Friday, March 14, 2014

If value-added tax (VAT) is implemented on July 1, 2014 chaos will erupt

Banker: ‘Total chaos’ without VAT delay

Top investment banker points to unanswered questions; says tax alternatives could take place in interim

Guardian Business Editor

“Total chaos” will result if value-added tax (VAT) is implemented come July 1 of this year, a top investment banker has warned, arguing that “too many questions remain unanswered” and the uncertainty surrounding the matter is causing major companies to hold off on investment plans.

Michael Anderson, RoyalFidelity Merchant Bank and Trust’s president, said that as far as he can tell, the current implementation date for VAT – given the lack of passage of legislation or significant public education – is “not viable”.

He suggested there should be a delay of at least six months to allow for a reasonable time to prepare for the tax to come into effect.

In the meantime, whether or not VAT is implemented in July, Anderson, who is involved with raising capital for many major companies in The Bahamas, said uncertainty over what will happen with VAT is “already showing up in the markets”.

Noting that there has been an “increased level of activity” of late with respect to companies taking an interest in coming to the market for capital raising, he said that whether or not VAT is implemented, and the potential financial impact of the new tax should it come into effect, is a “key issue they are trying to resolve” before making a final determination on moving ahead with investment plans.

“It’s showing up in the reluctance of people to do certain things. I’m involved with a couple of companies looking to raise capital and do projects that are basically on hold. I think the impact is seen in a lack of progress in various situations already. The question is, ‘how do I deal with this issue?’ They are holding off until that knowledge is available.”

The government has proposed VAT to be implemented at a rate of 15 per cent on July 1st, with the tax acting as a cornerstone of its efforts to plug its widening fiscal deficit and growing national debt. With the disclosure that the government now intends to regularize and tax numbers houses, Minister of State for Finance Michael Halkitis has hinted lately that the government may “relax” on this revenue-raising measure, but to date there has been no commitment to delay the implementation of the tax – or do away with it altogether – which many private sector stakeholders across a number of industries have called for.

The government has committed to paying attention to the results of a study commissioned by private sector group, the Coalition for Responsible Taxation, on the likely impact of VAT and possible alternatives. That study is due around the beginning of May.

Anderson said that there is a deficiency of information in the public domain which would allow companies to adequately prepare for the tax’s implementation, should it go ahead on July 1.

His comments suggest that whether or not the government decides to go ahead with implementing VAT at a rate of 15 per cent on July 1 or not, clarity would contribute to allowing the continuation of economic activity in the meantime.

“With the presentation on this there seems to be more questions that get raised and left unanswered. There’s a large number of unanswered questions. You’ve got the whole infrastructure, the reporting systems, and the testing of them; there are too many pieces of the puzzle that remain unresolved or incomplete.”

Such concerns were echoed recently in the International Monetary Fund’s (IMF) Article IV Consultation report on The Bahamas. In that report, released last week, the multilateral financial institution said that first year revenues from VAT will come in at just 1.3 percent of GDP, almost a full percentage point lower than that forecast by the government.

This projection was attributed in part to delays in rolling out the public campaign on VAT and in the passage of the necessary legislation, along with a lack of local experience in managing the collection of such a tax. The IMF supports the implementation of VAT overall, pointing in the report to the negative fiscal effects of delaying its roll-out and calling for it to take place in a timely fashion.

However, its comments linking the delays in the public campaign surrounding VAT and the passage of the legislation to potentially detrimental effects on its ability to raise revenue for the government, suggest that it too might see the benefits of a delay in the short term.

If such a delay were to occur, said Anderson, the potential impact on government revenues would be mitigated by recently announced plans to ensure the regularization and taxation of numbers houses.

And like the coalition, Anderson also pointed to a payroll tax as relatively easy-to-implement, revenue-raising measure that could be put into effect in the interim.

“You may find it’s a number of taxes that take over and you don’t have to get the full impact of VAT,” he said, adding that whenever the government chooses to move ahead with the tax it will have a “problematic effect”.

“It’s not a simple tax,” he said.

March 13, 2014