The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Legal and professional services providers were yesterday reassured that work for offshore clients would be treated as ‘zero-rated’ under the proposed Value-Added Tax (VAT), easing fears that it might undermine the Bahamas’ “international competitiveness”.

John Rolle, the Ministry of Finance’s financial secretary, told Tribune Business that services “exports” from the Bahamas to international clients would be ‘zero rated’ for VAT purposes.

This means providers can claim back VAT paid on their inputs, as well as avoid having to levy the 15 per cent rate on client billings, seemingly eliminating a major concern for Nassau’s leading commercial law firms whose client books are often 60 per cent international.

Mr Rolle explained to Tribune Business that “work that is strictly of an international nature”, and which qualified as “exports”, would be ‘zero rated’ for VAT purposes.

“For offshore services, if the client is offshore, it doesn’t matter if the client comes to the Bahamas to meet with the lawyer: That is zero-rated,” he said.

The draft VAT Bill released last week for public consultation supports this, listing a wide range of professional services that will be ‘zero rated’ provided they “are used, or the benefit or advantage is obtained, outside the Bahamas”.

Apart from legal services, the sectors covered by this include engineering and architectural services; consultancy services; accountancy services; insurance services; advisory services; and professional services.

However, Mr Rolle qualified the extent to which a ‘zero rating’ treatment would be applied, noting that professional services supplied in relation to a foreigner’s activities/transactions taking place in the Bahamas would be subject to VAT.

“If a non-Bahamian comes to Nassau or the Bahamas, and contracts for legal services in relation to something they’re doing in the Bahamas, that’s taxable,” the Financial Secretary explained.

Explaining that the “domicile of the transaction” was key to determining whether VAT is incurred, Mr Rolle said one example was a non-Bahamian engaging local attorneys to help them purchase Bahamian real estate.

The Government had previously made clear that the international financial services industry would be ‘ring fenced’ from VAT to maintain its international competitiveness, with the draft Bill confirming the sector will receive ‘zero rating’ treatment.

Yet the uncertainty over how associated providers, particularly attorneys, accountants and corporate services vendors, would be treated under VAT had caused concern that the sector’s cost base would still be impacted.

Such fears were recently expressed by Brian Moree QC, senior partner at McKinney, Bancroft & Hughes, who told Tribune Business that services providers were likely to pass the 15 per cent VAT on to their clients post-July 2014.

Pointing out that the Bahamas’ cost base was “high by international standards already”, Mr Moree warned that it VAT would impact this nation’s “competitiveness” if levied on overseas clients.

Warning that it would be “a tragic mistake” to think global markets could absorb ever-increasing costs, he questioned whether the Bahamas’ VAT treatment of legal services exports would be consistent with international standards.

Mr Moree had pointed out that UK attorney’s legal billings of overseas clients were not subject to VAT, a practice the Bahamas also appears to be adopting, based on the draft Bill.

And the well-known QC had also expressed concern that any VAT-induced increases to legal and other professional services fees might undermine plans to develop an International Arbitration Centre in the Bahamas.

Speaking to Tribune Business on the day the VAT Bill and draft regulations were published, Mr Moree had warned: “The simple fact is that on all services subject to VAT, there’s likely to be a 15 per cent increase, as service providers will likely pass all that on to their customers and clients.

“That, in an international and regional context, affects our competitiveness and cost base for doing business in the Bahamas.

“On this point we need to be very careful, because we know that today the cost base is quite high by international standards, and we must not price ourselves out of the market. That is a serious factor.”

And he added: “We must not assume in this country that there is an unlimited capacity in the marketplace to absorb higher costs.

“That would be a tragic mistake, because there comes a time in the marketplace where your costs will drive business away. We must be very careful that we do not get to that point.”

Mr Moree said professional services providers had been “waiting anxiously to see how this all plays out” with regard to VAT and their treatment under it.

“In the UK, if you’re an English lawyer and provide services overseas, your fee will not be subject to VAT in the UK,” he added.

The draft Bill appears to be in step with this policy, but Mr Moree had warned: “If professional fees that are charged to overseas clients are subject to VAT, that will significantly increase the cost of offering these services, and will affect the overall cost base for doing business in the Bahamas.”

While unable to speak for other law firms, he estimated that 60 per cent of McKinney, Bancroft & Hughes’s business was overseas clients, describing this as “a very large percentage of our business”.

Mr Moree also expressed concern that VAT would increase the costs of “various components” required to develop a successful International Arbitration Centre in the Bahamas.

“In simple terms, it makes it more expensive,” he added. “Whether or not it will be a viable offering will depend on whether our cost base is competitive with other arbitration centres.”