Accounting, legal services set to be taxed
Accounting and legal services are set to be taxed in next month’s Budget, according to a report by independent advisers of the Bermuda Government.
The Fiscal Responsibility Panel’s annual assessment, published last month, also estimates that Government is provisionally planning for a deficit of around $65 million in the next fiscal year — around $39 million higher than had been projected in last February’s Budget.
The previous One Bermuda Alliance government had planned to introduce a general services tax this year, expected to bring in around $50 million.
But the FRP says the new Progressive Labour Party administration has put the GST on the back-burner, while it can be considered by the Tax Reform Commission.
“The GST will not be implemented in 2018 as proposed by the previous government, but we understand that, possibly as an interim measure, a professional-services tax is to be implemented in 2018-19, limited initially to services provided in the legal and accounting professions,” the report states.
Asked for comment, a Ministry of Finance spokesman said more on the upcoming Budget would be revealed in the coming days.
“The Ministry of Finance will next week be issuing a Pre-Budget Report that will advise on the proposals under consideration by the Government for the coming fiscal year,” the spokesman said.
“Final positions by the Government with regard to fiscal matters are usually revealed on Budget Day, which is normally during a Parliamentary sitting on the third or fourth Friday in February.”
In its third yearly report, the FRP, comprising David Peretz, Peter Heller and Jonathan Portes, offers clues on the projected Budget deficit for 2018-19.
David Burt, the Premier and Minister of Finance, is due to deliver his first Budget next month.
“Looking forward, our understanding is that the new government’s current intention is to target a deficit in 2018-19 that is no greater than the Sinking Fund contribution, ensuring that net debt falls over the course of the year,” the report states.
“This implies a deficit, on the government’s preferred definition (that is, after Sinking Fund payments) of about $65 million, more than double the $26 million target set out in the 2017 Budget, with expenditure roughly flat in cash terms (instead of falling by about $18 million) and revenues also falling short.
“While this would still represent a significant reduction in the deficit from the current year, this further slippage, coming on top of that seen under the previous government’s budget, is unwelcome.”
The deficit for the 2017-18 fiscal year, which runs through March 31, was projected to be about $135 million.
The panel argues that the island’s tax regime is inadequate to face the looming challenges posed by an ageing population, the need for debt reduction and the need for infrastructure and human capital investment.
Bermuda should, the FRP said, aim over time to bring its revenue take to about 22 to 23 per cent of gross domestic product — four to five percentage points above where it is now — in line with some other island economies.
It noted that the current tax structure was “excessively weighted towards the taxation of labour and goods” and added that dividend income from partnerships, “much of which is effectively labour income”, went untaxed, a privilege that should end in the interests of a fairer tax system.
“It also has the perverse effect of taxing companies that bring employment to the island, through the payroll tax, while leaving those that do not bring employment largely tax free,” the report states.
This week, a Bloomberg report showed how Alphabet, parent company of internet giant Google, has slashed its tax bill by funnelling about $19 billion to a Bermuda subsidiary which employs no one. Such examples have provoked anger overseas and harmed the island’s reputation without bringing meaningful financial benefit.
The FRP had a suggestion to address this issue: “A very significant increase in registration fees charged to companies that do not have a genuine economic presence on the island, perhaps graduated according to their turnover.
“This would both raise revenue, and represent a clear ‘down payment’ on the Government’s commitment to address this issue in the context of the EU Code of Conduct Initiative.”
The FRP also urges an increase in the staffing of the Office of the Tax Commissioner to address the large amount of uncollected tax. And it argues that a GST is needed “on equity, efficiency and revenue mobilisation grounds”.
Other ideas included moving away from fixed-rate social insurance contributions to a percentage of income, and taxing capital income of residents, such as dividends, interest and capital gains, with an exemption for an initial tranche of such income.
“It is worth noting that other similar jurisdictions, such as Jersey and Guernsey, tax income from capital in the context of normal income tax regimes,” the FRP said.
In his Reply to the Budget speech in March last year, Mr Burt hinted at targeting capital income.
“There are vast swaths of domestic wealth and income that have never been subjected to tax, which by its very construct fosters continued economic inequality,” Mr Burt said in the House of Assembly.
“This is why our taxation system promotes and fuels economic inequality.
“Tax reform and broadening the tax base cannot be effective if they are unwilling to look at taxing the passive income of the privileged persons in society.”
During last year’s successful General Election campaign, the PLP stressed it did not plan to tax rental income.
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