The Tribune

• Judge urges: Try another legal approach

• Says Inland Revenue move ‘unnecessary’

• Bank pledges to battle Crystal ships’ tax

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Department of Inland Revenue’s bid to intervene in the sale of two cruise ships and secure the $11.636m in VAT it claims to be owed has been dismissed by the Supreme Court.

Justice Petra Hanna-Adderley, in a September 25, 2023, verdict told the Government it must take an alternative legal approach to securing the taxes it claims are due on the collective $128m sale of the Crystal Serenity and Crystal Symphony cruise ships.

She also ruled that the move by the Attorney General’s Office, acting on the tax authority’s behalf, was unnecessary and effectively premature given that sufficient funds have already been set aside in escrow accounts to cover the disputed VAT claim if it is ultimately proven.

Justice Hanna-Adderley’s ruling also confirms that the Department of Inland Revenue faces a battle with DNB Bank, the two cruise ships’ secured financier, which is disputing the claim that VAT is due and owing in the sales price.

DNB is asserting the VAT claim is against Lieutenant Commander Berne Wright, the acting Port Department controller, in his capacity as Admiralty Marshall and the person who handled the two vessels’ arrest and subsequent sale.

Yet the bank is also arguing that the Admiralty Marshall does own the $128m sales proceeds, which belong to itself and other creditors. And it is warning that “is still contesting the [VAT] assessment on narrow tax law grounds”.

The Department of Inland Revenue’s claim, if it succeeds, would be one of the single-largest VAT generating transactions seen in The Bahamas’ to-date. The Government, given its fiscal pressures and seeming recent cash flow issues, is understandably eager to get its hands on these funds - something that was signalled in its intervention bid.

However, if the Government and its tax authority succeed, it would substantially reduce the recovery for DNB Bank and other creditors. One legal source, speaking on condition of anonymity, said of the brewing VAT battle: “That’s going to go to the Privy Council for sure. It’s too much money.”

They also voiced concern about the potential fall-out for The Bahamas as a global maritime industry player if the Government persists with its bid to levy VAT on the sales price generated from disposing of the two ships and, indeed, if it succeeds.

“If they start doing this, no one will sell ships in The Bahamas or arrest ships in The Bahamas,” they said. “If there’s a chance they could incur VAT, they’re not going to arrest it. That’s problematic because we’re a major maritime country and have hundreds of ships on the registry. This is going to have effects long-term that we’re going to have to navigate. Whatever determination is made will be problematic for sure.”

The $128m proceeds from the June 2022 sale of the two former Crystal Cruises ships currently lie in escrow accounts amid ongoing efforts to determine the order in which creditors get paid and how much. The Attorney General’s Office, though, made its bid to intervene on the Department of Inland Revenue’s behalf on May 30, 2023, with further legal filings taking place in June this year.

Dexter Fernander, a senior tax manager in the Department of Inland Revenue’s VAT department, affirmed that on October 20, 2022, the tax authority assessed $11.636m “as due on the sale of the vessels which was served on the Admiralty Marshall the same day. The Admiralty Marshall accepted that the sales were subject to VAT and requested that the assessed tax be paid out of the joint accounts”.

The Attorney General’s Office, in its arguments, asserted that “the result of these proceedings will have a material impact upon the VAT Department collecting VAT due and owing”. As a result, it argued that the Department of Inland Revenue “has a material interest in being involved at every juncture of these proceedings”.

This, though, was disputed by DNB Bank which argued that the Government has no interest in the cruise ships or sales proceeds. “While the comptroller has assessed the [Admiralty] Marshall for VAT on the court sales, the marshall does not own the sales proceeds,” it alleged, arguing that the $128m represent the fruits of a judgment it has obtained.

“The comptroller’s claim is.... against the marshall and, as such, the issue is between the claimant and the marshall as to whether the VAT could be a marshall’s expense. If the bank is unsuccessful in its application against the marshall’s expenses, then will the marshall potentially have a claim against the proceeds, and the bank is still contesting the assessment on narrow tax law grounds.”

Justice Hanna-Adderley, noting that the Department of Inland Revenue intervention was based on the argument that “VAT is to be applied on the sale of the vessels, and that following the assessment of the same ought to be paid”, recalled that sufficient funds have already been set aside in escrow to cover the potential $11.636m VAT liability.

Acting justice Ntshonda Tynes, on December 19, 2022, ordered that $9.364m and $2.273m of the sales proceeds from the Crystal Serenity and Crystal Symphony, respectively, be placed in escrow to cover the potential tax payout. The Government had failed to show how its interests would be “injuriously affected” as a result.

Justice Hanna-Adderley, noting that the VAT dispute has yet to be resolved and remains live, effectively told the Attorney General’s Office to employ an alternative route to advance its claim and that it had acted prematurely.

“Obviously the Attorney General’s Office’s application to intervene is to ensure the VAT Department receives the totality of sums on what they assert is the VAT applied on the sale of the vessels and prevent the payout by the Admiralty Marshall to the claimant bank as such a payment can only be made to a judgment holder or by consent,” she wrote.

“By then Justice Tynes’ orders provisions have been made for the setting aside of the sums the Attorney General’s Office asserts are owed to the Department of Inland Revenue as the VAT levied on the sales of the vessels.

“It is for this reason that I am of the view that, at this juncture in this action, it would not be necessary for the intervention of the VAT comptroller. There is, of course, no bar to the comptroller of VAT commencing an action against the owners of the vessels as I fully expect other creditors to do.” In dismissing the application, the Supreme Court ordered that the Department of Inland Revenue pay legal costs.

Financial strife at its immediate parent caused Crystal Cruises, which pioneered home porting in The Bahamas alongside Royal Caribbean, to initially suspend operations in early 2022 with the hope they could be restarted in April. This was to allow management to assess the company’s business, and determine its future options, as the parent was set to run out of cash by end-January 2022, but all rescue efforts proved futile and the cruise line was wound up.