Belize General Sales Tax (GST): Issues for financial institutions

1. Is a Broad-Based, Multi-Stage Tax on Value Added Broad–based: charged on a wide range of goods and services Multi-stage: charged at every level of the economic chain Value added: is a tax on the mark up on goods and services supplied by one business to another or to the final consumer WHAT IS GST?

A transaction tax on supplies Charged on each and every transaction involving the supply of goods or services, including business to business and business to consumer transactions A consumption tax Passed on to consumers in price of each consumer transaction WHAT IS GST (cont)

RATES - STANDARD RATE IS 10% - ZERO RATE (0%) THRESHOLD $75, PER ANNUM PRICES CHARGED TO BE GST INCLUSIVE EXEMPT AND ZERO RATED GOODS OR SERVICES MAIN FEATURES OF GST

Types of supply (≈ outputs/sales):  taxable supplies (standard-rated and zero-rated)  exempt supplies  non-taxable supplies Tax is only charged on taxable supplies: (a) supplies (b) made in Belize (c) by a taxable person (registered or required to be) (d) in the course or furtherance of the business, and (e) not exempt

Exemption = main issues for banks Net GST payable = output tax – input tax Consequences of exemption:  no tax chargeable on exempt supplies  no input tax credits for the related inputs including overheads)

(a) granting, negotiating, and dealing with loans, credit, credit guarantees, and security for money, including management of loans, credit, or credit guarantees by the grantor; (b) transactions concerning money, deposit and current accounts, payments, transfers, debts, cheques, or negotiable instruments, other than debt collection and factoring; (c)transactions relating to financial derivatives, forward contracts, options to acquire financial instruments, and similar arrangements; “FINANCIAL SERVICES” MEANS 

(d) transactions relating to shares, stocks, bonds, and other securities, other than custody services; (d) management of investment funds; (f) provision, or transfer of ownership, of an insurance contract or the provision of reinsurance in respect of such contract; “FINANCIAL SERVICES” MEANS  cont’d

(g) provision, or transfer of ownership, of an interest in a scheme whereby provision is made for the payment or granting of benefits by a benefit fund, provident fund, pension fund, retirement annuity fund or preservation fund; (h) a supply of credit under a finance lease, if the credit for the goods is provided for a separate charge and the charge is disclosed to the recipient of the goods; or (i)the arranging of any of the services in paragraphs (a) to (h); “FINANCIAL SERVICES” MEANS  cont’d

intermediation  provides cost efficiencies, pooling of savings, pooling of risks, & provision of liquidity transaction clearing services  cheques, credit cards… creation & maintenance of markets in financial instruments  provision of an efficient means for exchanging securities agency services  reduce costs of geographical separation between buyers & sellers or securities by acting as agent in the transaction Functions of financial services

Deposit-taking intermediation between suppliers and users of financial capital; Risk intermediation between high risk takers & low risk takers; hedging & gambling Insurance intermediation: pooling risks to spread exposure of the risk; Brokerage services: connecting buyers and sellers of commodities, currencies, & debt or equity securities. Categories of exempt transactions

B2C under ‑ taxation where exemption applies to a consumer transaction the bank’s value added is untaxed B2B cascading  over ‑ taxation where exemption applies to an intermediate transaction Incentive to in ‑ source/‘self-supply’ essential activities, rather than out-sourcing Incentive to outsource to offshore suppliers Problems created by exemption

Wholesaler Importer BankConsumer Cost: $60 Value added: $40 Sell for:$100 plus GST: $10 Taxed Price: $110 Cost: $100 Value added: $20 Sell for: $120 plus GST: $12 Taxed Price: $132 Cost: $132 Value added: $80 Sell for: $212 plus GST: $0 Taxed Price: $212 Cost: $212 (includes $12 tax) Exempt financial services: B2C $6 $ $4 $4 $ $2 $2 To customs To DGST $4$2 + + =$12 $6

Bank Importer RetailerConsumer Cost: $60 Value added: $40 Sell for:$100 plus GST: $10 Taxed Price: $110 Cost: $110 Value added: $20 Sell for: $130 Cost: $130 Value added: $80 Sell for: $210 plus GST: $21 Taxed Price: $231 Cost: $231 (includes $31 tax) $6 $ $4 $4 $ $21 $21 To customs To DGST $4$ =$31 $6 Exempt financial services: B2B

Why are financial supplies exempt?  2 party supplier/recipient analysis breaks down – problematic for the tax credit mechanism  measurement problem  identifying the value added on a transaction by transaction basis (separating interest from inflation and from underlying flow of financial capital)  allocation problem  allocating the value added to particular recipients of supplies LenderBankBorrower Loan Interest

Approaches around the world All countries exempt financial services but some try to minimise problems this creates: many have no specific provisions to minimise cascading & outsourcing problems some countries tax insurance (very complex provisions) some extend exempt treatment to a limited range of types of supply to the financial supplier NZ zero-rates B2B financial supplies some give partial input tax credits (ITCs) for financial supplies many require reverse charging to deal with offshore outsourcing  Belize some tax explicit fees but not implicit fees