The Barbados government Wednesday outlined a series of new fiscal measures aimed at “staying the course” in turning around an ailing economy.
Prime Minister Mia Mottley delivering the 2019-20 budget presentation, told Barbadians the island has “left base camp and are climbing the mountain.
“Today, we are preparing to depart stabilization and moving on to the paths of growth and transformation,” she said.
In a presentation lasting more than five hours, she said that the taxation policies of her administration, which came to power in May last year, would be a balance between direct versus indirect taxation; taxing income versus taxing wealth and consumption and sharing the burden of taxation across businesses and households and locals versus foreigners and tourists.
In this regard, when we come to income taxation, we have to balance a set of tax tools that includes the rates; the treatment of allowances and the use of credits. Ultimately, the aim is to protect the most vulnerable groups, using the ability to pay criterion, while allowing for more disposable income to fuel growth.”
Prime Minister Mottley said currently, persons earning up to BDS$18,000 (One Barbados dollar=US$0.50 cents) per annum are entitled to a Reverse Tax Credit of BDS$1,300, noting that there’s a group of persons who do not pay income tax but who nevertheless are affected by the burden of value added tax (VAT) in the country. She said these are persons earning between BDS$18,000 and BDS$25,000 per annum.
Mottley said beginning for the income year 2018, the government is offering protection to an additional 7,000 individuals at a cost of nine million dollars, noting that this is the direct result of raising the qualification income to BDS$25,000, which is effective immediately.
She said that once an individual within this income bracket submits the income tax form for the income year 2018, that individual qualifies for the first time for the Reverse Tax Credit and that the money would become available around September of this year.
“Therefore, Mr Speaker, immediately based on income year 2018, we are adding the nine million dollars to the existing allocation of BDS$11.3 million for thousands more Barbadians who earn BDS$18,000 or less. Overall, the reverse tax credit is putting just over $20 million back into the hands of low income Barbadian workers.”
Mottley said that the government would continue to provide a BDS$25,000 personal allowance for all taxpayers and that those who earn above that figure but below BDS$35,000 per year, would benefit from the newly introduced Compensatory Income Credit (CIC), which would in effect mean that “ no one earning less than $35,000 will pay income tax in Barbados.
She said that the CIC is accessible after the filing of the income tax form for income year 2019. It is a non-refundable credit that brings the tax paid in this income range above to zero.
Mottley said that the government will reduce the rates on taxable income and will extend the first tax band and will use an income credit to give Barbadians significant income tax relief in a phased manner.
“The universal personal allowance of $25,000 that is tax free is retained. Effective July 1, 2019, we are getting rid of both the first tax band on which a rate of 16% is applied and the second tax band on which a rate of 33.5 per cent is applied.” She said, adding that the rate on the third tax band of 40 per cent is also being abolished.
“Mr. Speaker, effective July 1, 2019 the first tax band will be BDS$50,000 and a rate of 12.5 per cent will be applied. Sir, the second tax band is on taxable income over BDS$50,000 which is charged a rate of 33.5 per cent.
Mottley said typically in a VAT system, exports are zero-rated. And this allows all of the VAT paid on inputs to be claimed back. The concept of value-added is easy in a manufacturing process, where the value of the good is measurable at all stages of the production and supply chain.
“In the area of services…the export of certain services is not quite as easy to measure. In the circumstances, we are moving the export of certain services as Scheduled from zero-rated to exempt. This will broaden the base of the VAT and help us to contain the rate of the VAT.
“In the area of water, we are reverting to the original classification for VAT. Water will once again be an exempt supply rather than zero-rated. This change starts from April 1, 2019. This will save about BDS$10 million in refunds in a full year.”
Prime Minister Mottley said that the VAT on the accommodation sector is being increased from 7.5 to 10 per cent, effective January 1, 2020, even though last year she had announced that the rate would have been doubled to 15 per cent beginning in January next year.
“After persistent representation from the tourism sector, it was recognised that the doubling of the rate would have adversely affected the competitiveness of the sector and its packages in the international market. As a consequence…we conceded and backed off the suggested rate of 15 per cent.,” she said, adding that the tax generated by this measure will be BDS$27 million in a full calendar year but only BDS$4.5 million in this fiscal year.
She said the output tax on a Villa attracted only 7.5 per cent and consequently, the sector was always in a refund position because its inputs attracted the standard rate of 17.5 per cent.
“To remedy this unfortunate occurrence, it is recommended that the output is exempt from VAT thus preventing the sector from claiming back any VAT on its inputs. The shift to exempt status for Villas will result in savings to the government of five million dollars for a full year.”
The government also announced increases in the room rate levy going up by 75 per cent effective April 1, 2019.
It said also there would be adjustments in the property taxes and that the expected revenue from the changes to property tax rates is BDS$61.9 million.
Motrtley said that non-residential properties will account for an estimated BDS$39 million of this collection “consistent with the theme of asking those who can afford to pay more to do so.
“In the face of a lowering of the corporate tax rate for domestic companies, the shift in the burden is part of the change in our tax philosophy. In similar vein, the high-end of the residential market is being called upon to put some of the benefit from the reduction in income tax rates to the payment of property tax.”
The government also noted that the gaming industry has not paid any taxes since 2011, with the argument that a “Standstill” Arrangement was reached with the previous government in relation to license fees. “However, Mr. Speaker, there is no public record as evidence of such an arrangement and no public officer has borne witness to such a standstill arrangement taking place,” she said, adding tt seems there was an arrangement of some political undertaking at best.
She said effective May 1, 2019, there will be a 20 per cent withholding tax on gambling winnings and a 17.5 per cent gambling tax on the net-drop of all gaming establishments.
“Gaming establishments have until January 1, 2021 to change out slot machines to auditable new machines,” she said, adding government will collect three per cent of the monies owed for the period 2011 and 2018, over a four-year period.
Mottley said in addition gambling and its regulation is a highly specialised area and ‘it is absolutely clear to me that we do not have within the Government the capacity to appropriately regulate the betting and gaming sector”.
She said that as a result the government believes that this is one area in which it may be best served through a public-private approach toward the regulation of this complex sector.
“Against this background we will advertise for requests for proposals regionally, and if necessary internationally, for entities who are interested in pursuing such a partnership over the medium term with the government of Barbados on a revenue sharing model.”
The government also announced an increase in bus fares in the face of state-owned transport board receiving revenue of BDS$20 million while spending BDS $65 million.
She said this situation demands some increase in bus fare given that a fare hike has occurred once in the last 30 years and the hike was BDS$0.50 cents.
Regarding corporate tax, Mottley said that the government will be eliminating withholding tax on payments made to non-residents, other than dividends, including interest; management fees and royalties
“In the case of management fees there will no longer be a deduction for payments to non-residents,” she said, adding that on the other hand, withholding tax on residents will increase on Interest from 12.5 per cent to 15 per cent, on dividends from local sources from 12.5 to 15 per cent and that withholding taxes on pensioners will not be touched.
“These changes will be effective immediately and will be accompanied by anti-avoidance rules.
Mottley said that effective as of 1 September 2019, a thin capitalisation rule of 1.5 to one will be introduced.
“Interest payable on outstanding debts due to non-resident related parties that own more than 10 per cent of the company will be deductible to the extent that the total amount of the debt does not exceed one and a half times the equity of the company. Any portion of interest that exceeds this ratio will no longer be deductible..
“As part of our commitment to the OECD, we intend to introduce transfer pricing rules in the near future governing the taxation of transactions involving the sale of goods and services between legal entities within the same controlled group,” she said, adding that to bring the withholding tax treatment of branch profits in line with that of dividends, branch profits paid out of income earned outside of Barbados will no longer be subject to branch profits tax.