By ADRIAN GIBSON
ajbahama@hotmail.com
THE rollout of the
new Value Added Tax regime is seemingly setting up to become an unholy
mess! In this the second part of my VAT series, I spoke to a former
Canadian tax attorney—now resident in the Bahamas—and a noted accountant
who, whilst providing a general overview, asked me to allow him time to
meet with a committee of the Bahamas Institute of Chartered Accountants
to not only discuss the draft legislation, but to also look at the
accounting and administrative aspects of VAT before we continue our
discussion in the next week or so.
My
ex-pat source is a Canadian Chartered Accountant and tax lawyer who
moved to The Bahamas in the late 90’s. The specialist outlook on VAT
emanates from the fact that he practised tax law when the Canadian
Federal government enacted the GST (Goods and Services Tax) and the
Quebec government enacted the QST (Quebec Sales Tax).
According
to my source—he wishes to remain anonymous—VAT could hardly be
effectively administered in the Bahamas because the country has a
maladministered tax collection system.
Available
data about the Canadian Goods and Services Tax (GST)—that
jurisdiction’s Value Added Tax—shows that that country’s Federal
Government launched it in 1991. At the outset, the VAT was introduced at
a rate of 7 per cent and subsequently reduced to 5 per cent (where it
currently stands). What’s more, Canadian VAT isn’t readily noticeable in
advertised prices, as the tax is only appended to one’s purchases upon
the calculation of a consumer’s payment, for example, if one buys a cell
phone for the sale price of $200 only to have an additional five per
cent or $10 added at the cash register.
That
said, here in the Bahamas VAT we have decided to jump the gun and
implement VAT—from the very beginning—at a whopping 15 per cent. That
seems a bit absurd. Three or five per cent—or even seven per
cent—would’ve seemed more reasonable and been more palatable, but 15 per
cent seems ludicrous!
According to my Canadian source:
“Canada
has a sophisticated tax system. It began with income war tax and was
meant to be a temporary measure to finance Canadian war efforts in the
World War. However, it is still in place today and served as the
foundation for the current form of income tax.”
“In
Canada, people must have books and records, which can be audited. All
residents of Canada must declare income and expenses and pay taxes on
their net taxable income. The ultimate VAT tax is on the ultimate
consumer and that is the person at the end of the chain,” he said.
He
went on: “The Bahamas is currently incapable of collecting the easiest
tax in the world—property tax! There’s no country in the world that’s
incapable of doing that. All the state has to do is bring a lien against
the property and put it up for sale. It’s a no brainer! The government
wants to impose a VAT in a country that is not used to paying such taxes
and whilst the country itself predominantly operates on a cash based
system.”
Frankly,
my expat contact is right! Considering the fact that the Bahamas is
only now moving away from the cash basis of accounting—per the Public
Administration Act—to an accrual basis (meaning one must record what’s
earned, what’s owed/accounts receivables and the expenses incurred). Oh,
did I also say that Bahamian business persons—as is done in Canada and
many other jurisdictions—would have to pay VAT on accounts receivables
even if they haven’t collected the monies at that time (as long as it’s
recorded)?
Frankly,
the tax lawyer told me: “Everyone will pay cash here in the Bahamas!
The whole concept of instituting VAT in the Bahamas is convoluted. It
has not been established who will be trained or hired to audit the book
and records of all the businesses that will claim tax credits? Who will
make a determination as to whether the returns or statements that one is
paying is true? Who is going to conduct an audit to properly determine
if one is entitled to a tax credit? How many businesses are
sophisticated enough to handle books and records?”
As
it stands, my understanding is that the threshold for a business being
exempted from paying VAT is $100,000. But, frankly, what stops a
Bahamian business person from subdividing their companies, all to duck
exceeding this threshold? Is the government going to pass legislation
addressing the concept of associated companies, similar to what has been
done in the United States and Canada to prevent tax fraud? In the US,
if—for example—a corporation is seeking to attain a lower tax rate on
its first $200,000 of corporate income, as the company approaches the
$200,000 threshold its principals could simply incorporate another. In
the US and Canada, if it’s found that two or more companies have similar
principals or that they have been incorporated to avoid taxes, they are
considered to form one pool and found to be related. So, what stops
Bahamians from breaking up their companies and doing the same to avoid
VAT?
Quite
honestly, as it relates to VAT, I don’t believe that our national
behaviour—as it concerns paying taxes and tax collections—is at a level
to foster the sort of compliance that is absolutely necessary for the
implementation of VAT in another few months. The effective
implementation of VAT would largely depend on a culture of ethics and
compliance. And, honestly, there’s not enough advance time to put in the
measures, and all the other requisite aspects of a tax structure, to
ensure compliance!
According
to noted Certified Public Accountant Reece Chipman, “the whole VAT
system—along with FATCA requirements—will be pulling money away from our
economic base, along with the pressures of the OECD. It’s going to be a
case of separating the sheep from the goat, the haves from the
have-nots. It’s going to hit you personally and it’s going to hit you in
an economic capacity, in the way we think, buy and consume. When one
looks at all that is happening collectively, it’s hard. If it were
happening individually, there might be room for adjustment (referring to
FATCA, etc, coupled with VAT).”
So,
will the ultimate responsibility for the collection of VAT fall on the
Ministry of Finance or will the government pass legislation to establish
a Central Revenue Agency (CRA)? If such a body is created by
policy/regulation—as opposed to legislation—Mr Chipman believes that
“when one thinks about compliance and penalties, it wouldn’t have that
level of authority.”
According
to Mr Chipman, the consumer will find themselves paying the 15 per cent
whilst most “businesses will be acting as agents for the government,
collecting and sending money to the government.”
“The
question is, if a business is not a registered VAT agent, such a
business shouldn’t be charging a consumer 15 per cent. If one doesn’t
want to pay VAT, they would simply buy from those persons who are not
VAT registrants, for example, Super Value could potentially get hurt as
persons would shop at smaller petty shops that are exempt. There are
avenues that consumers—within a household—can look at in terms of
savings. My family and I will probably go and sit down and figure out
how to shop, to find where we can get the most bang for our buck and if
that means at the smaller convenience stores or shopping in bulk, then
that’s the approach we would have to take,” Chipman said.
He
went on: “We’re still on a cash based system and in cash based
societies, people generally look at things to be avoided. What if stores
decide to have two cash registers, one for adding up purchases for
which VAT is applied and one for purchases that reflect no VAT. In
Jamaica, you hear of issues of non-compliance all the time. People are
looking for ways to legitimately avoid the process and one realizes that
15 per cent is no small amount. If VAT is introduced at 15 per cent,
even in accounting, if I charged $10,000 before, I would now have to
charge $11,500 and that higher cost could put me at a disadvantage when
compared to accountants in other jurisdictions.”
So,
will a Central Revenue Agency (CRA) be tied to the Registrar General
Department and Business Licensing in order to detect those persons who
establish multiple companies for the purpose of avoiding taxes? What are
the penalties proposed for such persons?
How would a CRA be constituted? Would it be composed of accountants, auditors, outside consultants, who?
I look forward to hearing the debate of the draft VAT legislation in January!
