Belize General Sales Tax (GST):

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

WHAT IS GST? 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 (cont) • 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

MAIN FEATURES OF GST • 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

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)

“FINANCIAL SERVICES” MEANS  granting, negotiating, and dealing with loans, credit, credit guarantees, and security for money, including management of loans, credit, or credit guarantees by the grantor; 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  cont’d transactions relating to shares, stocks, bonds, and other securities, other than custody services; management of investment funds; provision, or transfer of ownership, of an insurance contract or the provision of reinsurance in respect of such contract;

“FINANCIAL SERVICES” MEANS  cont’d 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; 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);

Functions of financial services 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

Categories of exempt transactions 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.

Problems created by exemption 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

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

+ + = $31 $6 $4 + $21 Exempt financial services: B2B To DGST To customs $6 $4 $21 $21- 0$21 $10- 6$4 Bank Retailer Consumer Importer 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: $210plus GST: $21Taxed Price: $231 Cost: $231(includes $31 tax)

Loan Loan Lender Bank Borrower Interest Interest 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

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

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Belize General Sales Tax (GST):