The Tribune

By NEIL HARTNELL

Tribune Business 
Editor

nhartnell@tribunemedia.net

The Government’s proposed two-month timeframe for refunding companies their Value-Added Tax (VAT) input credits could place Bahamian exporters “at a major competitive disadvantage”, tying-up their working capital for three times’ as long as rivals.

A study prepared for the Nassau Institute economic think-tank, which has been seen by Tribune Business, noted that the Bahamas’ 60-day processing time paled into comparison to the two-three weeks taken by the relevant tax authorities in Australia and Canada.

The paper, ‘The Economic Consequences of the VAT for the Bahamas’, written by a former corporate tax auditor for the Canadian Revenue Agency, said the consequences of the Government’s proposal were that Bahamian exporters were likely to have working capital tied up in pending VAT refunds for 40-45 days longer than international rivals.

Among the companies potentially impacted by this are those in Freeport’s industrial sector, such as Polymers International and Pharmachem, plus the likes of Morton Salt and players in the crawfish industry - firms such as Tropic Seafood and Geneva Brass Seafood.

If the Government stays true to the proposals in its VAT ‘White Paper’, all Bahamas-based exports - and exporters - will be ‘zero rated’.

This means that while they do not have to levy a 15 per cent VAT on the exports they sell overseas, they will still be able to claim refunds for the tax paid on their inputs to the production/service delivery process.

As a result, Bahamian exporters in theory should “have little reason for concern” over VAT, but the Nassau Institute paper said this position was entirely based on the notion of an efficient Central Revenue Agency (CRA).

“Exporters are affected by VAT only through the refund process,” the study and its author said.

“Consequently, they are only affected by the wait times involved in refund issuance, hence, the implication of tax authority efficiency, and more specifically, refund timeliness. “

And it added: “All businesses face a disadvantage when VAT refunds are late. Exporters, who face international competition, can be placed at a major competitive disadvantage if forced to tie up working capital in the VAT refund process.

“Missing or late VAT refunds tie up cash and consequently increase the cost of working capital because international competitors without missing or overdue VAT refunds can use the refund to pay down costly debt, or can avoid borrowing if investing in new and profitable opportunities.”

As a result, the Nassau Institute study said the Government’s 60-day timeframe for VAT return and refund processing was cause for concern, when compared to the 14 days taken in Australia, 15 days required in New Zealand, and 21 days employed by Canada.

“Bahamian exporters could be compelled to tie up capital for 40-45 days longer than international competitors in a best case scenario,” the study and its Canadian author warned.

And they added: “Reality is likely to be different. In developing countries it often takes several months, and sometimes more than a year, to process refund claims.

“This effect will be especially pronounced for exporting firms whose competitiveness will suffer...... Refund issue delay is correlated with weak or absent government forecasting and monitoring systems, and delays are further exacerbated in the presence of Budget deficits and unmet tax collection targets.

“The incrementally higher increase in the cost of capital will erode exporter competitiveness, possibly reducing their growth prospects and threatening the livelihoods of Bahamian workers domestically employed.”

In response, John Rolle, the Ministry of Finance’s financial secretary, yesterday suggested to Tribune Business that the comparisons used in the Nassau Institute study were inappropriate, as they were all large, industrialised economies.

Arguing that it should have instead focused on comparisons with other Caribbean nations and small island developing states, Mr Rolle said: “I would have hoped his study looks at what has happened in the Caribbean countries that have introduced VAT.”

The Financial Secretary also questioned whether the Nassau Institute study had examined the Bahamian export economy in any detail, and added: “I’d love to give him [the author] a more in-depth critique.”