The International Monetary Fund (IMF) is advising Government to consider making additional tax reforms which, if implemented, would result in increased taxation for some Barbadians.
However, Minister of Finance Ryan Straughn is making it clear that Government’s intention is to continue reducing the tax burden on Barbadians where possible, as he pointed to reforms in this regard concerning land tax and energy, among other areas.
The minister also said yesterday that as the authorities monitored how recent tax reforms, including corporate income tax (CIT) changes, were working, there would be no rush to make immediate changes in taxation.
This, he added, was also within the context of improved public finances and the growing economy, even as fallout from the war in the Middle East was being monitored.
Reform options
The IMF-recommended tax reform options, which would result in increased collections from value added tax (VAT), land tax and excise levied on fuel, are suggested in the IMF’s latest Staff Report for Barbados following the recent completion of the biennial Article IV Consultation.
IMF experts believe the changes are necessary to facilitate the removal of distortive taxes and support growth and investment, and that given uncertain future CIT collections, further revenueraising measures “could be a critical element of contingency planning to support fiscal resilience”. “Although near-term corporate income tax revenues are expected to be strong, the full impact and permanence of the reforms remain uncertain,” the IMF staff said.
“In this context, the Government should develop further revenue-raising measures, which could include basebroadening VAT reforms, as well as reforms to the land tax and fuel excise tax.”
In an analysis titled Revenue Mobilisation: Recent Successes And Future Challenges, the IMF tabled some tax reform options that would impact the tourism and real estate sectors and property owners.
Distortions
While stating that VAT remains the linchpin of the indirect tax system, with collections surpassing those of other regional and international countries, the IMF team said that various reduced rates and compliance challenges meant that Government was not collecting VAT revenues as efficiently as it could.
“In particular, VAT treatment in the tourism and real estate sectors has historically been a source of complexity and inefficiency in Barbados’ tax system. Multiple exemptions and refund mechanisms create distortions and loopholes that reduce revenue potential,” the IMF report said.
Against this background, it proposed reform options to generate incremental additional tax revenues that could be used to fund more targeted social transfers to protect the most vulnerable.
One recommendation is to repeal the preferential 7.5 per cent and ten per cent VAT rates for supplies related to tourism, “so that these supplies are taxed at the standard 17.5 per cent rate”.
Straughn noted in his response that there was imminent policy decision on this issue but that it was one Government was constantly assessing, as it did with other taxes.
Another IMF suggestion is to broaden the VAT base “to reinstate the basic principles of VAT on real estate, including taxing the first sales of newly constructed residential property; and all supplies of construction goods and services”.
“Importantly, the existing housing rebate could continue to be targeted at lowand middle-income households, using property for residential purposes,” the report advised. Land tax was also targetted. Noting that the zero-rate threshold for residential property was recently increased to provide cost-of-living relief, the IMF Article IV report said that “the progressivity of the land tax could be further increased and additional revenue generated in several ways.
The suggested options were “eliminating the $100 000 cap on the maximum amount of tax that can be collected on a residential property; increasing the top residential land tax rate by 0.25 percentage points; subjecting villas to the same valuation methodology and progressive tax rates as residential properties; and repealing the 50 per cent hotel rebate and 25 per cent villa rebate”.
Reform was also recommended for fuel excise tax. “In the medium term, once fuel prices have declined from current high levels, the excise tax on diesel should be increased to reduce the differential with gasoline and better reflect the external costs associated with the use of diesel by motor vehicles,” the report recommended.
“Barbados currently imposes an excise tax on gasoline (99.39 cents per litre) that is more than double the rate on diesel (44.03 cents per litre), despite the fact that diesel use in motor vehicles results in relatively more local air pollution, greenhouse gas emissions, and roadway depreciation.”
Straughn reiterated that changes in excise taxes were part of Government’s effort to give Barbadians an ease in recent years, and more particularly in relation to the increase in oil prices triggered by the conflict in Iran and the subsequent closing of the Strait of Hormuz shipping artery. (SC)