fp Turks and Caicos

Consultants and the interim government have begun studying a new revenue strategy that will consider implementing valued added taxes, property taxes and excise taxes.

Also under review will be work permit and national insurance collection systems, and government fees and charges, according to a presentation for the process that began recently.

The country is currently deep in debt and unable to meet recurring expenses without massive loans from the U.K., which is demanding that the Turks and Caicos Islands get on sound financial footing before returning control of the government.

The exercise, which is expected to produce a final report in March, continues to follow the recommendations earlier this year by economist Alan Roe for a more sustainable system of government revenue. The government already has introduced Roe’s recommendations to revise the import duty and the land transfer stamp duty systems.

The outcome and recommendations of the revenue study will have to run the gauntlet of public consultation and review by the Consultative Forum and governor’s Advisory Council before implementation.

In charge of the process is new Chief Financial Officer Caroline Gardner, who was chosen by the U.K. Department for International Development (DFID) as one of the requirements for emergency loans being provided to the TCI.

“My first priority has been getting a handle on our cash and making sure that we are collecting all the revenues that are due to us and prioritizing the payments that go out,” she told the fp. The list of priorities includes payments involving security, health and government salaries.

“My job is to put in place a longer-term package that gets us out of that immediate flash fighting mode,” she said.

That longer-term package will require changes that bring in more revenue to the country, but Gardner says those changes are yet to be decided.

With consultants who are funded by the European Union to explore Roe’s recommendations, Gardner and her team are examining what the impact would be on the economy and on the government finances and looking at the ways they might be implemented.

“There are a whole range of options for current revenue sources and for potential new revenue sources that are being investigated as a part of that work, but it really at a very early stage, and I can ensure your readers that no decisions will be taken without first of all comprehensive modeling of the effect on TCI’s economy and secondly widespread consultation with the public and business community.

“After modeling and consultation has been done, any changes to the revenue system will be decided by the governor and the Advisory Council in the normal way,” she said. “But we are not close to that stage yet. We have just really kicked off the process and are just looking at what the options might be.”

Gardner said they are currently looking at what the options might be for making the tax system more efficient, fairer and support the economy better in the future.

"The global economic recession has hit the Turks and Caicos Islands very hard," said government CEO Mark Capes. "It has exposed weaknesses in the territory's economy and has resulted in falling revenues. The impact has been compounded by the scale of the national debt accumulated by previous administrations; a legacy of poor public financial management; and, the overexpansion of the public service that will this year cost the TCI $72 million, representing 60 percent of the revenues we expect to collect of $120 million.

"Accordingly, it is essential that the TCI’s revenues are reviewed and where necessary revised as part of the government’s comprehensive programme of public finance reform. The government is committed to develop a more sustainable revenue base; one that will help to rebuild the territory's public finances and put it on a stable footing for future generations."

A number of Caribbean countries have imposed value added taxes (VAT) and other taxes to offset the drop in traditional revenue sources such as import duty and stamp duty, which made up more than 55 percent of government revenue in 2008-09.

One of the consultants working with the government — Paulo dos Santos — has been involved in VAT implementations in other Caribbean nations, including presentations to the Caribbean Community (CARICOM).

Focus for future TCI revenue models should turn away from dependence on stamp duty, Roe said. This is necessary because of the “very substantial uncertainty about the future prospects of the TCI condominium model,” which was the major element behind the massive property boom and the rapid growth in gross domestic product (GDP) during years prior to 2008.

Instead, Roe suggests finding more ways to broaden the tax base, moving it away from the real estate sector, primarily with a VAT on all goods and services.

According to Roe, the VAT has been the most successful tax in terms of new uptake in the last two centuries. It was first introduced in France in 1948 but is now in use in some 140 countries worldwide, including CARICOM countries such as Jamaica, Barbados, Trinidad and Tobago, Dominica, St. Vincent, Antigua and Barbuda.

While several forms are being considered, Roe suggested replacing all customs duties and other forms of tax, such as the telecommunications and hotel tax, with VAT. He argues that the current system of taxation primarily comes from three major sectors of activity, namely hotels and restaurants, financial services and real estate, which account for 52.3 percent of the GDP.

VAT could collect more taxes indirectly from other sectors, such as construction (18% of GDP); transport and communication (9%); utilities such as electricity and water (4%); wholesale and retail trade (4.5%); manufacturing and mining (3%); and business services other than real estate (3%).

He also notes the current system allows for a “double jeopardy” in taxes, such as a resort having to pay import duties on most of their supplies, then having to pay taxes on their sales of rooms.

Roe also recommends considering some form of property taxes, such as an annual tax on land, residential property and commercial property.

“These three components need not sink or swim together — they should be considered on their own merits,” he said. “However, there is a general message to keep rates of property tax low and to not introduce any such new tax during ongoing periods of serious depression of the property market when the ‘urban blight’ tendencies are already likely to be a threat independently of the existence of property taxation.”

Because of the economic boom through 2008, former governments gave little consideration to the changing the country’s revenue system, Roe said.

“Neither they nor the authors of this report truly know what the next few years will bring and above all whether the development model that worked well prior to 2008 will really function again in anything like the same manner,” Roe concluded.

Click HERE to read Roe's complete report.

Click HERE to read Capes' complete statement on the current revenue study.