|Should VAT make business owners happy?||| Print ||
|Thursday, 17 March 2011 17:52|
Residents and business owners are already sweating the idea of the introduction of value added taxes in 2013 that were recently proposed by the European Union-funded economic advisors to the interim government.
Concerns have been raised by local business owners, as well as groups and political leaders about the effects this proposed new tax system will have on the economy of the Turks and Caicos Islands.
“The introduction of VAT to TCI will improve the situation for business owners,” says Jorge Baca, one of the two economists who made the proposal.
The upside for local businesses is that they will be able to credit any VAT paid against VAT collected. Baca points out that businesses will be able to credit VAT paid on all items required to operate the business, including capital expenditures.
All VAT paid on services provided to a business will also be applied against VAT collected, which Baca says will create an incentive for businesses to pay the value added tax. For example, if a clothing business requires the service of an attorney, they will have to pay 10-percent VAT on the total bill for services. The company can then use that VAT paid as a credit against VAT they collected for goods sold to a consumer.
The largest return for businesses will be seen with VAT paid on imported items. Currently local businesses pay customs duty on items they import into the country. That duty, which can be up to 40-percent, is then added to the value of the item sold.
Once VAT is introduced in 2013, customs duties will be reduced by an average of 50-percent . This means a business will then pay 10-percent VAT, plus a reduced duty on the item. When they then sell that item on to the customer, they can keep a portion of the VAT paid by the customer to offset the VAT paid upon importation.
For hotels and resorts, this can make a significant difference in their bottom line. They will now be able to credit VAT taxes paid at the import stage against VAT collected from guests (currently accommodation tax, which will be replaced by VAT). This also goes for VAT paid on utilities such as electricity and water.
So if this is all going to save local businesses money, how is the government going to make the revenue needed?
There is no free lunch
Baca says the most important thing people need to understand is “There is no free lunch.”
While no one likes to pay taxes, the civil service is taxing the consumer, literally.
Public service is being cut in the TCI because at its current rate — 60 percent of government spending — it is overly burdening the economy. His Excellency the Gov. Gordon Wetherell has said on a number of occasions that percentage needs to be significantly reduced and made more efficient.
All public services provided by the government, including infrastructure projects, border protection and police are all funded with revenue collected by the government from its residents and visitors.
“In most countries, public service is paid for by income taxes, corporate taxes and consumption taxes,” Baca explains. Since the TCI has no income tax and no corporate taxes, the only source of revenue to pay for all public services required are consumption taxes like VAT.
“For this reason, the consumption tax has to be paid on all items in order to keep it as low as possible,” he said.
Baca says while many countries, such as the U.K., pay up to 20-percent in VAT, they are only proposing a VAT of 10-percent for the TCI. But to keep the tax this low, everyone and every business will have to pay the tax and on every item. This includes the government and statutory bodies, who to date do not pay import duties.
These separate agencies are given special status, participating in the benefits of being considered a part of government, such as duty exemptions, but are not considered part of government in other situations - such as public service pay cuts.
Baca says in order to create a fair and efficient system, all agencies including those with government status will have to face taxes in the same way.
“There are many professional services in the country who are not currently paying taxes,” Baca says. By introducing VAT, the tax net can be widened to share the burden more fairly across all sectors of the economy.
With credits for local businesses against VAT paid on goods and services against VAT collected, Baca says this will encourage compliance, again widening the net of people paying by closing gaps where some are performing illegally.
Many open issues remain as to how VAT will be applied, especially protecting the low-income segment of the population. Baca says they are currently identifying the goods consumed by this group and looking to create a threshold.
For example, in terms of the electricity and water tax, considerations are being made to create a threshold where those falling below certain consumption amounts will not have to pay the tax. This also applies to certain goods, particularly those which are currently duty-free.
All the details have not been worked out yet, says Baca.
“We have time to get it right,” he adds, because the new VAT is intended to be brought into play in two years. Baca says they will use the next two years to work with companies and residents to educate, train and define the right system for the TCI.
“We have the opportunity to get a system that is not only fair but efficient,” he said.
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