The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Value-Added Tax (VAT) could result in the expansion of the ‘black economy’, a leading chief executive has warned, plus undermine consumer spending and the retail economy.

Gavin Watchorn, chief executive of BISX-listed AML Foods, told Tribune Business that many Bahamian businesses would likely switch to cash transactions in a bid to evade VAT when it is introduced on July 1, 2014.

Drawing on experiences with VAT in his homeland, Ireland, Mr Watchorn also warned that the Government’s centrepiece tax reform would - at least initially - have an “inflationary impact” on the Bahamian economy.

That, in turn, would reduce consumer disposable income and spending power, hitting an economy that is largely “retail driven”.

And, with large companies such as AML Foods looking to minimise their VAT exposure as much as possible, Mr Watchorn said they would be unlikely do business with suppliers who could not offer them tax-related ‘credits’.

Arguing that VAT was causing much “fear and uncertainty” within the private sector, due largely to the limited details released to-date by the Government and the inability of companies to assess the tax’s likely impact on them, Mr Watchorn called on the Christie administration to rapidly provide more information.

“We need to know,” he told Tribune Business. “There’s a lot of fear and uncertainty out there. Unfortunately, without the details, which we don’t have at this point in time, it’s difficult for us to each do an assessment.”

Drawing on his experience in Ireland to assess VAT’s likely impact on the Bahamas, the AML Foods chief executive said resulting tax avoidance schemes would likely expand this nation’s ‘black’, or ‘underground’, economy.

“You are going to have a black market-driven economy,” he warned. “People are going to want to do cash transactions. The risk of a black market economy jumps.”

Mr Watchorn’s chairman at AML Foods, Dionisio D’Aguilar, in a previous interview with Tribune Business had warned that there was a large potential for VAT evasion with 90 per cent of Bahamian economic transactions currently conducted in cash.

He warned that cash-based societies were a ‘breeding ground’ for tax avoidance and evasion, a statement backed up by the UK’s VAT experience. The tax is a major revenue earner for the British government, but all publicised VAT ‘fraud’ cases in that country invariably involve cash-based businesses.

Mr Watchorn, meanwhile, detailing other issues likely to emerge with VAT’s arrival, said: “A reality of when countries implement VAT, unfortunately, is that there are inflationary impacts.

“The fear that’s out there is that the VAT will become a sales tax, in reality, and ultimately the consumer will end up paying.”

VAT is a tax imposed on the value-added at each stage in the production chain. While the Bahamian consumer will pay 15 per cent VAT on the price of the product they purchase, the vendor will likely be able to ‘net’ or ‘offset’ that against the VAT he himself has paid on his own inputs.

“We can net our VAT with credits against outputs, but for the average consumer that will not happen,” Mr Watchorn explained. “So the average consumer will see a lot of increases in everyday living expenses.

“A lot of our economy is founded on retail spending, and if we lessen the power of the retail spend, what is the knock-on effect on the wider economy?

“We don’t know the details, but based on my initial assessment consumers are going to have less spending power and, as a retail-driven economy, that will have a lot of impact on us.”

Previous studies by the College of the Bahamas’ (COB) School of Business have suggested that close to two-thirds of this country’s economic activity is driven by consumer spending (consumption).

Inflation-inducing price increases that erode consumer spending power could thus have a major dampening effect on the Bahamian economy, at least in the short-term until households adjust, once VAT comes in less than 12 months from now.

And Mr Watchorn warned that VAT may also have implications for companies’ supply chains and business relationships with vendors.

Unless suppliers had proper invoicing and accounting systems, were registered to pay VAT and could thus offer ‘credits’ to offset the purchaser’s burden, Mr Watchorn said it was unlikely that the likes of AML Foods would continue to do business with them.

“The other side is that people will not do business with people who can’t give credits,” he explained, “as we would want all the credits we can get.

“I’ve lived in a VAT economy, and if VAT is on the sale, we’re not going to employ you if you can’t give me a VAT credit.”

“I would encourage the powers that be to let us know so that we can plan more accurately,” Mr Watchorn said. “Maybe there’s no reason for the fear, but without the information........”

Michael Halkitis, minister of state for finance, had previously emphasised that the Government’s ‘White Paper’ on VAT and tax reform was just intended to kick-start public discussions on the issue.

“We hope to have the legislation in Parliament by the end of June, definitely before the summer break,” he had told Tribune Business of VAT, the first timeline having already been missed.

“We expect to lay the legislation, and take it up in the fall, then have it passed six months before the project is implemented.”

Mr Halkitis said laying the proposed legislation in Parliament before summer, but not debating it until the fall, would give the private sector and individuals the opportunity to provide further feedback.

The accompanying regulations would “come shortly” after the legislation’s June release.