Thank you Chair for your kind introduction
and a very Good Morning to you all!
I would first wish to say how pleased I am to
be here to share with you my thoughts on the
implications for tax administration that the CSME is
likely to have with specific attention to the
individual, business and trade as well as
companies. As tax administrators, you are
responsible for the collection of Government revenue
and as such are a key complement to the policymakers
who design the framework for your operation.
Without your functioning, Governments will find it
difficult to finance their activities and as a
significant initiator of the process of integration
might lose some enthusiasm.
Even if
Governments remained enthusiastic and committed to
their budgets in the face of reduced tax
collections, the present debt status of most of them
would quickly constrain their capacity to spend. It
is therefore imperative that the CARICOM Secretariat
engage you in this grand integration strategy called
the CSME.
Over the next ten minutes or so, I would
like to provide a quick overview of the CSME and
where we are in its implementation. Then I shall
speak on the changes that are likely to occur that
would have direct bearing to you and conclude with
the challenges that need to be overcome.
The CSME is defined in Article 1 of the
Revised Treaty as “the regime established by the
provisions of the Revised Treaty”. It is premised on
a legal foundation that could be subjected to a
defined process of dispute resolution including
adjudication, as defined in Article 188. The CSME
has several underlying principles viz.:
- Non-discrimination against
CARICOM nationals who are defined in Article 32.
- Most favoured nation status to
every CARICOM member state that is defined in
Article 3.
- Most favoured nation status to
all CARICOM member states.
These underlying principles result in
processes which when completed would result in a
single market and economy. These processes are:
- liberalisation or the removal of
barriers to intra-regional trade in goods and
services,
- harmonisation of economic
policies and,
- macroeconomic convergence.
These three processes have and will continue to
provide the challenges to every CARICOM national in
his or her economic life and it is these processes
that tax administrators will need to be able to
anticipate their impact on economic agents and
formulate strategies to ensure that revenue targets
and other institutional goals are met in the
changing environment.
The new economic environment that is being
constructed, consist of a single market and economy.
On January 30 2006, six member states - Barbados,
Belize, Guyana, Jamaica, Suriname and Trinidad and
Tobago affixed signatures fulfilling the provisions
of Article 234 of the Treaty and thereby bringing it
into force. The remaining eight Member States
undertook and subsequently fulfilled their
commitment earlier commitment to declare themselves
single market compliant by June 30, 2006 on July 3,
2006.
Apart from completing the legal basis of the CSME, there has been significant progress in the
implementation of the institutional arrangements
that would facilitate the operationalisation of the
single market. Similarly, work has commenced on the
administrative supports of the CSME with the
preparation of a manual for public services,
mechanisms to monitor movement of persons as well as
the portability of pensions and social security
payments and efforts to harmonized company
registration to name a few.
In bringing the Revised Treaty into force,
Member States committed themselves to satisfying the
following obligations to CARICOM nationals allowing
them:
- The right of establishment
- The right to provide services
- The right to access land for the
purpose of establishing business and providing
services
- The right of selected categories
to seek work and a commitment to expanding the
categories as appropriate
- The freedom to move regionally
produced goods across jurisdictions
- The freedom to move capital
across jurisdictions and
- The freedom to move
The immediate effect of honouring these
obligations was to have member states remove any
legal or discriminating policy, law or
administrative procedure that would be inconsistent
with Treaty obligations. This meant that all fines,
fees, and taxes that hitherto discriminated against
intra-regional business and trade as well as
non-nationals defined to include nationals of
CARICOM would have to be removed.
The effect of
this is self-evident, since the prevailing system of
taxation and revenue administration was established
to support a strategy of inward looking development
based on import substitution and increasing domestic
capacity. In anticipation of the immediate income
effect, Member States agreed to phase in the removal
of restrictions. In the case of the goods regime,
the CET was initially to be phased in over a period
of five years while the other obligations were
scheduled to be phased in over three years.
8.In attempting to honour Treaty obligations
and maintain revenue yields, member states sought to
substitute other measures that would offset the
revenue loss. These measures included, inter alia:
- A revenue replacement levy
- A consent fee
- A consumption tax
Another effect of liberalisation, helped in
part by the information revolution, is the shift in
the structure of trade away from goods to services.
The information revolution facilitated the shift in
the composition of value added in favour of services
while the liberalisation effort facilitated the
increase in trade in services trade in all four
modes. This is where, I believe, the greatest
challenge will exist for tax administration, since
the commodity is no longer tangible, nor does it
have to cross a customs frontier and be available
for inspection. This means that there will be
issues of definition of income from electronic
activities such as the receipt for the supply of
training over the internet.
An examination of every economy in the region would
show this rising share of services in the
composition of trade. Trade patterns have changed
somewhat since 1990.The World Bank Study “A Time to
Choose” noted, “Merchandise exports fell from 52 to
45 percent of total exports of goods and services
between 1990 and 2001, while services rose
correspondingly.
A recent discussion, in Barbados, on the
strategic vision of the CSME by 2015 presumed that
tourism, transportation and financial services are
likely to account for significant shares of regional
GDP.
Aligned to the shifting composition of
intra-regional trade will be the movement of service
providers – both individuals and companies. At
present, the compilation methodology for the
services account of the balance of payments is not
as precise as that of merchandise trade, nor is it
uniformly developed across differing services
categories.
The effect of these two factors is to
make it difficult to accurately compute the
contributions of individual services provided by the
four modes of supply engaged in intra-regional cross
border activities. However, it is reasonable to
presume that with liberalization there will be an
increase cross border flow in all four modes. This
means that income earned by these categories can
become quite mobile and volatile as opportunities
for savings and investment expand beyond the country
of domicile.
Related to the volatility in income of
service providers is the room that is created for
arbitrage by the implementation schedule of the
single economy which can result in the growth of tax
collections to lag that of regional economic
activity. As the architecture of the single market
is being completed with the implementation of new
institutions to ensure harmonization of standards
and accreditation, differences in interest rates,
exchange rates and taxation policies would create
areas for arbitrage by the wily mobile service
provider.
The implementation schedule for the roll
out of the elements for the single economy is 2008
effectively creating a window in this intervening
period and for some time immediately thereafter for
income earned by mobile service providers to move
around the region and avoid taxation. This trend
could be further encouraged if there is
institutional resistance to the liberalization and
harmonization effort.
There is also the possibility of leakages out
of the region of capital, and by extension taxable
income, on account of the interest rates
differentials and delays in the implementation of
the single stock market that it is felt satisfies
Article 44(d) of the Revised Treaty. The private
sector has already indicated that the cost of cross
listing in the regional stock exchanges is
unattractive. This stakeholder has indicated that
listing internationally is becoming increasingly
attractive especially when significant sums are
required to finance acquisitions and mergers or
significant capital investment.
What we see, therefore, is the creation of a
system of economic management which is a work in
progress. As elements are operationalised, the
behaviour of Governments, individuals, business and
trade as well as companies will change to meet the
new circumstances. This will have an impact on tax
administration that is charged with the
responsibility to collect revenues to facilitate the
further advance of the process.
I have identified a
few elements viz. the immediate reduction in revenue
from traditional sources, the shift in economic
activity and the production of more intangible
commodities and the possibility of higher leakages
out of the Region during the intervening period
between the full operationalisation of the single
market and the single economy. Tax administrators,
will therefore need to face these challenges square
on and indeed there are some administrations in the
region that have advanced significantly in this
process.
The creation of new sources of taxes using a
traditional mindset will have to be eschewed since
the CSME has a legal institutional basis and these
measures could be challenged. Substituting fees
such as that for skills recognition certificates in
place of fees on work permits, in my view is
shortsighted and can very well backfire. I would
submit that efforts be expended in looking at ways
to expand the tax base to benefit from the expected
rise in cross border activity in non-traditional
areas.
Specifically, I believe that we need to
utilize the technology to garner information that
could be shared across administrations so that
wherever income is earned in whatever form by
Community nationals it could be captured and the
things that are for Caesar can be rendered unto
him. Our task here, I believe would be to:
Identify areas in our national
legislation and administrative procedures that
restrict the sharing of information across national
tax administrations and the manner that these could
be changed and yet provide protection to the
taxpayer privacy that was initially envisaged;
Identify areas and methods of
collaboration with other agencies such as the
Immigration Department that might facilitate the
identification of mode 4 service providers as well
as potential sources of taxation;
Identify areas and mechanisms
that would promote cross border collaboration in tax
administration on a daily basis;
Examine technological
applications that could assist in lowering cost to
the taxpayer and encourage his compliance;
Identify international
developments in tax administration that threaten to
make the region a high taxation location for
investment and technological innovation;
Identify potential areas of tax
evasion facilitated by the CSME process that a
regional approach would be a superior solution.
Consider a schedule or plan of
action for the advancement of an agenda for reform.
Identification of possible sources of financing for
the reform programme
If we could leave here with concrete
proposals on each of these areas, I think that we
would have achieved our administrative targets for
this meeting. In this regard, I propose that we
break into four groups to address the preceding
areas.
Thank you for your kind
attention.
______________________________________
REFERENCES:
1. The Revised Treaty of he Revised
Treaty of Chaguaramas
Establishing the Caribbean Community
including the CARICOM Single Market and
Economy. Zenitbago,
Services, Trinidad and Tobago. Zenith
Services, Trinidad and Tobago, 2002.
2. Dos Santo, Paulo and
Bain, Lauren. Survey of Caribbean Tax Systems
3. Caribbean Trade and
Investment Report.
4. A time to
choose
5. Wayne, Evelyn.
Essential elements of fiscal policy harmonisation.
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