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IMF Urges Bahamas To Install Long-Awaited VAT

by Mike Godfrey, Lowtax.net, Washington
24 July, 2014

Following its recent visit to the Bahamas, the International Monetary Fund (IMF) has reported gradual economic recovery, but stressed the importance of the prompt introduction of a value-added tax (VAT) to shore up the territory's finances.

The IMF team, headed by Mbuyamu Matungulu, met with senior government officials and representatives of the private sector. Matungulu said: "Economic activity continues to recover, but momentum remains weak, with growth estimated at 0.7 percent in 2013, and expected to be limited to 1.2 percent this year."

He said the fiscal consolidation process has begun, but its pace could be frustrated by delays in the introduction of the VAT. Preliminary data suggest that the fiscal deficit declined to 4.5 percent of gross domestic product (GDP) this year, from 5.4 percent in the previous fiscal year. The deficit is projected to narrow further to just under four percent of GDP in the 2014/2015 fiscal year, provided that the VAT is introduced in the coming months.

The Bahamas will introduce a VAT with a 15 percent headline rate from January 1, 2015 (the implementation date recently deferred from July 1, 2014). A concessionary rate of ten percent will apply to the business of hotels, including food and drink sold on their premises, as under the existing Hotel Occupancy Tax regime that VAT will replace. VAT is expected to generate some USD525m a year, or more than USD220m more than the present system.

Emphasizing the importance of VAT to broaden the territory's tax base, the IMF team encouraged the authorities to "finalize the agreed VAT legislation to ensure the successful introduction of this key reform."

The team reported that the financial sector remains well capitalized and highly liquid, although it continues to deal with a sizable and aging stock of non-performing loans.

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