The Tribune

• Changes to end VAT-free status by March 1

• And put Bahamians on tax level playing field

• Cruise industry given till February 16 to reply

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is planning tax reforms that will hit the cruise lines’ Bahamian private islands and end their nine-year VAT-free status, it was confirmed yesterday.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business that changes currently set to take effect from March 1 are designed to place the cruise lines’ private island activities on a taxation level playing field with Bahamian providers who service their guests at other destinations.

He confirmed the authenticity of a Department of Inland Revenue “guidance document” obtained by this newspaper which reveals that, within weeks, the tax authorities plan to change the tax treatment of goods and services supplied to millions of tourists who visit these locations annually by levying VAT on all such transactions at the standard 10 percent rate.

Among the private islands that stand to be impacted by such a move are Royal Caribbean’s Perfect Day destination at Coco Cay in the Berry Islands, its global showpiece attraction; plus Mediterranean Shipping Company’s Ocean Cay location; Disney Cruise Line’s Castaway Cay and Lighthouse Point; and Holland America’s Half Moon Cay.

Mr Wilson said the tax authorities have “no idea” how much revenue could be generated through the changed tax treatment, and imposition of VAT on all goods and services sold to cruise passengers, as they presently do not have access to commercial records showing how much economic activity is generated on these private islands.

Explaining the rationale for the move, he told this newspaper: “When we implemented VAT originally we were under the impression given to us by the cruise lines that any commercial activity on the private islands was an extension of the package purchased [by passengers] on ship - they were indistinguishable. That’s not the case. It’s a different commercial experience.

“It has grown significantly. The private islands are much bigger, much more diverse in their operations, and they actually compete with Bahamas-based businesses for onshore excursions.” Asked how much extra revenue could be generated, Mr Wilson replied: “No idea. We have no idea. We don’t know right now. We don’t get any record as to what’s happening on the private islands. No commercial records.”

The Government’s top financial official, though, said the move was designed to place the cruise lines and Bahamian businesses who cater to their passengers in non-private island destinations on a taxation level playing field as both will now have VAT added to their charges.

Given that VAT’s imposition will likely mean the total price charged by the cruise lines to their customers will increase, it is thought likely the industry will push for greater time to adjust to the changed treatment on the basis that most cruises are booked 12-18 months out. This means they will be unable to adjust pricing to accommodate the VAT, and could end up having to absorb it themselves.

Mr Wilson, though, described such a response and position as “not valid” and added: “The law is the law. We cannot exempt commercial activity. Why should the cruise lines be allowed to rent a chair on the beach and pay no VAT while the Bahamian has to pay VAT and Business Licence?”

The Department of Inland Revenue has given the cruise industry until February 16 to provide feedback on the potential impact from the VAT change. Mr Wilson agreed that, based on the response, the March 1 implementation target could be called into question, but said: “I don’t think that’s going to change. This was highlighted to the cruise line a couple of months ago and there was no reaction.”

One source, speaking on condition of anonymity, said the changed VAT treatment for the cruise lines’ private islands had been attempted before but was ultimately never imposed. They suggested the industry’s greatest concern would be the March 1 timing, and the inability to change pricing schedules before the 10 percent levy is added.

“They’re going to have a conniption,” the source said of the cruise lines. “They don’t mind paying it, but you just don’t spring it on someone. That’s going to cause quite a stir. It’s all about the timing. I don’t think the cruise lines will have an issue with paying and collecting it, but you just can’t put it on them. It’s going to be a passenger-only cost. The guests are going to get that, not them.”

Since VAT is paid by the end-user, it will be the cruise ships’ customers - the passengers - who will ultimately pay the tax and likely increased prices either at the point of purchase or via the voyage packages they purchase.

The Department of Inland Revenue’s guidance note on VAT for cruise lines and their private islands, dated January 15, 2024, said it replaces all previous advice and added: “The Department of Inland Revenue (DIR) intends to implement this guide with effect from March 1, 2024. The guide is being circulated to the industry for written comments to be provided to the DIR no later than Friday, February 16, 2024.”

It reaffirmed that it now considers the supply of goods and services to cruise passengers on the private islands to be VAT-able transactions, meaning that they should attract the 10 percent levy, since they take place within Bahamian territory.

“Therefore, where goods and services are provided or sold on-island, the place of supply is considered to be in The Bahamas and the supply of these goods and services is subject to VAT at the standard rate. This is an important change in the DIR’s position as it relates to the VAT treatment of supplies made on private islands and by cruise lines,” the Department of Inland Revenue confirmed.

The cruise lines themselves will have to become VAT registrants if they either own a private island or generate more than $100,000 in annual taxable sales from such destinations. If an island is owed by a separate legal entity, then economic activity and transactions generated by it as well as the cruise line could be VAT-able.

Among the transactions that will attract VAT, it added, are the provision of food and beverage; recreational activities; equipment rentals; and spa services on cruise lines’ private islands. Lease agreements for the rental of space, or right to use a private island, will also attract VAT, as will goods and services provided to a cruise line where the location is operated by a separate corporate entity.

Cabana rentals, shore excursions or charging cruise companies for passengers’ access to on-island services would be caught by this, as would “the purchase of on-island recreational activities such as tours, excursions and other attractions from Bahamian suppliers. The resale of these recreational activities to passengers is also subject to VAT at the standard rate as the services are being rendered in The Bahamas”.

The cruise lines will have to “maintain electronic records of passengers’ account billings that attract VAT” in a format that can be inspected by Department of Inland Revenue auditors to assess their compliance with applicable tax laws and regulations.

“Where the cruise line operator supplies goods and services to passengers as part of a package, any portion supplied in The Bahamas is subject to VAT at the standard rate,” the Department of Inland Revenue added.

“Cruise line operators are required to account for the VAT payable by either apportioning a percentage of the package that relates to the time on-island in The Bahamas or based on the actual price of the goods and services consumed on-island.”

The cruise lines, though, will be able to obtain “an input tax credit” for fuel, food and beverages, electricity and equipment obtained in The Bahamas. And, outside the private islands, the tax authorities said: “All port-side supplies for the direct operation of cruise lines are zero-rated.

“This includes port-side and harbour fees and charges such as for tendering, piloting and tugboats, security, fees, water and other utilities, maintenance and the replenishing of onboard supplies. Where these services are provided by a VAT registrant, invoices should show that the supplies are zero-rated.”

The changed VAT treatment would align with the Government’s 2023-2024 Budget aims of placing the burden from any tax and fee increases on foreign guests as opposed to Bahamians with the exception of the Boat Registration increases.

The cruise industry, and its passengers, in particular have been targeted as a source of increased revenue. Last May’s Budget involved increasing the existing $18 per passenger departure tax to $23 for “every cruise passenger” leaving The Bahamas via Nassau and Freeport, and to $25 per head for all those who exit “by sea from a private island not visiting any other port in The Bahamas”.

The revised tax structure imposes departure tax increases of $5 and $7, respectively. They are equivalent to a 27.8 percent and 38.9 percent rise, and took effect from January 1, 2024. Cruise departure taxes for the nine months to end-March 2023 stood at $87.847m, some 73.5 percent ahead of the full-year’s $50.642m target, with three months in the 2022-2023 period still to go and the $18 rate still in effect.

The former figure, which represents 61 percent of this year’s $144.89m target, will likely have given the Government confidence that its revenue goals will be achieved this year. And the changed VAT treatment will likely be hailed by environmentalists and Bahamian businesses who belief the industry should be contributing more to the Public Treasury.

The cruise lines’ private islands have been especially valuable to the sector, and have assumed even greater importance post-COVID given the switch by consumers towards shorter-haul three to four-night voyages that mandate calls in The Bahamas. Expansion and investment is ongoing in multiple locations.

MSC is investing further in Ocean Cay; Disney’s Lighthouse Point project is due to open next year; Carnival is developing its Grand Bahama-based Celebration Key; and Royal Caribbean is moving ahead with its Paradise Island beach club as well as Freeport Harbour and the potential Xanadu hotel purchase.