From Page 5 Mr. Speaker, any unnecessary delay in processing passengers through the Airport is cause for concern and the Government will be addressing the matter in a variety of ways. To begin with, and in an effort to help expedite passenger flows through Customs at the Airport, the number of tariff rates applicable to dutiable items imported as accompanied personal baggage is to be reduced to two: a standard rate of 22.25 percent for all dutiable items other than those which currently attract a rate of 33.5 percent. The latter will continue to be charged at the 33.5 percent rate. Goods which currently attract a 0 rate of duty, such as books, will continue to be allowed in free of duty.

In addition, instead of just two "duty free'' allowances a year, returning residents will be permitted a $200"duty free'' allowance for every trip, provided that the passenger has been outside of Bermuda for a period in excess of 72 hours. These two steps are designed to speed up passenger clearance at the Airport and assist the average traveller in preparing his or her customs declaration form, paying duty, and clearing customs with the minimum of effort.

There are two other matters involving customs duties that cause considerable irritation to the general public which the Government proposes to rectify at this time. Under the current law, goods re-imported after repair at no cost to the owner under a manufacturer's warranty are exempt from duty under section 79 of the Revenue Act 1898. However, in the electronics industry it is often more cost effective for the manufacturer to replace the entire unit rather than repair the defective part. This 'new item' then attracts duty when it is returned to Bermuda. To avoid what amounts to "double taxation'' an amendment to section 79 of the Revenue Act is to be introduced so that any individual, or his agent, wishing to return an entire product for repair or replacement may do so without the item incurring duty upon re-entry into Bermuda.

In recognition of the increasing propensity for Bermudians to travel and remain overseas for training and education for more than two years, a further amendment to section 79 of the Revenue Act is to be introduced to extend the period for exemption from customs duty on the re-importation of goods from the current two years to five years. This step should be of great assistance to students who often take expensive equipment, such as computers, etc. with them when they go overseas to study.

The Hotel Refurbishment (Temporary Duty Relief) Act 1991, which is due to expire at the end of November of this year will be extended to June 30, 1995.

This Act has encouraged the hotel sector to invest and up-grade properties during a particularly difficult period for the industry when cash flows have been strained. The result has been the enhancement of Bermuda's tourism infrastructure and an improved competitive position in an increasingly aggressive global market. This extension will permit the hotel sector to take full advantage of the concessions in their 1994 5 winter renovation programmes.

Mr. Speaker, although it was stated in last year's Budget that there would be no increase in land taxes until after the re-assessment of properties had been completed, the recently announced delay in that exercise is such that it would be imprudent not to make some adjustment this year to take account of inflation since 1992, when land taxes were last raised. Accordingly, it is intended to raise five percent more revenue from land tax on residential properties, using the existing valuations.

Under this arrangement, the land tax rate on the lowest ARV band of properties, which includes 25 percent of all housing units, will rise from the current 1.56 percent of ARV to 1.64 percent. This represents less than $4.53 per year on the average unit in this band. At the highest end of the ARV scale, houses in the top band which currently attract a rate of 24.1 percent of ARV will move to a rate of 25.3 percent, an average annual increase of $133.09. Under the highly progressive land tax system, four percent of domestic properties at the top end of the scale will generate 36 percent of the entire land tax.

The single rate of land tax on commercial properties will remain unchanged in the coming year to avoid any additional burden being placed on businesses in Bermuda as they emerge from the financial stresses of the recession.

Early payment of land tax is encouraged and Government rewards this with a discount of five percent on tax liability. However, delinquent payment also needs to be addressed and the Government will introduce an interest charge on outstanding land tax balances older than 30 days, with effect from July 1, 1994.

A number of anomalies have emerged in the land tax regime in recent years, one of which is the opportunity to reduce the land tax burden on a property by applying to have it sub-divided. This and other inconsistencies will be addressed in the forthcoming re-assessment.

The majority of Government fees were last increased two years ago. The yield from these fees has been eroded by the rate of inflation since April 1992.

Accordingly, most Government fees will be increased by five percent from April 1, 1994, by an amendment to the Government Fees Act 1965.

The Minister of Transport will shortly announce details of a five percent increase in vehicle licences and other fees.

Again, the increases have been kept in line with the rate of inflation. When company fees were last raised, in 1990, to take effect in 1991, it was indicated to the business community that fees would be adjusted every two years to take account of inflation. It was decided not to increase them in 1993 in order to assist the business community in dealing with the recession and to maintain Bermuda's competitive position. However, it is now considered appropriate to increase company fees modestly to compensate for their erosion in real terms. Accordingly, an Order will be made which will increase the annual fees payable by companies as set out in the Fifth Schedule to the Companies Act 1981 by five percent, rounded up to the nearest $5. This percentage increase mirrors the general percentage increase in Government fees to which I have just referred.

Two new bands will also be added to the company fee schedule to provide for the charging of higher fees to companies which have a very high capital base.

Mr. Speaker, the licence fees for the banks were last increased two years ago.

Nevertheless, in looking at the level of bank profits and bearing in mind that there is no corporation tax or profit tax in Bermuda, it is deemed appropriate to raise bank fees further. Accordingly, the licence fee for each of the two larger banks will be increased to $750,000. The fee for the third bank, which was last increased in 1991, will be raised to $100,000. Deposit company fees, which were last raised in 1990, are to be increased to $5,000.

Mr. Speaker, the revenue raising measures that I have just outlined, together with the improvement in revenues which will flow from the strengthening economy should secure an additional $18 million for the Consolidated Fund.

However, this sum remains well short of the additional revenue that the Government considers prudent to raise in 1994 5 keeping in mind the substantial new current account costs which have been identified. There is a need to generate a reasonable current account balance in order to ensure that borrowing for capital development and capital acquisitions can be kept to a manageable level and that the country is well placed to deal with the additional costs which will have to be faced as a consequence of the return of the bases.

Accordingly, to meet these challenges the current five percent basic rate for hospital levy applicable to all employers and self employed persons carrying on business in Bermuda will be increased to six percent with effect from April 1 this year. It is estimated that this measure will raise an additional $11 million in the coming year.

In imposing this increase, the Government is conscious of the overheads which currently have to be met by employers and the attempts which they are making to retain employees and to remain competitive in these post-recession times.

Accordingly, while remaining fully liable for the payment of the levy, employers in both the local and international sectors will be permitted to recover from their employees the full amount of the one percent increase in levy liability resulting from this change in the rate.

Measures were announced in the 1990 1 Budget to ensure that, over time, international and local businesses would be treated equally with respect to payroll taxes. To achieve this parity an additional levy was applied to international businesses which was the equivalent of the employment tax paid by local employers, and which was not to be recoverable from employees. This additional levy was to be phased in over a five-year period. The final one percentage point adjustment will come into effect as of April 1, 1994.

International businesses currently are required to pay both basic and additional levy on a level of assumed remuneration which changes annually by the same rate as the change in the Consumer Price Index. However, there is no provision enabling these businesses to benefit from deductions and allowances enjoyed by local employers who pay employment tax.

In order to ensure that international company employers are not disadvantaged, the Miscellaneous Taxes Act 1976 will be amended to enable international businesses to make an election to pay either the hospital levy and additional levy as they have traditionally done, or to pay employment tax and hospital levy in the same way that local employers do now.

Such an election will mean that those employers employing a substantial number of persons at wages and salaries lower than the level of assumed remuneration will no longer have to pay levy on the higher, assumed, wage level.

Furthermore, in order to ensure that international employers are encouraged to hire and train Bermudians, such employers will be able to deduct from their total assumed wage bill the assumed wages paid to Bermudians on approved training schemes, prior to paying the additional levy charged on them. This is entirely consistent with the arrangement which exists for local employers.

In another step designed to streamline the tax system, the Ministry of Finance will be working over the next 12 months to combine the hospital levy (long considered a misnomer) and employment tax into a single, easily understandable, payroll tax to be announced in the 1995 6 Budget.

Mr. Speaker, before concluding I want to make a few general comments on matters which are not strictly part of the Budget but which have important influences upon the general economy.

The first of these involves capital flows.

At a time when most countries in the world, including developing countries, not to forget the old Soviet States, are looking to relax or remove barriers which restrict trade and capital flows in order to reap the benefits of such moves, Bermuda remains somewhat out of step in this area.

Honourable Members will know that Bermuda has operated exchange control since the Second World War. While the restrictions on transactions which constitute current account payments, such as the purchase of goods and services abroad, have been relaxed by the Bermuda Monetary Authority to the point of near non-existence, capital transactions are still fairly tightly regulated.

Bermuda has two other statutory provisions which also frustrate the efficient allocation of financial resources -- the requirement that a ten percent tax be paid on foreign currency purchased for investment purposes, and the legislated ceiling on local interest rates.

The Government believes that the long-term interests of Bermuda are not best served by the continuation of these three practices.

The current low levels of both inflation and interest rates in those countries which are our primary trading partners, together with the strengthening of the local economy, provide a unique opportunity for Bermuda to address these monetary issues with minimum risk of unfavourable impact on our economy.

As a first step in a deregulatory process, the Government will introduce a Bill today which will amend the Foreign Currency Purchase Tax Act 1975. The amendment will establish a single rate of tax, namely 0.25 percent or 25 basis points, on the purchase of all foreign currency. Those transactions that are currently exempted from FCPT, set out in the Second Schedule of the Foreign Currency Purchase Tax Act, will continue to be exempted.

The Government is also introducing legislation today to amend the Interest and Credit Charges (Regulations) Act 1975 and to rescind the two Orders made under the Act. These actions will mean that the interest rate ceiling, finders' fees and credit charges will be released from statutory control. One benefit of this step will be the fact that lenders will be able to quote all inclusive interest rates, free from additional charges, thus clearly setting out for those wishing to borrow the true cost of borrowing.

At the same time that the local interest rate ceiling is released from control, the Controller of Foreign Exchange will be relaxing the restrictions on borrowing in foreign currency and on the holding of Bermuda dollar accounts by non-residents for exchange control purposes. These steps will allow the low levels of interest overseas to exert an influence on local lending rates.

During this Session, the Government will be coming to the House to explain further steps which the Government intends to take, over time, to remove the remaining restrictions on current and capital account transactions.

Mr. Speaker, I also want to say a few words about unemployment insurance and occupational retirement schemes.

Honourable Members will recall that the Government undertook to determine the feasibility of introducing an unemployment insurance scheme in Bermuda. A report on this subject was prepared by the Ministry of Finance and submitted to Cabinet last summer.

The Government has given careful consideration to that report and in particular how an unemployment insurance scheme might mesh with a national pension scheme to which the Government has given high priority.

It is the view of the Government that it would simply be too burdensome on businesses as well as employees to impose on the community simultaneously at this time both an unemployment insurance scheme and a national pension scheme.

On balance, it is felt that it is more important to pursue a comprehensive pension scheme inasmuch as the existing social assistance and housing allowance programmes have catered very effectively during the recession to those in need and can be counted on to do so in the future.

The Government recognises that the existing social insurance programme, which calls for a specific contribution, presently $40 per week, and which ensures a benefit on retirement of up to $700 per month, is a basic safety net for retirement. It is also recognised that the scheme falls far short of providing the 55-70 percent of final salary which is generally considered necessary to support retirees. The Government is further aware that at present only about 50 percent of Bermuda's employees are covered by any form of pension scheme other than the provisions of the social insurance scheme. Of greater concern is the fact that only half of those schemes are properly constituted, that is, have their pension funds segregated from their firm's moneys, have separate trustees, and have their funds professionally managed. In short, only about 25 percent of Bermuda's employers have a well run pension scheme.

The Government is of the view that an occupational retirement plan based on defined contributions should therefore be phased in over a period of years in order to ensure that at the very least the equivalent of ten percent of an employee's earnings, contributed in some equitable manner by employer and employee, is eventually set aside in a registered pension scheme.

In the course of the current session of the Legislature, the Government will introduce legislation to establish a Pensions Commission and a Pensions Commissioner -- much like the arrangement which exists with respect to health insurance in Bermuda. For a start, the Pensions Commission will be set up to ensure that existing pension schemes in Bermuda are properly constituted and that pension funds are segregated and protected.

The Government will, obviously, want to explore with the private sector and employee groups, ways in which occupational retirement schemes can be introduced or enhanced so that, together with the existing social insurance programme, Bermuda can indeed have a national pension scheme which will support each member of the population in his or her retirement years.

Mr. Speaker, in concluding this Statement let me, on behalf of the Government, commend everyone in Bermuda, Labour Unions, Management, Businesses, large and small, including self employed individuals, for the way they have dealt with the difficult economic and financial problems which the country faced during the recession. Careful planning by the Government, and the soundness of our economic base, not to forget the resilience and creativity of our residents, has stood us in good stead and has allowed the country to emerge from the recession in a relatively strong position.

There is now a growing feeling of confidence and optimism in the community, following the election and the recession, which is supported by encouraging economic statistics. We must continue to work hard at maintaining this momentum in order to reap the benefits of the challenges that lie ahead.

The remaining years of this century promise to be full of exciting challenges and opportunities for all Bermudians. The Government is confident that, with the backing and support of everyone living on this most fortunate Island, these challenges can be met and the many opportunities which will surely arise can be realised to the ultimate benefit of all.

I, as Minister of Finance, am most grateful for the overwhelming support and assistance that I have received over the past five years. The sharing of ideas and experiences has proved extremely useful in developing those Budgets that have guided Bermuda through the recession.

Mr. Speaker, we have worked together successfully to overcome the worst recession to face the western world since the thirties. Building on these experiences and working together in a spirit of mutual trust and respect we will surely produce an even more prosperous Bermuda as we move towards the twenty-first century.

February 14, 1994 TAXES TAX Speech.