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?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 $75,000.00 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 intermediationbetween suppliers and users of financial capital;

Risk intermediationbetween 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 Bank Consumer

Cost: $60Value added: $40

Sell for:$100plus GST: $10

Taxed Price: $110

Cost: $100Value added: $20

Sell for: $120plus GST: $12

Taxed Price: $132

Cost: $132Value added: $80

Sell for: $212plus GST: $0Taxed Price:

$212

Cost: $212(includes $12

tax)

Exempt financial services: B2C

$6

$10- 6$4

$4

$12-

10$2

$2

To customs

To DGST

$4

$2

+ + = $12

$6

BankImporter

Retailer

Consumer

Cost: $60Value added: $40

Sell for:$100plus GST: $10

Taxed Price: $110

Cost: $110Value added:

$20Sell for: $130

Cost: $130Value added:

$80Sell for: $210plus GST: $21

Taxed Price: $231

Cost: $231(includes $31

tax)

$6

$10- 6$4

$4

$21- 0

$21

$21

To customsTo

DGST$4 $21+ + + = $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

Lender BankBorrowe

r

Loan Loan

InterestInterest

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 problemssome 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 suppliessome give partial input tax credits (ITCs) for financial supplies many require reverse charging to deal with offshore outsourcing Belizesome tax explicit fees but not implicit fees