No reduction in the excise tax to offset value-added tax (VAT) tax

Price hikes likely on price-controlled items after VAT

By K. QUINCY PARKER
Guardian Business Editor
quincy@nasguard.com

Auto dealers and likely other businesses that deal in price-controlled items may hike their prices by more than the proposed value-added tax (VAT) rate of 7.5 percent proposed by the government in order to compensate for losses incurred by VAT compliance.

As Bahamians contemplate the impending institution of a value-added tax regime, the Bahamas Motor Dealers Association (BMDA) is sounding the alarm about the ability of price-controlled industries to remain profitable given an already onerous tax burden.

“There are some misconceptions that even the government has,” said Automotive Industrial Distributors (AID) Ltd. General Manager Jason Watson.

The government, according to Watson, is assuming that in the case of the BMDA, prices will be able to be kept at the same level, and as far as price-controlled items, that is so. However, for a company like AID that also sells items that are not price-controlled, the price of those items will go up in order to compensate for the losses on price-controlled items.

“That’s just an economic fact,” he said. “There’s just no getting around that.”

In fact, Watson said the likely price hike will be more than the VAT rate, because dealers will be compensating for losses due to inventory devaluation, gross profit declines and the costs of VAT compliance.

Fred Albury, president of the BMDA and owner of Executive Motors, talked about the “very negative” effect of recent changes to the government’s tax regime on the cost of doing business, even before adding VAT.

“It started in 2010. The business license fee increased from 0.5 percent to 0.75 percent. That’s a 50 percent increase when you translate that into dollars and cents,” Albury said.

He explained that there had been a revaluing of properties for property taxes – whereas he had been paying $20,000 a year for his parts and services building, the cost shot up to $75,000. He said that for a showroom, which had been $4,000, he is now paying $12,000 a year.

“All of that goes as an expense to the bottom line,” he said.

“If I was paying $200,000 a year in business license fees, that went to $300,000 (using the formula given above). And on top of that, we’re under price control, so we can’t up the prices to absorb these additional costs.”

“We have some of the same issues [as Albury and the other dealers], being under price control ourselves,” Watson explained. “Vehicles, parts, paints, accessories – it’s all under price control. Whenever we receive a price increase in our business costs, we’re not able to pass that on to the consumer.”

Watson admitted that potential layoffs were on the table in the long-term.

He said that even if sales remain constant, costs will increase, cash flow will decrease, gross profits will decrease because duty will be applied at a lower level in the cost structure. Still, he expects that sales will decrease. And he said that while business at AID is good now, and no layoffs are predicted in the near future, with no alterations in the governments plans, the current business model is “unsustainable.”

The two appeared on the ZNS economy-themed talk show “You And Your Money,” which airs at 8:30 p.m. on Wednesday nights and is rebroadcast at 9 a.m. Fridays.

Watson talked numbers. Accounting software to be able to invoice VAT and file for returns is valued at $300,000, and loss of value on inventory and other matters means a loss of $1.4 million; it will cost his company $1.7 million to become VAT compliant.

Watson said that it will take him six months to be completely compliant, and Albury added that his company, Executive Motors, has more than 30,000 different part numbers that would have to be revalued individually in order to comply with the VAT regulations. Both men said it was impossible to be ready for VAT by January 2015. Albury admitted that he would have to seriously consider whether to remain in business if the VAT is to be implemented in the current iteration.

“Having it where the VAT is a line item, based on what you’re selling – that’s simple. I’m ready for that. But if they say it’s gotta be built into the pricing, I’ve gotta think twice about whether I can stay in business.”

The BMDA is part of the Bahamas Chamber of Commerce and Employers Confederation, and through the chamber’s Coalition for Responsible Taxation (CRT) has expressed its concerns about the impact of VAT in addition to the government’s tax and fee structure. It is understood that on three occasions, State Minister for Finance Michael Halkitis has declined to meet with the BMDA representatives. BMDA members have instead met with Financial Secretary John Rolle and economist Simon Wilson of the Ministry of Finance.

“The Motor Dealers Association has attempted to get some meetings with [Minister Halkitis] but was unable to do so,” Albury confirmed.

“We’ve made it known that its going to have drastic negative effect on sales due to the fact that there’s going to be no reduction in the excise tax to offset the VAT tax,” he said. “The impact to the consumer is going to be tremendous [in terms of] increases.”

September 18, 2014

thenassauguardian

What are the Bahamian people saying about value-added tax (VAT)

VAT – Permanent failure for the government?

The subject of value-added tax (VAT) has stirred up quite a bit of discussion on social media and in the public sphere. In fact, the emails which I received were quite enlightening, informative and thoughtful. There were many more questions raised as a result and in this vein I propose to relate some of them today for consideration.

Has the Ministry of Finance been presented with alternatives to VAT? If so, did it do a proper evaluation of them? Will implementing VAT ensure that we improve efficiency and eliminate the potential for fraud with regard to government revenue collection? Why has the government operated with deficit spending for 18 of the past 21 years with the exceptions being 2000, 2001 and 2008? I should add that during the time I served in Parliament (2002 to 2007) this trend continued so I do accept responsibility for not speaking out and challenging my colleagues at the time on it.

To this end, we were either ill-informed or ill-prepared to understand the basic principles of running a government and derelict in our duties because we did not understand that successive governments could not go on spending binges without reaching a day of reckoning which is where we are today.

Why would the current Governor of the Central Bank of Barbados Dr. Delisle Worrell, call VAT an anti-tourism tax and the VAT system in Barbados a mess?

Are there lessons to be learned from Barbados? Merton Moore, who headed the VAT Implementation Unit in Barbados, calls it the “Rolls-Royce of taxes; treat it with intelligence, integrity, care and respect and it is likely to reciprocate”.

Will the government be bringing the VAT experts from Barbados, which is most similar in economy, culture and population to enlighten the public on VAT?

What spending cuts have been put forward as we prepare to implement VAT?

Clearly, all and sundry are aware that the government needs additional revenue. In fact, the government needs enough revenue to eliminate the deficit spending. This figure is close to half a billion dollars.

What mechanisms are in place to collect the outstanding hundreds of millions of dollars owed to the government now by taxpayers? Does anyone truly believe VAT will solve the economic issues that the country faces? Or will implementing VAT buy time with the international agencies to appear as if we are doing something to address our growing debt and deficit spending?

VAT fraud is a major concern for European countries that are well-developed and have a history of compliance. The Bahamas has a large underground economy, thousands of illegal immigrants who live outside of the law and a history of not paying taxes, and up to $400 million in uncollected taxes. How are we going to collect VAT? Further, there is the argument that every other country that has implemented VAT has used it as a slush fund to enable more spending and borrowing. What makes the Bahamas any different given our track record for running up debt?

Successive administrations have taken the easy way out and chosen to stick their heads in the sand and hope that things get better without adhering to the best financial principles for good governance. Political expedience was more likely a driving factor in the decision making and not fiscal prudence and responsibility as our current state of affairs makes the case for this argument.

The government has been lackadaisical and complacent in collecting existing taxes. Moreover, existing elected officials are setting a bad precedent by being blatantly delinquent on their own existing taxes and financial responsibilities to government agencies and corporations. This does not bode well for setting an example in a democracy nor does it help to champion an argument in support of VAT that is palatable to a majority of Bahamians. Implementing VAT without remedying the precursor is a recipe for lawlessness in the future.

Moreover, if the government is serious about tax reform, it would implement the policies of existing tax collection methods as an immediate priority.

In exploring expenditure reduction, has there been serious consideration given to public service mutuals as currently used in the United Kingdom? Also, would energy sector reform potentially raise a large revenue stream on a recurring basis for the government? How can we afford to give public servants increases in salaries when the government is operating at a deficit? In many countries around the world, governments have reduced salaries of public servants to reduce the recurrent expenditure in an effort to close the gap.

We have an indebtedness issue in the Bahamas. Eighty percent of persons with checking accounts in The Bahamas have a balance of under $1,000. Doesn’t this factor into an unsuccessful VAT system reality? Are members of Parliament visiting their constituencies to listen to what the Bahamian people are saying about VAT? If they were, there would probably be a different legislative agenda. Will it be that the $30 to $40 million coming as proceeds of VAT are used through Social Services where a debit card will be issued to persons in need, the pre-qualifier for issuance conducted through Social Services and in a way that is susceptible to politics? If such is forecasted then we know what outcomes to expect. VAT will take at least 7.5 percent out of the economy. Is there a corresponding increase in gross domestic product (GDP) of say 10 percent to compensate? I know that’s a big dream given the facts.

The harsh reality for The Bahamas of our current state of affairs is that our national debt has climbed from $1.1 billion in 1993 to approximately $5.2 billion at June 30, 2014. In the past seven years our national debt has more than doubled from $2.5 billion in 2007 to $5.2 billion in 2014. We accept that this cannot continue.

Further, from 2007 to 2014, the GDP of The Bahamas grew by only $1 billion. This means that in the last seven years we had stagnant growth along with excessive spending. Is VAT going to fix this problem? I put it to the ordinary person that VAT alone will not be enough. Moreover, we can find an alternative revenue stream to VAT, along with radical expense reduction and a real commitment to changing our reckless fiscal ways.

The Bahamian people want to see the government succeed but recognize that this means the government needs to operate with either balanced budgets or surpluses. If the current administration is not prepared to find and implement the solutions, which in my view do not have to include VAT, then it will be at their peril and further plunge this country into an abyss of failure the likes of which can be seen in many countries in the region.

• John Carey served as a member of Parliament 2002 to 2007 and can be reached at johngfcarey@hotmail.com.

August 08, 2014

thenassauguardian

Anyone who believes in freedom and democracy ...should protest and oppose the horrible provision of Section 64 ...in the revised Value-Added Tax (VAT) Bill

Qc Pledges Constitutional Challenge To The Vat Bill

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A well-known QC yesterday said he is mulling whether to challenge the Government’s plans to prevent delinquent Value-Added Tax (VAT) payers from leaving the Bahamas before the legislation even becomes law.

Fred Smith QC, the Callenders & Co attorney and partner, warned that if the Government succeeded in getting Section 64 in the revised VAT Bill on to the statute books and enforced it, it would soon seek to apply similar ‘travel bans’ to defaulters on other taxes.

Arguing that Section 64 was akin to something “totalitarian dictatorships” would seek to implement, Mr Smith backed private sector executives who had warned it violated freedom of movement provisions in the Bahamian Constitution.

“I will immediately bring an action for a declaration that it is an unconstitutional provision in the law,” Mr Smith told Tribune Business, when asked what he would do if Section 64 was ultimately included as is in any VAT Act.

“I might even sue beforehand,” he added. “I am considering suing before it comes into effect. I call on anyone who believes in freedom and democracy to protest and oppose this horrible provision.”

As revealed on Monday by Tribune Business, the new Section 64 in the revised VAT Bill would allow the VAT Comptroller to prevent delinquent taxpayers from travelling until they pay off their liabilities in full or agree a settlement/payment plan that is acceptable.

The legislation states that persons owing the Government VAT monies “may not leave, or attempt to leave, the Bahamas for an indefinite or prolonged period of time” - although it does not attempt to specify the duration that would meet this criteria.

“Where the Comptroller has reasonable grounds to believe that a person liable to pay tax outstanding under this Act may leave the Bahamas for an indefinite or prolonged period without paying such tax, [the Comptroller] may] issue a certificate in the prescribed form to the Commissioner of Police and the Immigration director, requesting the Commissioner and director respectively to take such steps as may be necessary to prevent the person from leaving the Bahamas” until due payment is made, the revised Bill states.

Those who attempt to flee the Bahamas without making due payment will face either a $100,000 fine or imprisonment for up to a year.

Section 64 appears designed to prevent foreign owners of Bahamas-based businesses, as well as Bahamians, from running away from their VAT liabilities, but it could well spark legal action of the kind promised by Mr Smith.

Analysing Section 64’s impact as is, Mr Smith said; “Every Bahamian, permanent resident, work permit holder, and their children and families, can be stopped at the border and prevented from travelling - to go on vacation or conduct business - simply because it is alleged that they owe VAT.”

This, he added, was exacerbated by the “vagueness” of the ‘indefinite or prolonged period of time’ wording, and the QC added: “There are no rules or boundaries, and excess and abuse will reign supreme.”

And Mr Smith quickly warned that, if it was successful under VAT, the Government would likely extend the ‘travel ban’ to cover defaulters on other taxes.

‘The idea of being able to stop people from travelling because of alleged arrears of taxation under VAT means the Government can extend this to arrears of real property tax, National Insurance Board contributions, Customs Duties and real property taxes,” Mr Smith told Tribune Business.

“If this legislation applies to one tax, it can apply to any tax, and this kind of dictatorial approach to government will make Bahamians prisoners in their own country. If this clause is permitted to stand, each successive government will extend it to every form of taxation.”

Mr Smith added that Section 64 would effectively make Bahamians and residents “slaves of the taxman, who will be judge, jury and executioner all in one.

“Once they stop us from travelling, does that mean they’ll take us into custody until we pay the taxes? Where will it end?”

Mr Smith added that the Bahamas appeared to be “going backwards as a democracy, instead of forwards”, and warned that freedoms were often eroded by stealth, one stage at a time, if governments were allowed to get away with the first move.

Gowon Bowe, the Tax Coalition’s co-chair, told Tribune Business earlier this week that the restriction contemplated by Section 64 would likely violate constitutional rights relating to a person’s ability to move and travel freely.

He added that it had been “a sticking point” in the initial November 2013 draft legislation, and had now been ‘broken out’ and stated more explicitly in the revised legislation tabled in the House of Assembly last week.

And Mr Bowe, a PricewaterhouseCoopers (PwC) accountant and partner, said imposing restrictions on a person’s ability to travel should be the sole preserve of the judiciary and Bahamian court system, not a tax authority such as the proposed VAT Department.

“I am not sure that will stand constitutionally. It would run against movement and free movement,” Mr Bowe told Tribune Business.

“The focus should be on prosecuting those individuals, with their ability to travel restricted only by the courts. That should be purely a court function; that shouldn’t be the ability of the tax authority to restrict a person’s movement.”

Suggesting that the focus should be on prosecuting VAT delinquents, not taking away their travel and movement freedoms, Mr Bowe said the world was “too much of global society to impose something as outdated as that”.

August 01, 2014

Tribune 242

The value-added tax (VAT) implementation date nears ...despite the widespread lack of understanding about it in the Bahamian society

To Be Or Not To Be - Bahamians Want Answers On Vat

Tribune 242 Editorial:


BAHAMIAN businessmen are becoming more agitated as the date for the implementation of VAT nears with only reassurances from legislators that draft legislation as to what it will mean to them is on its way.

Gowon Bowe, a Tax Coalition co-chair, has urged that the proposed legislation be brought to parliament before it takes its summer recess.

“If we don’t do a lot in the next six to eight weeks,” he said, “we would be right back in the same situation we were facing when we were looking at July 1 as the implementation date, with the business community again saying that they don’t have enough time.”

Mr Bowe said that the business community has still not had “the critical elements. There is no legislation, no regulations on what will be exempt, or what is ultimately going to happen. We need to urge the Government to be proactive.

“There is a concern,” said Mr Bowe, “that time isn’t on our side in that regard. We understand that there was a lot going on in the Budget, but now that is out of the way, this is the most critical time in terms of our fiscal course of action. We have had some casual conversations with the Financial Secretary and he had indicated that they were just waiting on Cabinet now.”

John Rolle, the Ministry of Finance’s financial secretary, recently confirmed to Tribune Business that VAT preparation/readiness efforts were being delayed because they were waiting for “final directions” from the Government.

Government brought two tax experts from New Zealand — one of the few countries that has a good word to say for VAT – to advise legislators on its merits and how to implement it.

Dr Don Brash and Mr John Shewan, both closely involved in the implementation of New Zealand’s Value Added tax in 1985-86, could not emphasise enough the importance of an extensive education programme, both for business and the general public. It was this programme that was the secret of New Zealand’s success. Such a programme would be even more important for the Bahamas, a country, unlike New Zealand, that has no income tax, but relies solely on indirect taxation and trade tariffs. In other words, Bahamians in general are not tax savvy.

“The reason our education campaign was so successful,” said Professor Shewan, “was because there was a commitment to an 18-month educational programme, six months of which was prior to the implementation date, but the most important things happened 12 months after the implementation because there were a series of detailed explanation programmes targeted at all kinds of groups.”

Government, which had planned to implement the tax on July 1 —13 days ago — was forced to delay it to January 1 next year — six months away – because, not only was legislation not ready, but there was not enough time to discuss it with the business community or to educate the public. Soon, if government continues its thumb-twiddling, another delay for implementation will have to be announced.

In their report, the New Zealanders expressed concern “at the widespread lack of understanding of how a VAT would operate in the Bahamas”. They were also “concerned at the complexity of the VAT proposal as currently envisaged (obviously government’s first draft on their arrival). This complexity would lead to high compliance costs and potentially extensive abuse of the system,” they predicted. Hopefully, this complexity has since been simplified. The state of business in the country today can certainly not absorb high compliance costs.

It was explained that VAT was urgently needed, not only to expand government’s tax base, but also for the country to be eligible to join the World Trade Organisation (WTO). Having had to reduce its original 15 per cent tax proposal to 7.5 per cent, the government maintains that it cannot afford to also reduce Customs duties. If joining the WTO is its objective, then Bahamians can count on the VAT rate being increased so that the Bahamas – a non producing country — can qualify for WTO membership. Qualification means that all Customs duties have to be abolished. Government, while explaining VAT, should also explain in detail the advantages of the Bahamas having WTO membership.

Several months ago, Social Services Minister Melanie Griffin outlined how our sluggish economy has hurt those in the lower income brackets – the group with the potential of being the most affected by VAT. With the September opening of schools, Mrs Griffin said, there was a substantial increase in demand on Social Services to feed and equip children for school. At the time, she was being interviewed she said that 1,606 out of just over 3,500 children had requested uniform assistance.

There was also more demand for food stamps, a relief system that is growing, she said.

Mrs Griffin appealed to corporate Bahamas and private citizens to partner with government to assist children in need. Recently the 58-year-old Ranfurly Home for Children appealed for financial aid. Mrs Griffin said government would assist to make certain that the Home, which has cared for so many children sent by Social Services, would not have to close. She also said that her Ministry will have to step into the breach to assist those who might be severely affected by the implementation of VAT.

A few days ago, we were discussing VAT with a businessman who said that what his company had traditionally set aside as donations for the various charitable organisations and student scholarships would now go to VAT. This shift in donations will put an even heavier strain on Mrs Griffin’s Ministry. In other words VAT will force the public sector to curb its generosity.

No matter how we look at it, VAT is going to create a vicious circle, and regardless of how it is introduced, Bahamians will not be satisfied until the government demonstrates that it too is making substantial cuts in its unnecessary spending. Bahamians are not going to pay taxes to give government a licence to spend foolishly. 

July 14, 2014

Tribune242

Premature Value-Added Tax (VAT) rate increase announced

Vat Rate Rise 'Criminal' If No Compliance

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former Bahamas Chamber of Commerce president yesterday it was “criminal” for the Government to already be talking about increasing the 7.5 per cent Value-Added Tax (VAT) rate prior to getting the existing tax system’s compliance levels to 80 per cent.

Dionisio D’Aguilar described suggestions by John Rolle, the Ministry of Finance’s financial secretary, that the VAT rate would likely increase in “the not too distant future” as “premature”.

“It’s too early for them to say what’s going to happen or not,” he told Tribune Business. “They don’t know how much revenue it’s going to yield. It’s premature of him to say that.

“The Government has a lot of legwork to do to improve revenue collection and the enforcement of collection. It would be criminal for them to talk about increasing the rate before they’ve raised the compliance threshold. They should get it to 80 per cent before they raise the rate.”

Mr D’Aguilar added: “If we were to collect everything we were supposed to collect, we would not need the VAT, and it wouldn’t just be honest people paying the Government.

“The Government has to think about how they’re going to enforce compliance. They can’t keep increasing taxes or introducing new ones unless they collect the ones on the table.

“You talk to politicians about how to do it, and they skirt the issue all the time. They just don’t want to take tough decisions to implement collections. Talk to Perry Christie and John Rolle, and they have no answers.”

Given the problems the Government already has in collecting all the Business Licence fees, real property taxes and border taxes due to it, Mr D’Aguilar questioned how it would cope with VAT.

“People don’t pay unless you get vicious,” Mr D’Aguilar told Tribune Business. “Unless you crush that rock, I don’t think you can talk about increasing the VAT rate.”

Robert Myers, the Coalition for Responsible Taxation’s co-chair, yesterday told Tribune Business that fiscal reform had to “hold everyone’s feet to the fire”.

“Already the consumer’s feet are being held to the fire because we’re all going to be paying more in tax,” Mr Myers said, referring to the increased cost of living/reduced living standards that VAT will bring.

“Our position is that it cannot happen without government’s feet being held to the fire,” he added. “They need to be accountable for compliance and working towards a balanced Budget, and accountable for expenditure.

“That means expenditure control, as we’ve been living beyond our means. They’ve [the Government] been doing that almost year-over-year for the last 30 years.

“That’s where we’ve been very adamant that it’s got to be tough love. We don’t mind paying, but you in government have to be accountable, and have some control.”

Mr Myers agreed that much uncertainty surrounded the 2014-2015 Budget because its content was determined in the last 72 hours prior to the Prime Minister’s address.

“I think a lot of it has kind of been a bit unsure because the timing was not great,” he said. “We’re all guilty on that standpoint, but it couldn’t be helped. We moved as fast as we could.”

June 04, 2014

Tribune 242

The new value-added tax (VAT) proposal

Budget 2014/2015: Answering the questions on VAT

Last week, the prime minister of The Bahamas delivered his budget communication to the House of Assembly. As expected, the speech and details of the aforesaid communication attracted a lot of attention from the Bahamian people as we sought information and clarity on the plans of the government for the new fiscal year. Chief among our interests in the communication was the specific details on the proposed value-added tax (VAT) regime.

There is no doubt that we now possess more information on how VAT will be implemented in The Bahamas and some level of certainty has been provided to the private sector and the Bahamian public as a whole. In this piece, we take a look at what we now know, analyze some initial commentary and responses, as well as determine the questions that ought to be answered as we move toward the implementation of VAT.

The government’s position

After over a year of extensive deliberations, engagement of myriad experts, multiple reports commissioned by the various stakeholders and sometimes emotional debates on fiscal and tax reform, the government has specified that VAT will be introduced at one single rate of 7.5 percent effective January 1, 2015.

The announced positions were driven by consultations with the private sector and other stakeholders and reflected compromises on the part of the government after having proposed a standard rate of 15 percent, a special rate of 10 percent and an implementation date of July 1, 2014.

Additionally, it is anticipated that fewer exemptions than originally proposed will be granted and the Ministry of Finance will have the necessary resources by October 1, 2014. In this regard, the government ought to be commended for keeping its promise of working with the private sector and taking their concerns into consideration in making the final decision.

The new VAT proposal also entails a VAT-inclusive pricing system to simplify price comparisons by consumers and more favorable procedures for accounting and tax credits, as well as refunds to accommodate small businesses.

Based on the lower rate at which VAT will be introduced, there will not be a wide-scale reduction in import duties and excise taxes during this budget cycle. However, the government has indicated its willingness to revisit these taxes in the next fiscal year as The Bahamas moves closer to accession to the World Trade Organization.

The impact of VAT on government finances

The acknowledgment of the importance of curbing government expenditure and the deficient nature of our current tax system in the budget communication is welcomed.

It is hoped that this will translate into a calculated and focused effort to ensure a more efficient allocation of taxpayers’ funds and the effective collection of taxes by the government going forward. This is vital as the fiscal predicament of our country cannot and should not be addressed solely from the revenue side. The government must remain resolute in the implementation of its fiscal consolidation plan.

It was noted in the budget communication that tax revenue as a percentage of gross domestic product (GDP) for The Bahamas is expected to be about 17.1 percent in 2013/14 which is significantly lower than the global average and lags behind the regional norm.

According to the Organization for Economic Co-operation and Development (OECD), the average tax to GDP ratio in OECD countries was 34.6 percent in 2012. While this suggests that we have the capacity to increase tax yield to meet the demands on government, the rise ought to be gradual and calculated to ensure sustained economic growth and to avoid a distortion of the economy.

That being said, VAT is expected to only slightly enhance revenue yield by 1.5 per cent of GDP in 2014/15 based on the date of implementation, while other revenue measures outlined in the communication are expected to increase revenue by 2.7 percent of GDP in 2014/15 with a resultant improvement in overall tax yield as a percentage of GDP from 17.1 percent to 19.8 percent.

Are there any winners or losers?

It was recently reported that the Inter-American Development Bank (IDB) in its Caribbean Region Quarterly Bulletin had suggested that The Bahamas has “further worsened its potential” to be downgraded by one or two notches by international credit rating agencies due to the postponement of the implementation of VAT.

This report highlights the potential risks to the maintenance of our investment-grade rating and further drives home the point that has been reiterated over the last two years – that we need to urgently address the fiscal challenges confronting us as a nation.

The positive side in this discussion is that as we now know that VAT will definitely be implemented at the specified rate at a specific date; this should dispel any doubts in the minds of international rating agencies as to whether we will be proceeding with tax reform. When combined with the downward trajectory of our GFS deficit evidenced by a reduction in the GFS deficit to 5.4 percent of GDP in 2013/14 compared with 6.3 percent for 2012/13, international rating agencies should be comforted that the government is committed to fiscal reform; after all S&P had indicated earlier that our overall fiscal plan will guide any decisions on revisions to The Bahamas’ rating.

Against this backdrop, it is obvious that we cannot approach the issues of fiscal and tax reform from a win or lose perspective based on the interest group we belong to. Rather, we must seek the best formula and optimum strategy to address an issue of significant implications for our commonwealth.

It is difficult sometimes to understand the rationale for certain commentaries that appear to ignore this reality. The decision of the government not to carry out any wide-scale reduction of custom duties with the implementation of VAT, while it has invoked some commentary, could be understood in the initial implementation phase of VAT. It is often said that the devil you know is better than the angel that you don’t; hence, the government must exercise prudence and conservatism so as not to further worsen the country’s fiscal position in the event that actual revenues from VAT are not in line with projections.

The other important details

Now that we have the most important details on VAT, there is other specific information that should be provided as soon as possible to enable proper preparation for the new tax system. It is important that the full list of exemptions (which are expected to be fewer than initially proposed) is released.

In this regard, the discussions with sectors that will be impacted by this new proposal should be expedited by the government. While we do not expect wide-scale reductions in custom duties, the planned reductions should be communicated to stakeholders and the general public in a timely manner to allow for the necessary internal changes.

Industry-specific guidelines on VAT would also be very helpful in simplifying the information contained in the VAT legislation and assist businesses with VAT compliance.

Concurrently and in the lead-up to the implementation date, more information should be provided on the reforms to the social welfare system aimed at minimizing the impact of VAT on lower income families.

Finally, the proposed public education campaign which will entail private sector involvement must now commence without delay. The clock is ticking and even though it seems like we have a lot of time before VAT implementation, there is much work to be done.

• Arinthia S. Komolafe is an attorney-at-law. Comments on this article can be directed to a.s.komolafe510@gmail.com 

June 03, 2014

thenassauguardian

The low rate/ few exemptions value-added tax (VAT) model

U.S. study looked at VAT with ‘attendant tax cuts’

By ALISON LOWE
Guardian Business Editor
alison@nasguard.com

A range of “attendant tax cuts” were assumed to accompany the implementation of value-added tax (VAT) when it was recommended by U.S. economists commissioned by the government to examine the best possible approach to tax reform, Guardian Business has learned.

In addition, the economists, Compass Lexecon, also supported the contention of groups such as the Coalition for Responsible Taxation and others when they recommended that the government must strengthen the existing tax system, particularly the administration of real property tax, as a key component of its overall reform plan.

In an email exchange with Guardian Business, David Kamin, an adjunct professor at New York University’s School of Law and a key participant in the formulation of the study produced by the government, discussed the objectives, assumptions and findings of the study, which the government has pointed to as further support of its plans to introduce VAT.

Kamin confirmed that the group found value-added tax (VAT) to be the preferred method of tax for The Bahamas, proposing a combination of VAT and a varying range of tax cuts in order for the government to raise a level of revenue that would not choke off economic activity.

He said: “We analyzed what revenue should be generated by the VAT in combination with related tax cuts. Here, we warned that there’s a balance between 1) the long-term revenue needs of the government and positive long-term economic impact of deficit reduction, and 2) the short-term negative impact that fiscal consolidation is likely to have on the economy.

“We then analyzed the VAT and attendant tax cuts producing 1) over two percent of GDP (like the government proposed last year); 2) 1.5 percent of GDP, and one percent of GDP.

“In striking this balance between long-term revenue needs and the short-run impact on the economy, we recommended a VAT and attendant tax cuts that would produce less revenue on net than the government had proposed last year - consistent with a VAT rate in the range of five to 10 percent (depending on the breadth of the base and size of related tax cuts). And, we further recommended that this be backed up with a fiscal rule to bolster credibility.”

On Wednesday, during the Budget Communication 2014/2015, the prime minister announced that the government is planning to implement VAT on January 1, 2015, at a rate of 7.5 percent, with “much fewer exemptions” than initially proposed, and no “wide-scale duty reductions”.

The decision to offer fewer exemptions has won applause from the business community, who felt it would make administration of the VAT more simple, as suggested by New Zealand experts Don Brash and John Shewan, but the announcement that there will be few duty reductions has been more controversial.

Coalition co-chair Gowon Bowe has argued that findings of the study commissioned by the private sector grouping suggest there will not be a “radical” price spike under a VAT with few duty reductions, while some retailers and the president of the Bahamas Contractors Association fear a major knock to consumer demand from the plan.

As to what duty reductions were assumed under a VAT with 7.5 percent if the revenue target was to be achieved, Kamin said: “We were not asked to calculate (and didn’t calculate) the duty reductions that would be consistent with our recommended net revenue target for a VAT with a 7.5 percent rate. Since both the potential breadth of the VAT tax base and the duty reductions were shifting as our report was developed, we focused our recommendations on the net revenue that we believed appropriate.”

When selecting VAT as the preferred method of taxation for The Bahamas, Kamin noted that what is involved in administering a VAT, as opposed to other taxes, was of particular relevance to the consultants. Kamin is a specialist in tax law and policy; he served as adviser, to Peter Orszag, director of the U.S. Office of Management and Budget, and helped to formulate policy for President Obama’s first two budgets.

“The study considered whether the current tax system in The Bahamas was in need of reform, concluding that it is and that a VAT should be adopted in light of The Bahamas’ significant revenue needs, the expectations of the markets and the current relatively narrow and inefficient tax base,” he said.

“In arriving at this conclusion, we looked at a number of different alternatives, including payroll taxes, corporate income taxes, individual income taxes and the VAT. Based on what is known of these different tax systems, we concluded that a VAT is superior in terms of efficiency and, especially, administrability as compared to these alternatives.

“We also recommended that The Bahamas endeavor to strengthen parts of its existing tax system, like the property tax. To be clear, this analysis considered the effects of these taxes in terms of efficiency, fairness and administrability.”

Prime Minister Perry Christie spoke of the Compass Lexecon report during his presentation on the Budget 2014/2015 last Wednesday. He noted the group’s favoring of the VAT, as well as how the study also concluded that the government implement a fiscal rule to bolster its “credibility” in the budgeting process. However, Christie said that the government determined that such a rule, which would require the government to legislate a maximum debt to GDP and minimum annual level of reduction in the debt to GDP ratio removed a level of “adaptability” that the government sees as important to its ability to make financial decisions going forward.

Meanwhile, contacted for comment on the government’s proposed tax plan, New Zealand tax expert Don Brash said that he and Shewan were “very pleased” to hear that it appears that the government may have elected to pursue the “low rate/ few exemptions” VAT model they recommended during their recent visit to The Bahamas, but declined to comment on the government’s decision to do so while largely retaining duty rates at the current levels.

June 02, 2014

thenassauguardian

Views and commentaries on the proposed value-added tax (VAT) system in The Bahamas

The fiscal reform series: About that VAT

The views and commentaries on the proposed value-added tax (VAT) system have been as diverse as they have been inconsistent. What makes the discussion even more interesting is that the divergent opinions have come from economists, experts in this form of taxation and industry leaders.

There is often the tendency for facts to either be lost or manipulated in a prolonged debate, with the loudest or most frequent message being perceived as the ultimate truth. It is therefore important that we filter out the proverbial noise in the market and unravel the actual facts that will enable us to develop our own opinions on the proposed VAT framework. In this article we briefly consider the various utterances made by both local and foreign individuals as they chimed in on the ongoing debate on VAT in The Bahamas. We will subsequently embark on the tasking journey of understanding VAT and what it means for the average Bahamian.

The Barbados experience

It was reported a number of weeks ago that the Governor of the Central Bank of Barbados, Dr. Delisle Worrell, had indicated that VAT is an anti-tourism tax and had hurt that country’s local industry. Worrell was also reported as stating that the tax is very complicated and suggested his preference for a simple sales tax. We will examine sales tax as an alternative later.

A few days after the aforesaid report on the comments of Worrell, The Nassau Guardian quoted Lalu Vaswani, president of the Barbados Chamber of Commerce and Industry (BCCI), as saying that VAT has been good for the economy of and businesses in Barbados. Vaswani noted the level of concern and anxiety within Barbados prior to the implementation of VAT; an experience that seems similar to the current pre-VAT environment in The Bahamas. Of particular note was his reference to an adage that a rope in a dark room feels like a snake. More recently, Mark Shorey – a VAT expert out of Barbados with about 20 years experience in VAT consultancy and a member of the VAT implementation unit – weighed in on the VAT debate in The Bahamas. Shorey remarked that anti-VAT hoteliers will not be satisfied and indicated that training closer to implementation may be more effective. In the end, Shorey suggested, the implementation of VAT in Barbados was successful and is a model that could help The Bahamas.

Chronicles of the local commentaries

Comments attributed to past and present government officials with responsibility within the Ministry of Finance have been consistent insofar as they relate to the urgent need to address our fiscal imbalance. These individuals have also been backed by some locally respected professionals who have cautioned that we are between a rock and a hard place with the window for remediation closing with each passing day. A common concern has been the rate at which VAT is introduced, with recommendations for a rate lower than the proposed 15 percent.

The main opponents of VAT from the business community have been fervent in their campaign against this form of taxation, arguing that it is not appropriate for The Bahamas and would increase the cost of living while further shrinking the middle class. A study of jurisdictions that have implemented VAT will show that the fear and anxiety being expressed is not unique to The Bahamas, nor is it unusual for various interest groups to voice their concerns. The emergence of groups that purportedly represent the populace and average citizens has also inserted a unique dimension to the ongoing debate on VAT.

WTO accession and a replacement tax

We know that the government requires among other measures on the expenditure side, additional revenue to correct our structural recurrent deficit. However, the recent revelation by the co-chair of the Coalition for Responsible Taxation that the group was not aware that the reduction in tariff rates has to be immediate and cannot be phased in as The Bahamas seeks to join the WTO is indeed food for thought. This raises the question of how effective the government has been in explaining the link between our efforts to join the WTO and the introduction of VAT.

It appears that the case for our urgent accession to the WTO has not been adequately presented to the average Bahamian. It can also be argued that not enough has been said to sensitize the public to the fact that VAT is intended to replace the significant amount of revenue the government will be forfeiting as tariff rates are reduced to facilitate our accession to the WTO. Perhaps this is an indication of the oft manifested culture of addressing matters in vacuums or isolation without due attention to the bigger picture. It follows therefore that if VAT on goods is expected to replace existing tariffs on goods, the introduction of VAT should be neutral in relation to government revenue. This will not however be the case as the government expects to raise some $200 million in additional revenue from VAT on services which have been untaxed for quite some time even though our economy is for the most part service based.

The progressive aspect of a regressive tax

There is no doubt that VAT cannot be classified as a progressive form of taxation and is generally regarded as a regressive tax. In this regard, there have been numerous criticisms of this proposed tax system and suggestions for alternatives which are deemed to be more progressive in nature, including income tax.

Warren Buffett – the man often referred to as the Oracle of Omaha and regarded as one of the greatest investors of all time – has been a proponent of the rich paying more taxes in support of the philosophy of U.S. President Barack Obama. Locally, businessman Tennyson Wells has been quoted as stating a similar view, albeit from the perspective of a different school of thought on welfare, allocation of the tax burden and the trickle down paradigm. Nevertheless, as research has shown that individuals who are more well off spend a higher percentage of their income on services than goods when compared to the less well off, one can conclude that the introduction of VAT will increase the amount of taxes paid by the upper class in our country over that paid by the lower class. It should be noted that this does not eliminate the expected increase in the cost of doing business for companies, though this will ultimately be borne by the consumer.

VAT versus sales tax

The complicated nature of a VAT system has been a major component of the concerns raised by the private sector with preference for a sales tax being expressed. The government had documented its rationale for proposing VAT as opposed to other forms of taxation in the white paper released in February 2013. While the paper did not provide ample details on the analysis conducted on each type of tax prior to the selection of VAT, the superiority of VAT over sales tax in terms of enforcement mechanisms is apparent.

It is therefore understandable why the government would prefer VAT over a simple sales tax. It is a known fact and Shorey confirmed that VAT has inbuilt self-policing and compliance features which reduce the level of resources that the government will have to allocate to its compliance efforts. In effect, VAT creates a level of accountability, responsibility and transparency that makes registrants and in some cases consumers, agents of the Central Revenue Agency with significant incentives and penalties ensuring that the government receives VAT payments. On the other side, it is expected that businesses will prefer a sales tax system which is easy to administer because it requires the collection of taxes at the point of sale instead of throughout the production/value chain as required in a VAT regime.

Conclusion

The German-born American artist Hans Hofmann famously stated that "the ability to simplify means to eliminate the unnecessary so that the necessary may speak". It is time to rid ourselves of the unnecessary commentary in the VAT debate and focus on the facts necessary to move the discussion on fiscal and tax reform forward. Only then can a constructive discussion about the VAT that has become associated with fear and uncertainty, as well as proposals for viable alternatives, begin. Next week we will take a deeper dive into the features of VAT and the contents of the draft VAT Bill and regulations. In the interim, the various stakeholders need to disclose all the relevant details and simplify the information necessary for all to comprehend.

• Arinthia S. Komolafe is an attorney-at-law. Comments on this article can be directed to a.s.komolafe510@gmail.com.

April 01, 2014

thenassauguardian.com