The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Value-Added Tax (VAT) will be levied post-July 2014 against goods and services being supplied under pre-existing contracts, a senior government official confirmed last night.

John Rolle, the Ministry of Finance’s financial secretary, said that while the VAT would not “invalidate” commercial contracts or force companies to rewrite them, firms would have to levy 15 per cent on what was supplied even if these arrangements were agreed prior to the new tax’s implementation.

“Pre-existing contracts would attract VAT against any supplies that are made or delivered after the date when VAT goes into effect,” Mr Rolle confirmed to Tribune Business via e-mail.

“In the case of the hotel sector, the VAT is designed to replace the Hotel Room tax, which is going to be at the same rate [10 per cent]. This means that the law will specify that the room tax exists up and to the date that it is substituted for by the equivalent VAT.”

The fact that the Government’s proposed VAT legislation and regulations will require them to levy, collect and remit 15 per cent on pre-existing contracts is likely to dismay many in the Bahamian private sector.

The Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) Coalition for Responsible Taxation, in a list of ‘Queries and Recommendations’ submitted to the Government on October 28, 2013, identified pre-existing goods/services supplies contracts as a key ‘transitional’ issue when switching to VAT.

“A number of service providers have contracts with consumers that were/will be negotiated pre-VAT, but will have service being provided post-VAT implementation,” the Coalition said.

“Such businesses are unlikely to add VAT for services provided post-VAT implementation. There are other advanced bookings/prepaid service contracts which are unlikely to be renegotiated despite the implementation of VAT.”

To deal with this, the Coalition suggested “grandfathering” in business contracts/activities that will span the VAT implementation date.

It also called for existing services contracts to be registered with the Government’s Central Revenue Agency (CRA) at the same time as those companies with an annual turnover greater than $100,000 registered to pay VAT.

It does not appear, though, that the Government will allow existing contracts to be ‘grandfathered’ in.

In a telephone interview, the Ministry of Finance’s Mr Rolle reiterated that companies generally became liable to levy, collect and remit the 15 per cent VAT to the Government once the bill/invoice for a specific product or service was issued to the end-customer. The remittance has to happen within 21 days of that month’s end.

When it came to pre-existing contracts, he added: “I know the intent is not that businesses will be expected to rewrite contracts because of VAT. The requirement to pay VAT will not invalidate a contract.

“The exact time the delivery of the service occurred determines whether VAT will be attracted. A company that gives a lot of credit to its customers, the VAT liability is recognised when the customer gets the billing for the goods or service.”

While it is a common worldwide practice that VAT liability arises from the time a good/service is supplied, the BCCEC’s Coalition warned that many services-based businesses in the Bahamas “have extended payment terms on invoices for services provided”.

With 30-60 day payment terms common, and “disputes, negotiations/renegotiations and litigation” also happening, the Coalition warned that this might result in Bahamian companies having to pay VAT on behalf of their customers before receiving payment.

“Payment of VAT prior to collection from consumers will put significant pressure on business cash flows,” it said, urging that the tax only become liable when invoices/bills were settled.

“This may create an accounting mismatch between statutory financial reporting and VAT reporting, but would minimise administration for revenue adjustments,” the Coalition added.

It also warned that, on the physical goods side, “minimising inventories prior to VAT implementation is not a practical or realistic solution, as this presupposes an ability to dispose of inventories at will, which is not a business reality”.

The Coalition expressed concerns about “anti-competitive pressures” on inventories purchased prior to VAT implementation, if the new tax was imposed on top of Customs duties calculated at pre-July 1, 2014, rates.

Mr Rolle, meanwhile, confirmed that VAT levied on imports ‘at the border’ would be calculated as a percentage of the ‘CIF’ - Cost, Insurance, Freight - price, rather than just their pure cost or ‘market value’.

He added that this approach had been selected for “ease of calculation”, and said that while this may increase the VAT payable on importation, it would also raise the amount of credit that registered businesses could claim back.

Assessing the impact on a $100 good and $100 service pre and post-VAT, the Coalition said that on the former, its end-price to Bahamian consumers would rise from $259 to $293.60 - a 13.4 per cent increase.

And the Government’s revenue take, assuming duty rates of 40 per cent and 20 per cent pre and post-VAT, would rise by 45.7 per cent - from $40 to $58.30.

As for the $100 service, the price to consumers was shown to rise 18.7 per cent - from $185 to $219.65. Government revenues, in the hypothetical example, increased from zero to $28.65, with the provider increasing their mark-up by 6 per cent.