Value added tax not suitable for Turks & Caicos Islands - expert

House of Assembly votes to repeal VAT.

 British Governor hints he may ignore the decision of elected government and enact VAT anyway.

by Nanessa Narine

Turks and Caicos Weekly News 

VAT Not Suited For Turks and Caicos Islands - Expert Warns Against New Tax Regime

THE initial report on the effects of Value Added Tax (VAT), a study commissioned by the Turks and Caicos Independent Business Council (TCIBC) was leaked this week. Author, Richard Teather, warned that VAT is a "notoriously complex tax” and one that is not well suited to small island economies such as the TCI.

The report titled ‘VAT and the TCI an independent appraisal’ looks at the suitability of a VAT for the TCI and examines whether it would be better or worse than the range of current taxes that it is proposed to replace. It notes clearly that VAT is not expected to raise significant extra revenue, but merely to replace the revenue from those other taxes.

The report found that because VAT is charged on all (or nearly all) business transactions, but then is refunded to business customers, it is expected to be more administratively complex and expensive to operate than the simple, targeted taxes that it will replace.

In addition it will not tax any significant sectors of the TCI economy that are not already being taxed under import duties or other existing taxes (primarily the Accommodation Tax, the Communications Tax and the new Energy and Water Taxes).

Those sectors that are not currently taxed are either unsuited to VAT (financial services, government services) or are largely business services, so any VAT collected from the sector would be largely refunded to its business customers.

Teather maintained that VAT would be expected to increase administrative costs without spreading tax across any significant sectors that are currently untaxed.

He said, "VAT is a notoriously complex tax, and although some VATs are more complex than others a certain degree of complexity is unavoidable because tax is collected from every business and also refunded to every business within the system.

"To put this in perspective, the cost for the UK government of administering VAT is (for each pound collected) similar to the cost of corporation tax, and over twice the cost of collecting social security contributions.

"The costs of VAT administration for businesses are more difficult to measure, although one study by the UK Parliament found estimates that for small businesses the cost of VAT compliance was almost 1.5 per cent of turnover (that is merely the administrative costs, not the costs of the VAT itself), and that small businesses spent an average of 1.8 hours per week dealing with VAT administration.”

DEBUNKED

The report has debunked the reasoning pedalled by the Chief Financial Officer (CFO), Hugh McGarel Groves, in favour of implementing the new tax regime.

Last October, the CFO noted that the overall position is that VAT is a replacement tax intended to be revenue neutral with any cost rises kept to a minimum – hence the extensive list of exempt and zero-rated items. 

McGarel-Groves said VAT’s purpose is to provide the Government with a more stable and predictable income stream with which to better support spending priorities.

Earlier in June, he stressed that TCIG is not aiming to raise more revenue overall from VAT.

He said, "This is all about widening the tax base, creating more stability in government revenues and a fairer tax system, with no concessions offered on VAT and reduced import duty concessions (by reducing import duty rates).

"TCIG’s forward financial projections are showing an increase in TCIG's annual revenues post VAT implementation of $10m due to improved compliance and reduced tax leakage. Existing honest taxpayers would not be contributing to this extra $10m.”

McGarel-Groves maintained that there are benefits of VAT to a renewed TCI economy.

SMALL ISLAND DYNAMIC

 According to Teather, no small island country had VAT until 1989, and it was long thought that they were unsuited to it. He stated that this is because of a combination of two reasons.

Firstly in a small country, the costs of implementing a VAT system can be disproportionately high.

And in a small island economy, a high proportion of the economy is based on imports, which can be taxed by means of much simpler import duties, and with proportionately very little domestic value-added business that needs to be taxed by way of a VAT.

The tax expert said, "The natural and logical way to tax consumption in such economies would therefore be by way of import duties; they are easy to operate and relatively cheap to collect, and in a typical small island economy with relatively little domestic production a well-designed import duty combined with a few specific taxes will tax almost all consumption.”

The report noted that the biggest effect on consumers will be felt in the retail sector, as prices are increased by VAT.

It said, "It has been said that the effect will be minimal, because import duties will be reduced by a similar amount to the VAT rate.

"However this misses the crucial distinction between import duties and VAT; import duties are charged on the import value, whereas VAT is charged on the resale value. It is that difference that will make the cost to the consumer of VAT much higher than import duties.

"Retailers need to add an uplift to cover the costs of distribution and the various costs of operating, heating, lighting and staffing their stores, and so retail costs are typically a multiple of the raw cost of goods.

"There will also be VAT on locally produced goods, and on services. Although the overall effect on the economy and VAT revenues from these will not be great (see below), the impact on individual businesses and consumers will be greater.

"However the impact on locally produced goods and services will depend on which producers are large enough to be over the VAT threshold and so liable to charge VAT.

"Without that information, modelling the effect of VAT on different groups of consumers will be impossible.”

EFFICIENCY

Teather addressed the efficiency of the proposed new model, pointing out that it is not that a VAT cannot be implemented in a small island economy, but whether or not it would be efficient.

He said, "The main reason for the adoption of VAT by small island nations is external pressure to reduce import duties, rather than because VAT has advantages in itself for such islands.

"The growing trend in international trade is for compulsory reduction in import duties, whether via global trading groups such as the World Trade Organisation or regional bodies such as the European Union.

"In the case of small island countries, many have adopted or are considering adopting VAT because of regional international trade agreements such as the Pacific Islands Countries Trade Agreement (PICTA) and the Pacific Agreement on Closer Economic Relations (PACER).

"In other cases, the small island’s proximity to an international trading bloc has forced it to adopt their import duty reduction programmes.”

However, the report noted too that even though some international agencies, like the International Monetary Fund (IMF) are wholly supportive of VAT, it is not necessarily in favour of VAT for small island nations.

Teather quoted the Deputy Director of the Fiscal Affairs Department of the IMF, Michael Keen, as saying, "The suitability of the VAT for small countries, and for small islands in particular, is an issue that arises with increasing frequency.”

The tax expert pointed out that whilst some Caribbean jurisdictions have indeed adopted a VAT, notably Grenada and Belize, have tried a VAT only to later abandon it.

Teather said, "Overall the expectation is that a VAT is likely to increase administrative costs for both government and business, because a few simple taxes will be replaced by a more complex one. On the revenue side, the analysis of the TCI economy suggests that additional revenues will be small.”

He made it clear that the existing taxes are few and simple.

The tax expert’s final report is expected to be made public soon.

TCI News Now

Assembly votes to repeal VAT (L-R) Premier Rufus Ewing and opposition leader Sharlene Cartwright Robinson In a rare display of bi-partisanship, the TCI House of Assembly voted on Friday to repeal the controversial value added tax (VAT) legislation, due to take effect on April 1. The final vote was 16 in support of VAT repeal and 2 opposed. The news of the vote prompted an immediate and pointed repsonse by Governor Ric Todd emphasising the constitutional requirement that the governor must assent to a bill for it to become law in the TCI. “I have been informed about the decision of the House of Assembly today on the Turks and Caicos Islands Value Added Tax (Repeal) Bill 2013. Section 73 of the Turks and Caicos Islands Constitution Order 2011 sets out the procedure under which a bill becomes law. I intend to discuss this matter with my colleagues in Cabinet on Wednesday, 6 February 2013,” Todd said. The repeal of VAT was introduced as a private member’s motion by leader of the opposition Sharlene Cartwright Robinson, who gave what nearly every member acknowledged was a stirring speech in support. Premier Rufus Ewing seconded the motion and spoke primarily about his government’s inability to do what he called the will of the people. “This is not democracy,” he said. This was the approach taken by elected and appointed members of the ruling Progressive National Party (PNP) who rose to support the repeal. Their argument was that VAT would increase the cost of living and was not appropriate for the TCI.  Mentioned only by one member was the ostensible reason for the tax -- the pay down of the $260 million loan guaranteed by Britain. This was later picked up by the member from South Caicos Norman Saunders, who said in his opinion the loan only needed to be $130 million.  The governor’s appointed member Lillian Misick spoke out strongly, saying that the premier’s arguments that democracy was not in force were flawed.  In responding to an assertion by Ewing that VAT was not legitimately enacted, in part, because it did not pass in the Consultative Forum with a majority vote, Misick, the former Forum chair, said, "He is wrong. VAT was in fact passed with a majority vote, which means that the premier is also wrong in saying that the governor ignored the advice of the members of the Forum." Misick also reminded the premier and the opposition leader that the new TCI constitution vests in the governor a prerogative to ignore not just the advice of his government, but any law enacted by it.  "Tthroughout the entire three years of the interim administration our local political leaders did little more than mislead our people with promises to do things they knew they had no authority or power to do," she said. After the lunch break, the members of opposition expressed their support of the repeal. One member asked why he had not heard from the government members what alternatives they were proposing to VAT. The members spoke of the numerous studies and reports, some from high level persons from the UK, all of which had recommended against the new tax. Late in the debate, the government’s minister of finance Washington Misick spoke at length against the tax on the basis that the tax had been imposed by Britain. He spoke out against the interim government and then listed his alternatives to the VAT tax, which basically were a one percent increase in the accommodation tax and a tax imposed on tourists involved in water-sports activities. This was a repeat of what Misick had announced earlier. In fact, he repeated his warning that the repeal of VAT will not be readily accepted by Britain and he was ready to submit to firing or prosecutions.  “We may have to engage in civil disobedience,” he said. No one from either side of the house spoke of cutting spending to create a budget surplus. However, the cost of the National Health Insurance Plan was mentioned by three opposition members. One of the last members to speak was former chief minister Derek Taylor, who reminded Washington Misick that when Misick was chief minister he had to engage in redundancies to balance his budget.  “This resulted in our leadership of the government in 1995 until 2003 a period when we expanded the economy,” said Taylor. VAT was approved by the then Consultative Forum and signed into law in July last year. Britain’s Foreign and Commonwealth Office (FCO) has rejected all attempts by the recently elected PNP government to defer its implementation for at least six months, unless or until a viable alternative to VAT is proposed. VAT has been embraced by the FCO as the way out of the financial difficulties facing the TCI. Massive malfeasance in office and systemic corruption on the part of the former PNP government, coupled with debts and liabilities associated with the National Health Insurance Plan and two new hospital buildings, left the TCI some half billion dollars in debt, requiring Britain to guarantee a $260 million loan to prevent default and bankruptcy. Chief financial officer Hugh McGarel-Groves believes that VAT is the only way to bring the government from yearly deficits or break even to a surplus, which will not only cover the health costs but also service the remainder of the debts. However, McGarel-Groves has admitted VAT may raise the prices of taxable items by 3 to 4 percent. The politicians believe the costs to islanders will be much higher. *****     Brianca Johnson The House of Assembly vote places the people of the TCI head to head with the FCO. to  TCI News Now *********** The House of Assembly vote places the people of the TCI head to head with the powers of the Foreign and Commonwealth Office (“FCO”) and brute force. There is more than sufficient evidence to conclude that VAT is designed to destroy the TCI’s economy. The recent resolve of the parliament of the TCI to unanimously vote across party lines to denounce VAT is to be encouraged and has made the elected chamber more relevant in the TCI that it has ever been in recent times. This powerful vote cannot be regarded as ‘symbolic’ because it places the people of the TCI head to head with the powers of the FCO and toe to toe with those ‘powers’ behind the throne that seek to exploit our wealth and taxes.   The intellectual debate forming against VAT is a valid reaction to the invasion of constitutional force from the Governor’s office. Yet through this all a valid debate is forming. It is like we have been invaded and conquered “again” by the Romans, our country under siege and the conquerors for no valid reason have decided that we will pay for this conquest through higher taxes.   It is suggested that this conquest began well before the commission of enquiry, when the FCO tacitly and openly supported waste, theft and corruption while stating there was no evidence otherwise. Their support of the hospital deal and the $260 million aspect of this siege and taking of our taxes to pay for “this debt” mounted through the FCO condoning what was wrong. The new constitution gives them brute force in taking our monies to pay for these past and present misdeeds.   In all of this a pretext has been created for what they call a “steady and consistent supply of revenue” to pay for debt created by condoning and the blessing of all that was corrupt. The debate that has formed is valid and must continue. Yet there is no clearer clarion call for commonsense than the letter written by Jerzy Kolodziej in making the case that the planning for VAT and the disclosure of documents was half hearted and weak on the part of the chief financial officer (CFO).   “…. I would like to refer to the recent request for documents from the Appropriations Committee. The CFO refused to provide the documents in support of VAT. His claim was that they are confidential! Only after being informed that he could not lawfully conceal them, did he make a half hearted attempt and produced just two documents. These documents did not provide anything further than the reasoning that I have already mentioned.  Those documents did state reliance on another report, the Roe Report 2010. However, the Roe report does not recommend VAT as the only option. It also suggests that the existing taxation system might be the best option.  Hardly a definitive case. The Roe report did not evaluate the performance of VAT in the TCI. Clearly, no-one has! What is becoming certain is the arbitrary nature of the decision. A reckless and irrational decision that was taken by unelected officials on flimsy or non-existent evidence.” Courtesy of the tcijournal.com VAT will only destroy the TCI and further impair our ability to grow out of debt. It will discourage foreign investment and make the possibility of economic expansion far less. Ironically it is only through expanding our economy through greater investment incentives that will lead us out of this debt. Whilst no one wants to debate how we got into this debt and the causes such as the hospital deal, the only way we can get out of it is through seeking legal remedies to remove the hospital deal and resulting debt. Today the government and opposition elected officials are to be congratulated but the CFO, the Governor and the FCO cannot be let off scot free. Their careers and ability to destroy small island developing countries through ill thought out schemes must end. The bungling of TCI tax reform should follow them wherever they go. They cannot be allowed to rely on introducing VAT and using that as a stepping stone to career advancement.   More than anything else, we are being lied to by the Governor, CFO and FCO. The only evidence they have on VAT is that it will surely kill TCI’s economy. Yet why do they insist and persist? Mr Kolodziej states that: “Throughout this sorry affair the Governor and the CFO had been claiming that the justification for the decision were contained in these secret documents. Therefore the case for VAT has been predicated the most vulgar mistruths and dishonesty. To call this lie, this manipulation, this perversion of good governance, is wrong in your opinion. But if this matter were allowed to pass without contest what future is there? “   Mr CFO and Governor, you have taken it onto yourselves in the Constitution to do as you like. But is this a valid and legitimate exercise of these powers and as such simply to use them in brute force? I say no. In sum the vote by the TCI people, through their elected representatives, is a valid expression of “how we all feel” and it must be used as a tool to undermine the improper and invalid use of brute force in the TCI Constitution to make us all pay higher and for no valid reason. The debate from the private sector, the Providenciales Chamber of Commerce, the TCI Business Council and the community all are in sync with this powerfully valid vote by the people of the TCI. We do not want VAT and it can destroy us. In sum this is the reality of the anti VAT debate. Also see: A View From the Mud Hole: Is Democracy Dead or Alive in the TCI reference VAT?