The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Value Added Tax (VAT) will be “less clean” for the Government to oversee due to its several thousand collection points, a leading Bahamian accountant yesterday describing its administration as the “biggest challenge”.

Simon Townend, a Bahamas-based KPMG partner and managing director of its corporate finance arm in the Caribbean, told Tribune Business that should the Government decide to adopt VAT as its chosen tax reform, it would be faced with collecting revenues from hundreds of companies as opposed to several points of entry.

“The administration of it [a VAT] is the biggest challenge,” Mr Townend told this newspaper. “It’s not as clean as capturing all your goods in a few points of entry.”

He added that moving all the shipping companies to one location at Arawak Cay should boost revenue collection from the existing Customs Duty-dependent tax structure.

While Customs’ administration costs/burden would reduce, as it was no longer having to collect revenues from multiple locations, the Nassau Container Port is also likely to cut down the potential for revenue leakage and smuggling.

Mr Townend compared the ‘single port of entry’ advantage for Customs with a VAT which, if implemented, will see the Government faced with having to collect the bulk of its revenues from several thousand companies.

Ryan Pinder, minister of financial services, gave a hypothetical example last week to the Rotary Club of Nassau on how a VAT would work, stating that based on a certain threshold less than 4,000 Bahamian companies would be liable to pay this tax.

Picking up this thread, Mr Townend said of Customs duties: “It’s a bit cleaner in terms of tax collections, whereas with VAT you have a combination of a new administrative burden as well as the duty to collect taxes.

“You have many, many people to collect tax from. There’s a cultural change, and it’ll take some time.

“People [businesses] will need to build capacity in their system. Many accounting packages so have a sales tax, VAT component, but every company regardless will have to have new processes and adjust, or buy a new system. So there is a significant cost to business in the first phase of implementing it.”

The KPMG (Bahamas) partner added: “It’s a major implementation which will take very detailed planning. You will have a tax administration department dealing with many, many companies - 4,000 odd [based on Mr Pinder’s example].

“It’ll be challenging, but as long as it’s properly planned and carefully implemented, with the right education on new systems and processes, and how things are done going forward, it should be OK.

Mr Townend, though, added that “one of the first things” that needed to be done in the context of tax reform was a ‘social/economic analysis’ of how VAT would impact different sectors of the economy and community.

Noting that it was unclear how much work had been done in this area by the Government to-date, he said: “The other thing that struck me is that the Government appears to be doing some in-depth analysis of the numbers, but one of the things we felt needed to be done is a social/economic analysis in the context of tax reform. That should be one of the first things you do.”

Mr Townend said that assuming other taxes were reduced in line with the revenues generated by a VAT, the latter’s nature - and way it was implemented - would be key.

He added that the Bahamas needed to analyse the impact a VAT would have, though, on key sectors of the Bahamian economy and society.

“It’s ultimately a tax on the consumer,” Mr Townend told Tribune Business. “It flows through the chain and, ultimately, the consumer pays.”

The KPMG accountant also explained that with VAT, any threshold below which companies were exempt from paying was usually voluntary - not mandatory.

Mr Pinder last week took a $50,000 annual turnover, based on Business Licence fee data, as the threshold below which companies would be exempt from paying.

Mr Townend, though, noted that there was nothing in VAT systems adopted by other countries that prevented companies below the threshold from choosing to register to pay VAT voluntarily.

This stemmed from the fact that VAT, as per its name, is a tax levied on the ‘value added’ at each stage of the production process.

Mr Townend explained that firms often elected to register voluntarily if the VAT rates levied on their production inputs (raw materials and supplies) exceeded that levied on their output (finished) product, as they could then benefit by claiming back from the Government the difference between the two.

If, for instance, a company saw a 10 per cent VAT rate levied on its inputs, but just 8 per cent on its output, it would be able to claim the 2 per cent differential back - a characteristic that Mr Pinder alluded to last week.

“Even if they fall below the threshold they can volunteer to register because they get a net benefit, if the input VAT is more than the output VAT,” Mr Townend explained.

When it came to the ‘exemption threshold’, he added that both Barbados and Trinidad & Tobago had gone for levels below $50,000, while the UK had adopted a higher one. Turks & Caicos, the Bahamas’ southern neighbour, is eyeing a $200,000 threshold that would leave around 1,000 companies liable to pay a VAT.

“It would be fairly common for a small number of companies to make up a large proportion [of VAT payments],” Mr Townend added, citing the oft-used 80/20 rule.

But there was a catch to voluntary registration by companies. “The setback with that is the increased administrative burden,” Mr Townend told Tribune Business.

“The administration of this tax will be quite significant, so the fewer companies you have registered that represent the highest level of turnover, the better. It can get quite hard to find that balance that makes sense for the Government.”