VAT has potential to make more revenue in the Caribbean — IMF research
The International Monetary Fund (IMF) has released a new working paper on value added tax (VAT) and consumption taxes within the Caribbean region which asserts that competition for investments has led to diminishing returns from the tax category.
Tax Administration Reforms in the Caribbean: Challenges, Achievements, and Next Steps, by Stephane Schlotterbeck was released earlier this month.
Twenty Caribbean islands are discussed in the paper which analyses VAT performance in the region and concludes that while it has boosted revenues, the VAT has not reached its potential.
The author considers to be problematic the broad use of VAT exemptions, zero-rating, and VAT withholding to attract FDI and boost competitiveness.
Schlotterbeck says that over the past decade, governments in the Caribbean region have introduced the value-added tax (VAT) to modernise their tax system, rapidly mobilise revenue and reduce budget deficits.
But, one common theme noted within the region by the author is special treatment of the tourism sector. At the same time, it notes that another weakness of the system is the tendency of tax collectors to focus on large companies instead of collecting effectively from a wider base.
In a section entitled, "Tax competition, a race to the bottom," the author notes that tax incentives have become increasingly pervasive. Schlotterbeck pointed to estimate the revenue forgone for the main taxes (VAT, import duties, excises, and the CIT) at about 4.0 to 6.5 percent of GDP in Antigua and Barbuda, as well as Dominica and St Kitts and Nevis, above seven per cent of GDP in Grenada, St Lucia, and St Vincent and the Grenadines, and nearly 10 per cent of GDP in Jamaica.
"Tax incentives erode the tax base and significantly complicate tax administration. They require resources to control and monitor them," she noted.
In Antigua and Barbuda, 64 percent of all sales (aggregated turnover) were either zero-rated or exempt, 50 per cent of imports were not subject to the VAT, of which 73 per cent were zero-rated, and 27 per cent were exempt. In St Vincent, 36 per cent of the value of imports was not subject to the VAT in 2008, and this percentage reached 56 per cent in 2011.
In 2015, a VAT gap analysis completed in Jamaica showed that the policy gap is equivalent to five to six per cent of GDP, and the General Consumption Tax (GCT) expenditure has been between four to five per cent of GDP.
Schlotterbeck said the tourism sector has always attracted special treatment.
"Almost all the countries in the Caribbean (including Antigua and Barbuda, Barbados, Dominica, Grenada, Jamaica, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines) have introduced reduced rates (ranging from 7.5 to 10 per cent) for hotel accommodations," she outlined.
The reduced rate has been expanded to restaurant food and beverage, and to several tourism activities, such as water sports services, tours, and admission to heritage sites and touristic attractions.
In the struggle for FDI, "There has been a proliferation of bilateral agreements granting VAT exemptions to hotel industry leaders in the region. In St Kitts and Nevis, for example, these agreements allow for the nonremittance of 70 per cent of the VAT charged on supplies of accommodation and the zero-rating of food and beverage supplies.
"In Barbados, goods imported under the Tourism Development Act are zerorated, and service charges are zero-rated or exempt," the author outlined.
Schlotterbeck said that an expected decline in trade tax revenues and the persistent demand for higher investment in social and physical infrastructures has added new pressures for mobilising revenue
The author said that the VAT is a good revenue-raising instrument with potential to raise more. Although VAT remains a strong and stable source of revenue, improvements to its current structure are required to turn it into a simple, non-distortive, revenue-efficient tax.
"VAT analysis shows that there is scope for substantial gap reduction by curtailing tax expenditures (such as restricting domestic zero-rating, exemptions, and differentiated rates), and by increasing the revenue administration’s effectiveness," Schlotterbeck said among her conclusions.
The analyst targetted systems which affect a population of 17 million living in Anguilla, Antigua and Barbuda, the Bahamas, Barbados, Belize, Bermuda, the British Virgin Islands (BVI), Cayman Islands, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Suriname, Trinidad and Tobago, and Turks and Caicos.