The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government must not treat the extra revenues anticipated from Value-Added Tax (VAT) as a licence to spend money, a well-known accountant urging Bahamian taxpayers to hold it accountable for how it used these funds.

Kevin Seymour, PricewaterhouseCoopers (PwC) former Grand Bahama-based partner, said that while the Government’s tax reform centerpiece provided “an excellent opportunity to hit the reset button” on the Bahamas’ fiscal approach, taxpayers needed to be “vigilant” about how the additional revenues were used.

“Only time can tell whether the proposed VAT will be the silver bullet that cures the country’s recurring deficit,” Mr Seymour told the Rotary Clubs of Freeport and Lucaya last week.

“What we do know is that if we, the taxpayers, are not vigilant in making the Government accountable for the collection, safeguarding and spending of tax revenues, any additional tax revenues raise by the VAT can easily be misused and squandered. As stated , ‘most governments have never met excess tax revenues that they did not ‘need’ to spend’.”

Yet he added: “If the additional revenues expected to be collected are prudently managed, and the Government resist the urge to increase spending, the implementation of the VAT has the potential to shrink the deficit over time.

“In my view, the implementation of the VAT provides the Government with an excellent opportunity to hit the reset button and start down the road of fiscal prudence and balanced Budgets.”

Now a business tax and strategy consultant, Mr Seymour agreed with most other private sector observers that VAT’s introduction would have an inflationary impact on the cost of goods and services – as it has in other countries who have recently implemented it.

And he added that VAT was “unlikely to stimulate investment” by both Bahamian and foreign investors, especially in labour-intensive industries such as tourism, due to the increase in prices to the end consumer.

Mr Seymour also added his voice to those warning that the Government’s proposal to levy a 10 per cent VAT on the hotel industry would give a competitive advantage to resort-based restaurants and eateries, as their competitors on the outside will have to charge consumers at the higher 15 per cent.

And, with the Government not seemingly budging from its determination to bring in VAT by July 1, 2014, Mr Seymour warned the private sector not to leave their preparations too late otherwise they could suffer a competitive disadvantage and extra costs.

The former PwC executive said the Bahamas had suffered from successive governments’ “lack of transparency” when it came to implementing tax reform.

This, he added, had been compounded by “the frequent mismanagement and misuse of tax proceeds collected”.

Noting that VAT was present in 150 countries, chiefly found in Europe, Canada and the Caribbean, Mr Seymour described VAT as a tax levied on consumption at each stage of the production process or ‘value chain’.

Acknowledging that VAT’s implementation was being driven by two objectives, generating more revenue to eliminate the Government’s existing multi-million dollar deficits, and to comply with the World Trade Organisation’s (WTO) demands for import tariff reductions, Mr Seymour said that in countries where the tax was recently introduced “ the immediate effect has been inflationary”.

“The chief reason for this is that in most of these cases, the VAT was layered on top of existing custom duties, excise taxes and fees, as is being contemplated here in the Bahamas,” Mr Seymour said.

“Even when these Custom duties, Excise taxes and fees were reduced or eliminated, the process of ‘filling the hole’ was generally an iterative one as opposed to a one-time fix. Additionally, many merchants will increase the selling price of their goods and services in order to cover the ‘administrative and accounting costs’ expected to be associated with their new responsibilities as intermediaries and collection agents for the Government.

“Opponents of the inflationary position argue that the inflationary tendency of a VAT moderates over time with the reduction and tweaking of the pre-existing taxes.”

Arguing that VAT was unlikely to stimulate investment in the Bahamian economy, Mr Seymour added: “The reason for this is that the prices charged to end consumers, particularly services provided by labour intensive entities, will likely rise.”

This was why the Government was proposing a 10 per cent VAT rate for the hotel industry, and the sector’s food and beverage sales. However, Mr Seymour said one unintended consequence might be to make non-resort restaurants and eateries non-competitive.

“Now I want you to put yourself in the shoes of a cost conscious visitor. Given the choice of dining at one of the hotel restaurants where the VAT will be 10 per cent, and dining at a downtown restaurant such as Cafe Matisse, Van Breugel’s, Twin Brothers at Fish Fry where the VAT will be 15 per cent, where would you dine?” Mr Seymour asked.

And while investors will still be able to receive their duty-free benefits under the Hotels Encouragement Act and other incentive legislation, Mr Seymour said some were already expressing concern at having to pay VAT on their domestic purchases and imports.

To ease this, and any prospect of price/cost increases, the consultant said the Government was exploring whether to provide such investors with VAT ‘credits’, or refunds, or their input taxes within one month as opposed to three.