Bermuda is exploring ideas on how to broaden its tax base — and is working with an organisation which has helped several Caribbean islands to introduce value-added tax (VAT).

Finance Minister Bob Richards said in the Budget statement last Friday that Government’s revenue as a percentage of gross domestic product (GDP) was lower than that of eight other island economies he cited, according to figures from the International Monetary Fund (IMF).

He said Government was working with the Caribbean Regional Technical Assistance Centre (CARTAC), an IMF regional body, to study the feasibility of broadening Bermuda’s tax base. A decision on the outcome of this analysis would follow a period of study and public consultation, he added.

CARTAC, staffed by experts in a number of areas including revenue administration, was founded to provide technical advice to governments in the region. The organisation has helped island nations including the Bahamas, Antigua and Barbuda, St Vincent and the Grenadines and Grenada, to introduce VAT, which is a point-of-sale tax.

Bermuda’s revenues, when social security contributions are included, total 19 per cent of GDP, less than other small island communities such as Jersey (26 per cent), Cayman (22 per cent), Barbados (25 per cent) and St Maarten (28 per cent).

Mr Richards said: “One could say kudos to Bermuda for keeping its taxes low. But that would only be appropriate if we were balancing or nearly balancing the budget; something that is clearly not the case.

“In view of the inherent and serious risks of running large deficits, this study implies that Bermuda’s taxes are not high enough to achieve or maintain long-term fiscal stability.

“The bottom line is Customs duties are no longer producing the portion of revenue they once did, thus exacerbating the annual deficit.”

Without ever mentioning VAT, Mr Richards laid out a case that would appear to support its implementation, in that VAT covers all sales, including services, while Customs duties apply only to goods.

“Consumption of services constitutes most of our consumption, and much of it is not taxed at all,” the Finance Minister said. “For many years this situation was not a problem for Government because revenue levels were sufficient to support its commitments. But it has become a problem now.”

Government aims to eliminate the annual deficit — estimated at $220 million for the next fiscal year — within three years. With its plans including an estimated net borrowing requirement of $313 million over the next three years, it needs to convince credit ratings agencies of its ability to balance the budget in order to avoid a downgrade that would increase the interest rate it has to pay on newly issued bonds.

Economist and consultant Peter Everson, a former head of the Bermuda Chamber of Commerce economics committee, said the Chamber had spent “a lot of time” discussing VAT.

He added: “The issues always revolved around the cost of implementation.”

Mr Everson added that 20 years ago, only 20 of the 150 top countries had a VAT system — but now only 20 did not, including, at Federal level, the US.

He said: “For Bermuda, the problem is a lot of the smaller businesses don’t have formal accounting records — essentially the bank balance substitutes. They would be required to spend more money on financial record keeping.”

Mr Everson explained that the Bermuda taxation system, which dates back decades, concentrated on goods rather than services such as mobile phones and cable TV — which had become an increasingly large part of expenditure.

He said: “If we were introducing it in Bermuda, we would pay a lot of attention to the interface with Customs duties. VAT taxes services as well as goods.

“The difference today is that services are a far higher percentage of disposable income.

“In theory, some goods would go down in price because you are broadening the base. Some physical goods might go down in price, but that’s all in the details.”

Although there is no tax on services, the Government will rake in $10.73 million in fees from the telecommunications industry in the fiscal year ending next month. In 2015-16, it projects it will take in $12.26 million, representing an increase of 18 per cent.

Among those who have implemented VAT after taking advice from CARTAC, both St Vincent and Grenada have a standard rate of 15 per cent, a reduced rate of 10 per cent, applied to hotel accommodation among other things, and a rate of zero per cent applied to some basic food and medical goods, for example.

VAT does have its detractors, however, Delisle Worrell, the Governor of the Central Bank of Barbados, where VAT is charged at 17.5 per cent and at reduced rates of 7.5 per cent and zero, has described VAT as “horribly complicated” and as “an inappropriate tax for a tourism-based economy”.