On June 11th, 2018 the Prime Minister of Barbados stated as follows: “I announce the intention of my Government that effective October 1st, 2018 we intend to make all online transactions for the purchase of goods and services by Barbadian residents subject to the Value Added Tax. The Barbados Government has announced the taxation of online transactions.” This date has subsequently been shifted to December 15, 2018 and then to April 2019.
It comes as no surprise that this initiative comes hand in glove with the OECD Base Erosion and Profit Shifting (BEPS) initiative. In March 2017, the G20 Finance Ministers mandated the OECD, through the Inclusive Framework on BEPS, to deliver an interim report on the implications of digitalisation for taxation by April 2018. It is however the case that what suits the rich countries of the world does not necessarily suit developing countries like Barbados which have an underdeveloped innovation and entrepreneurial base.
THE SAVIOUR OF SMALL BUSINESS
The reality of Barbados is that many have turned to sourcing products on line because often they were unavailable, the choices were poor and the mark –ups were exceptionally high. In addition Barbados against all the odds has established a cadre of small businesses which use websites, Facebook and other social media as a means of getting their products noticed. The high cost of advertising in the traditional media would have meant that these small businesses would not have existed or would be far less successful.
THE CREATIVE AND DIGITAL ECONOMY
The Creative Economy which is seen as a new growth sector for Barbados and which has been appropriated in the name of the Ministry responsible for Culture is highly dependent upon information technology and the digital economy for its success. Developed countries do not tax anything before it can run successfully, so while this might suit them with the advent of power houses such as Microsoft, Apple, Amazon, Facebook, Twitter and Reddit. Barbados is not there as yet. The Creative Economy has experienced a boom in many countries because of the ability to sell a range of cultural and creative products online.
VALUE ADDED TAX PRINCIPLES
VAT is a tax on consumers and is meant to pass through businesses unless of course the business is the final consumer. Exports are usually exempt from VAT. Imports are usually subject to VAT at the official ports of entry. Thus online purchases will be captured at the ports. We have heard that if one pays VAT online there would be a refund when one collects at the Port. However one recoups the VAT it must be that customs must be able to tell without doubt that the documentation produced matches the good in their possession and the value of the good declared is consistent with that of Customs.
SERVICES PRODUCTS AND DIGITISED GOODS
The products that the Government is most concerned with then are not tangibles but intangibles. This includes items that can be downloaded from the Internet to the Computer like software for computers and other equipment, music, beats, and the services like website hosting and Facebook boosting. All of these are critical to the emerging Creative Sector with its focus on culture and technology. Since the intention of VAT is to tax the consumer and not the supplier then it does not matter that the supplier is outside the jurisdiction.
THE TAXATION MECHANISM
This is the big question. The two main methods of buying products from overseas are through the use of credit cards and wire transfers. One would expect that the Government would be examining these two systems which fall within the purview of the banking system. This banking system already levies a 2% tax on all foreign exchange transactions. Barbadians must also be mindful that credit cards carry draconian interest rates often as high as 25%. The difficulty here is whether a distinction can be made between any of the transactions to determine whether they should be subject to VAT or not. Will educational material such as books enter freely at the Port be taxed on line if downloaded? The Government can of course take the position of insisting on the payment of the VAT and leaving it to the purchaser to get that refund.
Very few countries have found an efficient way of imposing this tax on online transactions and Barbados is not ready for the increased compliance and administrative costs which would result. There can be no doubt that this would be yet another burden for small businesses and especially those operating in the cultural and creative space. The Creative Economy has never had a fair chance to be an engine of growth. An online tax would stymie these individual efforts. Small businesses are already reeling from the petrol tax and the reintroduction of a tax much like the solid waste tax. There is not much more that small businesses can bear, many of them have closed their doors; some professionals have had no choice but to carry on their practice from at home. This measure may very well be problematic and will do more harm than good.