The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas Motor Dealers Association’s (BMDA) president believes new vehicle sales could follow St Lucia’s lead and slump 30-35 per cent post-VAT, warning: “Some of us will not survive.”

Fred Albury told Tribune Business the industry could not “take much more of a hit”, given that it had yet to recover from the recession’s 50 per cent sales plummet, plus a tripling in Business Licence fees and real property tax.

With gross profits projected to shrink 8 per cent following Value-Added Tax’s (VAT) implementation, due to the auto industry being on price control, the BMDA chief warned consumers that discounting “might disappear altogether”.

Calling on the Government to release the revised Tariff Schedule “sooner rather than later”, so that dealers could adjust their five month inventory ordering cycle accordingly, Mr Albury said other unresolved VAT questions concerned the treatment of corporate vehicles and imports into Freeport.

And, in an ominous echo of what fellow businessman Ethric Bowe told Tribune Business last week, Mr Albury warned that many Bahamian companies were “at breaking point” and would have to decide “whether it’s worthwhile to stay in the business or get out”.

“My anticipation, based on what other markets like St Lucia have experienced, is that there will be a big sales run up to the end of June, and then they will taper off,” the BMDA president said of likely Bahamian consumer behaviour in 2014.

“It might take a year or two for consumers to settle down [post-VAT], and the anticipation is that new vehicle sales will decrease considerably. That’s the premise I’m going to work on.”

Mr Albury reiterated that St Lucia’s new auto dealers had seen service revenues slump 30 per cent after that nation introduced VAT, with vehicle sales falling by a similar 30-35 per cent.

Implying that Bahamian dealers would likely suffer a similar impact, given that consumers will suffer a VAT-induced cut in their disposable income, the BMDA president said this was the latest in a series of setbacks to hit the sector.

With new car sales yet to rebound from their 50 per cent slump compared to 2007 pre-recession levels, Mr Albury told Tribune Business: “I don’t think the new car business can take much more of a hit.

“I would anticipate some of us will not survive. The strong will continue to pay their bills, keep their heads above water and continue to pray for better days. It’s [VAT} not going to put us in a healthy position.”

Tracing the combined effects of other tax impositions on his three businesses, Auto Mall, Executive Motors and Omega Motors, Mr Albury said: “Business Licence fees from 2010 to now have gone up 150 per cent, along with lots of other things.

“The real property tax, particularly on the parts and services department, went to $75,000 in 2010 from $25,000. The showroom went from $4,000 to $12,000 a year.

“All of that goes directly to the bottom line. At the end of the day, it gets to the position where you’ve got to make a decision whether it’s worthwhile to stay in the business or get the hell out and let someone else deal with it,” he added.

“A lot of businesses are at a breaking point. Those businesses are looking at a make it or break it scenario, where a lot of them will say: ‘To hell with this, let’s pack up shop and call it a day’. Maybe it’s the fear of it, or the compliance aspect or the cost of compliance, the lower gross profit and higher selling prices of VAT.”

Mr Albury’s comments mirror what Mr Bowe told Tribune Business in confirming that he was set to close his retail business, ATEL Outlet, due to the impending arrival on July 1, 2014, of VAT.

While there is no suggestion that the BMDA president is looking to close his own businesses, the comment by both prominent businessmen give a good indication into the private sector’s battered ‘state of mind’ and low confidence levels.

Mr Albury, meanwhile, urged the Government to rapidly publish the final missing piece of the VAT jigsaw - the revised Tariff Schedule. This is critical in enabling Bahamian firms to precisely forecast, and budget for, the impact tax reform will have on their businesses.

While the Ministry of Finance has suggested import tariffs will decline by an average of 17 per cent to make room for VAT, the picture is made more complicated by the Bahamas’ commitments to the World Trade Organisation (WTO) and Economic Partnership Agreement (EPA).

Companies therefore want to see a ‘line by line’ breakdown of the revised import tariffs to assess whether there is indeed a ‘tax neutral’ effect, and Mr Albury said the schedule’s publication was “better sooner” from the auto industry’s perspective.

“We’re on about a five-month ordering cycle from the time to order to the time we receive the product, so we need to know where the pricing will be at to see whether we decrease orders, or shift from one model to another,” he explained.

“The biggest concern is going to be spare parts inventory and vehicle inventory, where they’ll be at. We’re waiting for the Tariff Schedule to see the picture it paints for us, and do some forecasting as to where sales will be, so we can do some budgeting and know whether we can carry certain expenses or pull back. The bulk of those expenses is staff.”

That, of course, implies potential job losses in the auto industry if VAT’s fallout is worse than expected. The sector is one of the highest-yielding revenue areas for the Government, with Excise Tax rates on new vehicle sales set at between 65-85 per cent.

Yet both these and spare parts sales are price controlled by the Government, and dealers have expressed concern that this - combined with VAT - will squeeze mark-ups and profit margins.

Bahamian auto dealers like to entice consumers with price discounts, but Mr Albury warned: “That might disappear altogether.

“If our gross shrinks by 8 per cent, it’s highly unlikely there’ll be any or much discounting going on. There won’t be discounting, but there’ll still be higher prices because of VAT. It’s a matter of us making the consumer understand it’s not is; it’s the VAT.”

The BMDA has developed leaflets showing the likely impact VAT will have on parts and services prices once it is implemented, based on Excise Tax rates dropping to 43 per cent.

While parts prices are shown to increase 7 per cent post-VAT, service costs will rise by around 10 per cent due to the labour component being thrown in, too.

The BMDA is currently drawing up a list of outstanding VAT issues it is seeking to address with the Ministry of Finance, including what items will be treated as ‘exempt’ under the new tax.

Mr Albury said such issues included when dealers became liable to levy VAT on corporate vehicle sales - whether it was the time the car was taken out of stock and registered, or when the sale closed. And there was lingering uncertainty over whether VAT would be levied “at the border or not” in Freeport.

The BMDA chief also agreed that VAT was likely to drive consumers to online shopping and purchasing abroad, buying vehicles in Florida and shipping them to the Bahamas. While still having to pay import tariffs and VAT at the border, they would avoid the tax’s imposition on a local dealer’s price.

“The biggest concern is the compliance aspect of it, having to deal with the complicated accounting that goes with it,” Mr Albury said of VAT. “There needs to be a better education process on how it’s going to work.

“But we may have to embrace it, deal with it the best way we can. We can bitch, scream and carry on about it, but if it happens we’ll just have to deal with it.”