duty-free import of raw materials and equipment for manufacture of spirits, beer, and wine.
  - The Bahamas Vacation Plan and Time-Sharing Act (1999): exempts customs duties on construction materials.
- General discretionary tax concessions are granted under Heads of Agreement between the Bahamas Investment Authority (BIA) with consent from the Prime Minister across a wide range of priority investment areas.
- The combined effect of incentives erodes the tax effort by narrowing the taxable base and creating volatility and low buoyancy in revenues.

### Cost-ineffectiveness, reform proposals, and empirical evidence
- The Bahamas has promulgated at least eight stand-alone acts that provide wide-ranging tax concessions; the BIA can grant additional discretionary concessions.
- Proposal to rationalize by consolidating individual incentive legislation into an overarching concession law with sector chapters or schedules; such an act should be a money bill introduced, amended, and withdrawn only by the minister of finance.
- The consolidated law should replace discretionary powers with published objective criteria for investor eligibility.
- The soon-to-be established CRA should administer incentives and be empowered to withdraw concessions from taxpayers that transgress provisions or fail investment yardsticks; line departments must assist CRA in verifying compliance.
- Review relevance of incentives with terms of more than 50 years; some hotel incentives may no longer be needed given sunk investments.
- Long duration of tax concessions is a concern; incentives should be time-limited to induce initial investment and not renewed perpetually to avoid ongoing rent-seeking.
- Empirical evidence: a country’s tax burden is not the main factor in business investment decisions—World Bank survey ranks national taxes number 11 among the top 20 factors for location decisions. Key determinants include access to customers, stable social and political environment, ease of doing business, infrastructure reliability and quality, ability to hire technical professionals, and cost of labor.
- First-best solutions would address underlying problems (e.g., high energy costs) directly rather than compensating with tax exemptions.

*Italic: Source: Excerpt from IMF staff report content provided in the supplied document.*

### 96.      Tax preferences distort investment decisions and more often than not constitute

### _cr1417 - 96.      Tax preferences distort investment decisions and more often than not constitute

### Benefits and costs of tax incentives
- Tax preferences distort investment decisions and more often than not constitute a deadweight loss.
- Foregone revenues from tax expenditures could have been used for other priorities such as improvement to physical infrastructure.
- Tax incentives are frequently poorly implemented, cost-ineffective, and inefficient in design, often inviting abuse and corruption.
- Globally, there is little evidence that tax policy in respect of incentives has any significant effect on investment—the tax structure is more important.
- International experience indicates that tax incentives create inefficiency and inequities through socially corrosive rent seeking behavior.
- Sparing use of tax preferences is advisable given the risk of primary revenue loss and leakage through avoidance.
- Granting tax preferences to new investors may undermine competitiveness of established companies.
- Incentives are often a political "quick-fix" to absorb sovereign risks or infrastructure costs for investors.
- Often investment incentives do not generate enough incremental investment to compensate for revenue losses—they may only affect location decisions.
- Reference markers in text: 50, 41.

### Box 1 — The Ten Most Common Arguments Against Tax Incentives
- 1. Revenue loss—triggered by the existence of a deadweight loss (investment may have happened anyway) or redundancy as incentivized investment is no longer viable. In the absence of tax sparing provisions in the host country’s treaty network with capital-exporting home country, the foreign tax jurisdiction preserves its taxing right (i.e., reverse foreign aid). Also, revenue losses stem from tax holiday firm displacing current taxpaying firms.
- 2. Revenue leakage―through avoidance and evasion (company churning, income shifting, interest pump, false export declarations, tailor made loopholes) secondary revenue losses are created that dwarf in most instances the direct revenue loss from the incentive.
- 3. Adverse impact on tax administration―tax administrators become incentive monitors and regulators.
- 4. Economic cost of fiscal adjustment―curtailing government expenditure through loss of tax base, or the need to increase tax burden (mostly VAT) on vulnerable or other deserving economic activities.
- 5. Economic distortions―incentivized firms may become less productive, efficient, and competitive.
- 6. Generally, tax expenditures impact negatively on equity and fair tax treatment across sectors.
- 7. Lack of transparency—in incentive adjudications gives rise to rent seeking behavior.
- 8. Governance problems―leading often to opaque discretions and corruption.
- 9. Other fiscally more sustainable alternatives are available (see accelerated depreciation allowances).
- 10. Tax incentives are mostly too costly, merely attracting footloose investments, without lasting employment effect.

### Empirical evidence on concessions and FDI (The Bahamas and CARICOM)
- Empirical evidence suggests that tax incentives rarely have any significant effect on investments.
- In The Bahamas, incentives have been in place for decades; strong FDI performance over the last decade may not necessarily be due only to the concession regime.
- CARICOM region shows a rising linear trend in attracting investments, with most member states achieving results with an income tax system in place.
- For The Bahamas, over the last 11 years, FDI as a share of GDP have been an average of 15.23 percent and reveal a rising long-term trend (Figure 2).
- Klemm and Van Parys (2009) examine a panel of more than 40 countries over the period 1985–2004 and find no effect of tax incentives on economic growth and aggregate investment.41
- It is possible that pristine marine ecology, not tax incentives, is the attraction for investment.
- Recommendation:
  - Consolidate the various individual concession acts into a single fiscal omnibus act that can only be introduced, amended, or withdrawn by the minister of finance.

### Comparison of different tax incentives
- Appropriately designed capital allowances as part of an income tax system—such as accelerated tax depreciation provisions—are cost-effective for granting early cash flow benefits for major investments.
- Depreciation is preferable because it defers government receipts rather than permanently foregoing revenue.
- An income tax regime provides start-up and loss-making firms with a tax deferral benefit through carry forward of tax losses; this preserves cash flow and prevents government from taxing generated cash flow when firms suffer tax losses.
- The current turnover-based business licensing system in The Bahamas, with multiple fees and duties, ignores fundamental cash flow dynamics and could deter firm establishment.

### Tax holidays
- Tax holidays are commonly not well targeted and constitute temporary exemptions from certain specified taxes.42
- They tend to attract footloose industries with minimum backward linkages.
- Tax holidays for hotels with a duration of decades are unprecedented and unnecessary; long-term investors already receive de facto tax holidays via loss carry forward and depreciation in a CIT regime.
- Tax holidays for start-up firms are ineffective and prone to abuse, including transfer pricing manipulation.
- Long tax holidays granted to large investors create distortions between new and existing firms and erode small firms’ prospects.

### Free Trade Zones (FTZ) / Special Economic Zones (SEZ)
- Local FTZ legislation grants complete tax holiday dispensation from import and stamp duties, business licenses, and real property taxes for an indefinite period; concessions are not entirely transparent due to designating orders.
- Ideally, zones should focus on reduction of red tape for customs procedures and not grant direct tax incentives due to domestic transfer pricing concerns and tax leakage.
- Free zones operate as ring-fenced enclaves and are exempt from national import/export duties and VAT; however, direct tax incentives are increasingly added, creating administrative challenges and revenue erosion.
- Lack of reporting on associated business activities allows structures to function as tax avoidance vehicles.
- Common problems with zones: poor site locations; uncompetitive policies (reliance on tax holidays, rigid performance requirements, poor labor policies); subsidized rent and other services; cumbersome procedures; inadequate zone administration; lack of coordination in infrastructure provision.
- Suggested principles for SEZ/FTZ regimes:
  - (1) Allow FTZ enterprises to locate within the same area; separately fenced-off areas are less preferable but acceptable.
  - (2) Ensure the FTZ regime is flexible, allowing commercial and manufacturing activities; a separate commercial free zone regime is not required.
  - (3) Promote private rather than public development of zones.
  - (4) Develop an appropriate legal, regulatory, and institutional framework to reduce red tape and improve administrative capacities.
- Emphasis: rather than establishing FTZs to attract FDI, make the entire tax system more attractive to all investors.

### Import duty concessions
- Duty concessions for imports of capital or intermediary inputs operate as duty suspensive (not duty-drawback) regimes and are granted to registered beneficiaries.
- Leakage problems are higher for duty suspensive regimes than for duty-drawback schemes.
- Such concessions can lead to unfair competition and are open to abuse via leakage into the domestic economy.
- For domestic producers disadvantaged relative to international producers, duty concessions can help; nevertheless it is preferable to reduce or withdraw tariffs on industrial or single purpose capital goods and intermediary inputs instead of special concessions.
- Introduction of VAT is recognized by Bahamian authorities as an opportunity to enable tariff reductions for certain goods.

### Fiscal incentives for the tourism industry
- The Hotels Encouragement Act focuses on large international firms and may ignore activity generated by local smaller hotels and tour operators.43
- Discretionary incentives for foreign firms perpetuate bias toward foreign investors and complicate tax administration with corruption risks.
- Many tourist destinations attract investment due to natural resources (pristine beaches, coral seas) and thus incentives may constitute deadweight loss.
- Renewing or extending tax concessions beyond initial periods for foreign hotel operators appears unnecessary.
- Example: Mauritius initially offered incentives in the 1980s and abolished them once tourism gained momentum; today it applies standard 15 percent rates to VAT and corporate income tax across sectors.

### Mitigating erosive effects of tax competition within CARICOM
- Tax competition can lead to a race to the bottom, driving down tax rates and increasing costly tax expenditures, eroding tax effort and public service provision.
- Granting more tax incentives may have adverse distributional impacts.
- Recommendation: CARICOM member states should reduce the level of costly incentives regionally and agree, for example, on a common standard for taxing the tourism industry to avoid unfair competition.

### Policy recommendations on incentives (selected)
- Use tax incentives sparingly and only where they address market failures or generate multiplier effects such as infrastructure development.
- Withdraw the power to issue discretionary incentives.
- Impose a sunset clause of no more than five years for all tax incentive legislation to evaluate effectiveness.
- Decline requests for extending concessions granted under the Hotels Encouragement Act.
- Influence other CARICOM member states to reduce tax expenditures for the tourism industry so countries can reap a bigger share of rents.

### Tax Expenditure Reporting — concept and measurement
- Consider introduction of an annual tax expenditure budget as authorities continue granting tax incentives.
- Tax expenditures are government spending through the tax system that lower tax revenues for certain categories of taxpayers and deviate from the benchmark tax system.
- Forms of tax expenditures include exclusions, exemptions, allowances, deductions, credits, preferential tax rates, or tax deferrals; tax holidays and free zones are examples subject to time or geographic limits.
- Determining tax expenditures requires establishing a benchmark tax structure from which concessions depart; establishing that benchmark is the most difficult part of the exercise.
- Tax expenditures should be tabled at the same time as the annual budget (the tax expenditure budget).

### Main steps in preparation of tax expenditure estimates
- Four steps:
  - (1) Establishing a benchmark tax system—no consensus exists; one simple method is to use the main legal provisions of the tax system at a given date, including deductions/exemptions deemed essential (e.g., VAT thresholds or property tax without tax holiday). The benchmark should represent consistent tax treatment and not favor or disadvantage similarly placed activities.
  - (2) Identifying and estimating tax expenditures—create an inventory defined as deviations from the benchmark, indicating the purpose of each tax expenditure. Use tax returns as the best initial data source.
  - (3) Integrating tax expenditure reporting in budget documents—provide information about tax expenditures with the annual budget to improve fiscal accountability.45
  - (4) Entrench fiscal transparency through four rules:
    - (a) clarify roles and responsibilities so coordination and management of tax expenditures can be centrally monitored from the ministry of finance;
    - (b) make the cost of tax expenditures publicly available by publishing tax expenditure as a key budget document to improve governance, fiscal analysis, and accountability;
    - (c) include in budget execution and reporting a statement of fiscal policy objectives and an assessment of fiscal sustainability for tax expenditures;
    - (d) audit tax expenditures for performance.

*Italic: IMF staff report content.*

### 109.     There are three principal approaches to estimate the costs of tax expenditures.

### _cr1417 - 109.     There are three principal approaches to estimate the costs of tax expenditures.

### Approaches to estimate the costs of tax expenditures
- (1) Initial revenue loss (gain): defined as the amount by which tax revenue is reduced (increased) as a consequence of the introduction (abolition) of a tax expenditure. It:
  - does not account for the change from removal of one provision resulting in increased use of other provisions, or lowering tax revenue elsewhere.
  - does not take into account that the removal of a tax expenditure may result in some taxpayers moving into a higher marginal tax bracket under a progressive income tax system or higher rate under the stamp duty act.
- (2) Final revenue loss (gain): defined as the amount by which tax revenue is reduced (increased) as a consequence of the introduction (abolition) of a tax expenditure, taking into account the change in behavior and the effects on revenues from other taxes as a consequence of the introduction (abolition) of a tax expenditure.
- (3) Outlay equivalence approach: estimates the equivalent amount of direct expenditures that would be required, in pre-tax dollars, to achieve the same after-tax dollar benefit if a tax expenditure were replaced by the corresponding direct expenditure program, to which the tax expenditure is associated.

### Proposed steps toward tax expenditure budgeting in The Bahamas
- The MoF is advised to prepare an annual report on tax expenditures that is published as an attachment to the Budget and which adopts the initial revenue loss approach.
- Tax expenditures should be classified by tax instrument: excises, stamp duties, import duties, real property tax, business license fee, and VAT (when introduced).
- Ideally, the tax expenditure report should be tabled together with the annual budget documentation.
- A recent estimate of revenue foregone from duty concession alone is equal to 21.96 percent of total collections in 2011/12 (or 3.6 percent of GDP), up from 13.2 percent of collections in 2009/10.

### Recommendations on tax expenditure budgeting
- Structure the tax expenditure inventory per Tax Concession Act—and begin to include the revenue losses from real property tax and stamp duty exemptions for first-time home purchases together with duty concessions.
- The costs of tax concessions should be calculated by the MoF and published in a periodic tax expenditure budget.
- Integrate tax expenditures into the budget process, by grouping them in functional categories to facilitate comparison with the corresponding direct budget expenditures, thereby identifying total fiscal resources allocated to each functional area.

### Strategies for rationalizing existing tax incentives
- Three practices to mitigate fiscal damage from poorly designed incentives:
  - (1) Make incentives simpler and provide for a minimum of discretions—that is, ultimate withdrawal of additional concessions into the “heads of agreements” in investment contracts or “designating orders” granted under The Bahamas Free Trade Zone Act.
  - (2) Keep regular and transparent records about take-up, including published annual lists of beneficiaries, and costs of the incentives.
  - (3) Include sunset provisions to evaluate effectiveness and results of investments placed in reaction to the incentive.
- Constraints and practical considerations:
  - Some concession agreements may have clauses that protect investors against changing fiscal regimes; grandfathering may be the only option for such agreements.
- Additional steps authorities could take:
  - (a) Review existing tax system and ensure it conforms with international practice (i.e., broad base, low tax rates, minimum exemptions).
  - (b) Maintain tax incentives that provide fast recovery of investments as they are most cost-effective.
  - (c) Eliminate preferential real property tax treatment as beneficiaries are consuming infrastructural services which have to be financed from a narrower tax base.
  - (d) Resist the renewal of any granted tax concessions because if a company could not establish itself cost-competitively in the initial concession period the chances are slim for ever achieving this benchmark.
  - (e) Ensure that all incentives are embodied in tax codes.
  - (f) Repeal those incentives that may be inconsistent with international agreements against harmful tax practices.
  - (g) Eliminate all discretionary incentives that are prone to abusive rent seeking, or which are rarely used.

### Recommendations on incentives
- Withdraw all discretionary powers that grant additional concessions beyond those specifically provided for in legislation.
- Maintain already granted investment incentives under an investment contract.

### Excise and trade taxes — overview and key statistics
- Tariffs, excises and stamp duties on international trade are the most important sources of tax revenue, accounting for more than 50 percent of the total tax revenues.
- All taxes on international trade are collected by The Bahamas Customs.
- Starting in FY2008/09, excisable goods are separately classified.
- The Bahamas has a wide range of tariff and excise rates; in addition to ad valorem rates, alcohol and some petroleum products are levied a specific amount.
- Revenues declined in 2009/10 to a large extent as a result of the global financial crises.
- Excise tax act was introduced in 2008/09. Some items were taken from the Tariff Act and placed in the Excise Act. Excise tax revenues are as much as the revenues collected under the Tariff Act.
- Excise taxes:
  - contribute about 24 percent of total tax revenues.
  - raise almost as much as the customs duties.
  - apply to tobacco products, luxury items, petroleum products, motor vehicles and cameras.
  - alcoholic beverages are not subject to excises but taxed under stamp duties.
  - there is no excise on beer but it is subject to tariff rates.
  - the rates vary from 7 percent for cameras, crystals, and gasoline (in addition to a $1.06/gal. excise tax) to 220 percent for cigarette products.
  - there are 279 items subject to excise taxes.
  - all goods subject to excises are subject to an ad valorem tax rate; gasoline, diesel, and propane are subject to a specific rate and an ad valorem rate.
  - products that are easy to sell to the tourists are subject to low excise rates ranging from 7 percent to 10 percent.
  - Petroleum product and motor vehicle excises account for 84.5 percent of all excise revenues.

### Selected trade tax aggregates and shares (selected figures from tables)
- Grand Total (Taxes on Trade): 538,279,316 (2002/03); 529,939,444 (2003/04); 547,761,970 (2004/05); 648,241,216 (2005/06); 675,885,742 (2006/07); 705,502,781 (2007/08); 605,348,925 (2008/09); 575,529,504 (2009/10); 647,736,946 (2010/11); 723,640,615 (2011/12).
- General Import Duties (levels): 421,019,197 (2002/03); 409,252,120 (2003/04); 412,740,705 (2004/05); 487,909,605 (2005/06); 507,506,816 (2006/07); 529,713,908 (2007/08); 379,497,051 (2008/09); 349,532,344 (2009/10); 354,117,822 (2010/11); 347,913,382 (2011/12).
- Excise Taxes (levels): - (2002/03–2007/08); 187,170,734 (2008/09); 188,537,338 (2009/10); 253,718,894 (2010/11); 331,291,179 (2011/12).
- Stamp Tax - Imports (levels): 95,764,551 (2002/03); 96,300,880 (2003/04); 111,686,493 (2004/05); 134,523,670 (2005/06); 143,146,602 (2006/07); 149,740,382 (2007/08); 15,183,692 (2008/09); 14,984,643 (2009/10); 15,928,074 (2010/11); 17,556,397 (2011/12).
- Customs Fees (levels): 6,420,335 (2002/03); 6,360,155 (2003/04); 6,483,363 (2004/05); 7,782,812 (2005/06); 8,138,463 (2006/07); 8,222,237 (2007/08); 7,301,661 (2008/09); 5,679,991 (2009/10); 4,576,692 (2010/11); 4,020,671 (2011/12).
- Customs Bonding Tax (levels): 547,700 (2002/03); 540,860 (2003/04); 605,630 (2004/05); 678,362 (2005/06); 627,610 (2006/07); 978,576 (2007/08); 930,335 (2008/09); 736,619 (2009/10); 2,203,759 (2010/11); 1,221,241 (2011/12).
- Grand Total as share of Total Tax Revenues: 64.68 (2002/03); 62.57 (2003/04); 58.42 (2004/05); 60.06 (2005/06); 53.48 (2006/07); 52.24 (2007/08); 50.38 (2008/09); 49.82 (2009/10); 46.37 (2010/11); 52.26 (2011/12).
- Total Tax Revenues (levels): 832,252,507 (2002/03); 847,000,720 (2003/04); 937,592,265 (2004/05); 1,079,360,673 (2005/06); 1,263,829,612 (2006/07); 1,350,588,658 (2007/08); 1,201,547,834 (2008/09); 1,155,319,456 (2009/10); 1,396,751,442 (2010/11); 1,384,662,237 (2011/12).

*Source: The Bahamas, Ministry of Finance, Treasury Department and FAD staff calculations.*

### 115.     The Bahamas has an advantage in terms of collection efficiency where all excises

### _cr1417 - 115.     The Bahamas has an advantage in terms of collection efficiency where all excises

### Collection efficiency and cost characteristics of excises
- All excises are collected by the Bahamas Customs, providing an administrative efficiency in terms of collection costs.
- The marginal cost of collecting excise duties is considerably lower than of all other taxes, including the VAT.
- Excises are low-cost sources of revenue because:
  - products are easy to identify;
  - the volume of sales is high;
  - there are few producers or the products are imported, which simplifies collection.
- Demand for excisable products tends to be price inelastic (addictive or indispensable), implying that tax-induced price increases do not result in proportionate decreases in consumption and potential distortion of economic decisions is relatively small.

### Excise categories and revenue shares (as presented)
- Alcoholic beverages — Share of Excise Tax Revenues: 11.8%
  - Wine 50%, other grape 35%-60%, spirits 7% if imported, domestic spirits $10-11/proof gal. Domestic Beer $5/gal. ($2/gal. in Freeport) Beer $10/gal.
- Tobacco — Share of Excise Tax Revenues: 0.3%
  - 10% on leaf tobacco, 220% on tobacco products.
- Petroleum products — Share of Excise Tax Revenues: 53.5%
  - 45%, gasoline 7% and $1.06/gal, diesel 34.5% and $0.25/gal, aviation fuel 7%.
- Luxury goods — Share of Excise Tax Revenues: 3.5%
  - 7% and 10%.
- Gaming equipment and video games — Share of Excise Tax Revenues: 0.1%
  - 45% for games, 60% for equipment.
- Motor vehicles — Share of Excise Tax Revenues: 30.9%
  - 25% to 85% most common 60%.
- Source attribution in text: The Bahamas Customs and FAD staff calculations.

### Objectives and design principles for excises
- Excises serve multiple objectives that can conflict: revenue-raising efficiency, externality-correction, distributional incidence, and administrative feasibility (including dealing with cross-border shopping and smuggling).
- When properly designed, excises can proxy the marginal damage imposed by consumers (physical, financial, psychological) and thereby improve allocation efficiency.
- Externality-correcting excises should be:
  - expressed as a specific amount per number, volume, weight, strength, or other physical characteristic (specific taxes favored over ad valorem for externalities);
  - adjusted with the consumer price index for inflation.
- Specific duties tend to involve less avoidance and evasion and avoid contentious valuation issues; the factory gate or import stage can be chosen as the place of imposition.
- Once VAT is introduced, it should be imposed on the excise (and import) inclusive price of excisable products.

### B. Excises on Tobacco Products — findings and recommendation
- Current highest excise: 220 percent rate on tobacco products.
  - The high ad valorem rate is consistent with reducing negative externalities but may result in undervaluation and smuggling.
- Policy observations:
  - Choice between specific and ad valorem affects revenue, price, and quality of tobacco products.
  - Specific rates reduce relative price differences between low-priced and high-priced brands; ad valorem rates increase absolute price differences.
  - Because heavy taxation is justified by negative externality, tax structure should be based on tobacco content, not relative values.
  - For cigarettes (filtered and unfiltered), tobacco content averages around 1 gram per stick; rates for these two products should be the same.
  - Specific taxes encourage lesser price competition, higher quality, diversity, and a larger number of manufacturers; they act as a de facto minimum price.
- Evidence of smuggling:
  - Imports of alcoholic beverages were US$44 million in 2011/12.
  - Imports of tobacco products recorded at the Bahamas Customs were only US$354,000.
  - Simple calculation in text: about 5 million tourists annually; assuming one-fourth from North America smoke and same proportion of local population smoke implies a smokers’ population of about 1.3 million. With assumptions on pack purchases this implies about 1.36 million packs annually at CIF value of US$2 per pack → declared value should be around US$2.7 million.
  - The Prime Minister indicated annual revenue loss can be as high as US$20 million.
  - Government is initiating an excise stamp on cigarettes to reduce smuggling.
- Recommendation:
  - Tax tobacco products at specific tax rates with periodic adjustment to retain the real value of the excise.

### C. Excise Taxes on Alcoholic Beverages — findings and recommendations
- Current legal framework:
  - Alcoholic beverages are taxed under tariffs or stamp duties, not under the Excise Act (beer under the Tariff Act, wine and sparkling wine under the Stamp Duty Act).
  - Beer taxed at a specific rate of US$20 per gallon under the Tariff Act.
  - Wine and sparkling wine taxed under the Stamp Duty Act at a 50 percent duty rate.
  - Different rates apply to domestically produced and imported spirits: domestically produced spirits taxed at a specific rate while imported alcoholic beverages are taxed at an ad valorem rate.
- Policy observations:
  - One single excise act should address alcoholic beverages to simplify administration.
  - Alcohol duties should be related to alcohol content; specific rates are preferred over ad valorem if duty is to proxy external costs.
  - Ad valorem rates involve contentious valuation (transfer pricing) issues.
  - Once VAT is introduced it should be applied on excise-inclusive prices.
- Recommendations:
  - Continue taxing domestically produced alcoholic beverages using specific rates based on alcohol content by volume.
  - Move beer from the Tariff Act to the Excise Act.
  - Move wine and spirits from the Stamp Duty Act to the Excise Tax Act.
  - Tax wine and sparkling wine by applying a specific rate based on alcohol content.
  - Establish equal excise taxation of spirits produced domestically and imported.
  - Adjust all specific rates periodically to maintain the real value of excise.

### Excise taxes on petroleum products — findings and recommendations
- Current structure:
  - Gasoline: 7 percent ad valorem excise tax plus a US$1.06/gallon specific tax.
  - Diesel: 34.5 percent plus a specific rate of US$0.25/gallon.
  - Tax on both equalizes around a price of US$3/gallon; prices below US$3/gallon favor diesel, prices over US$3 favor gasoline in terms of tax burden.
- Effective combined excise rate statements:
  - The combined effective excise tax on gasoline and diesel is 4 percent.
  - Unleaded gasoline has a much lower effective excise rate of 3.2 percent.
- Policy observations:
  - Diesel should be taxed at a more favorable rate because of intermediate uses, but diesel used in commercial vehicles and in industrial/agricultural machinery should bear appropriate externality-correcting taxes.
  - Higher motor fuel taxes tend to reduce vehicle use and encourage purchase of more fuel-efficient motor vehicles; impact greater on fuel use and vehicle emissions than on congestion.
- Recommendations:
  - Limit excise exemptions and increase rates on gasoline and diesel.
  - Index the specific excises on both gasoline and diesel.

### Excise duties on luxury goods — findings and recommendations
- Current situation:
  - Excises applied to about 70 products account for about 3.5 percent of excise revenues.
  - Excise rates are 7 percent and 10 percent.
  - Many of these products are primarily sold to tourists (perfumes, linen, bags, cameras, crystals).
  - Regime is neither progressive nor revenue productive; multiple and separate excises increase administrative cost.
- Policy observations:
  - If excises on luxury goods are intended to increase progressivity, they should be levied on products with income elasticity of demand exceeding one (expenditure rises faster than income).
  - Good candidates for higher excise taxes: cars, pleasure craft, yachts, aircraft.
- Recommendations:
  - Reduce the list of luxury goods subject to tax by moving taxation of some of these products under the Tariff Act.
  - Instead of excise on many luxury goods, increase excise taxes on luxury passenger cars, yachts, and aircraft to add progressivity to the tax system.

### D. Current trade taxes and WTO accession — findings, impacts, and recommendations
- Current situation:
  - Taxes on international trade are the largest source of income in The Bahamas; collected by Bahamas Customs under the Tariff, Excise and the Stamp Duty Acts.
  - There are 12 different tariff rates ranging from 10 percent to maximum rate of 300 percent (on live animals, fish and agricultural products, some manufactured goods).
  - Imported goods are taxed under three different schedules; many products taxed at 30 percent, 45 percent, or 60 percent. Beer from malt subject to US$10 per gallon tax and a 10 percent ad valorem tax.
  - Tariff Act exempts a wide range of products under Schedule 4; about 35 percent of imports are exempted from tariffs.
  - Agriculture and manufacturing accounted for 8.6 percent of GDP in 2012.
- Issues:
  - High and uneven tariff rates protect domestic industry and raise revenue but increase cost of living and doing business and erode competitiveness.
  - High tariff protection can encourage investment in inefficient industries and reduce incentives to adopt new technologies.
- WTO accession context:
  - The Bahamas is not a WTO member and has not joined CARICOM CET; negotiations for WTO accession are at early stages.
  - Authorities should request a long transition period in WTO negotiations to allow domestic industries, particularly agriculture, time to adjust.
- Tariff reduction example and fiscal impact (estimates provided for 2011):
  - Authorities considering reducing the weighted average tariff rate to 10 percent from estimated current level of about 25 percent.
  - Effect of tariff reduction and VAT table (as presented):
    - Tariff Rate (Current)25%
    - Tariff Rate (Proposed)10%
    - % Δ in Imports24%
    - % Δ in Domestic Output-4%
    - Δ in Tariff Revenue (million $)-275
    - Net revenue increase as share of GDP-3.5%
    - Notes in table:
      - GDP (million $)7873
      - Imports subject to tariff (million $)2891
      - Elasticity of domestic supply1
      - Elasticity of import supply2
  - Lowering tariffs by 15 percentage points results in a revenue loss of about US$275 million or 3.5 percent of GDP (estimate based on aggregate import and domestic supply elasticities).
  - For more accurate revenue impact, estimations should be done on a product group basis using price elasticities of import and domestic supply estimated for The Bahamas.
- Interaction with VAT:
  - Lowering tariff rates should be synchronized with the introduction of VAT; VAT applied to a broader base is expected to raise sufficient revenues to compensate for tariff revenue losses.
  - VAT revenues will be the sum of VAT on current level of imports plus VAT on induced import supply due to tariff reduction.
  - Effect of VAT depends on which products are exempted from VAT; exemptions from tariffs should not automatically carry to VAT.
- Recommendations:
  - Consolidate the current range of tariff rates to three to five different rate classes.
  - Request a long transition period in negotiations with the WTO for domestic industries, particularly agriculture.
  - Remove some products from Schedule 4 as tariff rates are reduced on these products.
  - Estimate revenue impact of tariff reduction at product level if possible.
  - Determine reduction in tariff rates accounting for interaction with the design and rate of VAT.

*Source: _cr1417 (extract), The Bahamas Customs and FAD staff calculations, as presented in the supplied IMF content.*

### 136.     Under the Stamp Act, the only stamp duties on imports are levied on imported

### Stamp Act: Stamp Duties on Alcoholic Beverages

### Current stamp duty structure and administration
- Under the Stamp Act, the only stamp duties on imports are levied on imported alcoholic beverages excluding beer.
- According to the Act, wine and sparkling wine are levied a 50 percent stamp duty.
- The stamp duty on imported spirits is a 7 percent ad valorem duty.
- Other stamp duties are on spirits with high alcohol content.
- These stamp duties raised about US$14.6 million in 2011/12, about 0.2 percent of GDP.
- Stamp duties on alcoholic beverages are collected by The Bahamas Customs and Excise.
- In addition to imported wine and spirits, there is a stamp duty on domestically produced spirits.
- Domestic production of spirits has either a US$10 or US$11 per proof gallon of alcohol.

### Issues identified
- The difference in the duty structure (domestic production at US$10 or US$11 per proof gallon versus ad valorem/import rates) favors domestic production of high-priced spirits.
- Before accession to WTO membership, The Bahamas will be required to equalize the rates on domestic and imported spirits.
- It would be best to move all the alcoholic beverages under the Excise Act as it is more common worldwide.
- The stamp duty rates are low relative to taxation of alcoholic beverage elsewhere.
- Consolidating all alcoholic beverages and tobacco products under the Excise Act would facilitate the administration of taxation of all excisable goods.

### Recommendations
- Consider increasing the stamp duties on alcoholic beverages.
- Consolidate the taxation of wines and spirits under the Excise Act.

*Source: IMF country report section on Stamp Act stamp duties on alcoholic beverages.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1417.pdf_