The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian hotels will see their tax obligations increase 125-150 per cent under Value-Added Tax (VAT), which the industry ‘can live with’ provided the Government makes changes in seven key areas to maintain its global competitiveness.

An August 11 presentation by the hotel and tourism industry, obtained by Tribune Business, discloses that 68 per cent of hotel revenues previously untaxed - or subject to a lower rate - will now attract 7.5 per cent VAT.

While this illustrates one of VAT’s key attractions for the Government, namely that it captures more economic activity and industries than the present tax structures, it also highlights the potentially massive increase in tax liabilities some industries are subject to.

In the hotel industry’s case, it is currently subject to just a 10 per cent room (occupancy) tax. This impacts, on average, just 32 per cent of a resort’s total revenue, but VAT will now capture food and beverage sales plus all other non-casino revenue.

This means revenues from amenities such as Internet, retail, communications, golf, marinas and spas, ground transportation and attractions will also be taxed at a 7.5 per cent rate come January 1, 2015.

The presentation, by the Bahamas Hotel and Tourism Association’s (BHTA) Tourism Tax Reform Task Force and Industry Partners Group, showed that the tax base for Bahamian hotels could potentially triple under VAT.

Using a hypothetical $200 room rate, the Government would earn $20 under the current structure from the room (occupancy) tax. But, with the other 68 per cent of revenues now captured by VAT, a typical resort’s tax base would now equal $625.

This, the presentation said, was equivalent to a $425 or 212.5 per cent increase. And, compared to the $20 room tax, VAT at 7.5 per cent would generate $46.88 in taxes to the Government if levied upon this $625 figure.

The $26.88 tax liability increase is equivalent to a 134.4 per cent rise, and highlights the BHTA’s fears about the impact VAT-induced price increases may have on the competitiveness and market share held by the nation’s number one industry, which is already perceived as ‘high cost’.

A study previously conducted for the BHTA by the Ernst & Young accounting firm had forecast that tourism industry prices would increase “by at least 4.2 per cent” under a 7.5 per cent VAT, something the sector said was “acceptable.... while difficult” given the Bahamas’ fiscal woes.

Yet the Ernst & Young study had not accounted for seven key provisions in the new VAT Bill and regulations that, according to the BHTA’s August 11 presentation, threaten to “increase the price even more” than the projected 4.2 per cent.

The key concerns revolve around how the legislation proposed to levy VAT on mandatory gratuities; overseas sales; Promotion Board levies; and overseas advertising and other expenses.

The BHTA is also opposed to levying VAT on a hotel’s own supplies, and wants the Government to exempt pre-booked groups and businesses from the 7.5 per cent levy. It is seeking further “linited” tariff reductions.

Robert Sands, Baha Mar’s senior vice-president of government and external affairs, told Tribune Business that following meetings with the Christie administration and Ministry of Finance, the hotel/tourism industry had received indications that these issues would be “positively addressed”.

Explaining why these areas were so vital to the industry’s well-being, Mr Sands said: “They’re important because they speak to the ethos of our competitiveness as a destination, and for the Bahamas to remain competitive in this ever-changing environment.

“It has its genesis in the perceived value of the vacation. We always have to be aware that customers have many choices in where they can go, and when the perceived cost of a vacation exceeds the value of a destination, it continues to lose market share.

“That is why we have advised the Government to address these areas, as they speak to our competitiveness in this market, and keep us building market share rather than losing it. All are extremely important areas.”

The BHTA’s August 11 presentation sought to reinforce this message, drawing on research from last year that showed the Bahamas currently draws on just 35 per cent of its potential tourist market.

Based on how much a couple was wiling to spend for airfare, hotel and ground transportation, the BHTA-commissioned report showed that a collective $500 increase in these costs could drop the Bahamas’ US market draw to just 19 per cent.

Given this backdrop, the BHTA’s desire to limit VAT’s impact on costs and pricing is perfectly understandable.

Its presentation described the Government’s current plan to levy VAT on gross overseas sales as “unprecedented practice for the travel industry”, as this would see the 7.5 per cent charge applied to air fares and commission to foreign travel agents and wholesalers.

Arguing that this would be “difficult to impossible to track”, the BHTA said such treatment would reduce sales and cause a “huge price increase for travel to the Bahamas. It would also discourage overseas sales, with most foreign wholesalers unlikely to share information on their mark-ups.

“VAT should only be applied to the revenue received by hotels and other Bahamas-domiciled tourism related businesses, as this is their legal entitlement to revenues,” the BHTA said.

It wants the Government to take a similar approach when it comes to the mandatory 15 per cent gratuity, and not levy VAT on top of this - as the current Bill and regulations propose.

“With all-inclusive pricing, factored on top of 15 per cent gratuity, [VAT] creates confusion and an inderfensible position to customers,” the BHTA said. It added that gratuities were difficult to eliminate, and boosted employee earnings.

The consequences of levying 7.5 per cent VAT on top of gratuities were increased consumer costs, “adverse public relations implications for the Bahamas, and a reduction in gratuities and employee earnings.

The BHTA is also calling on the Government not to levy VAT on Promotion Board levies, which are typically added to room charges, as this would either raise visitor costs or reduce the private sector’s promotional budget.

Based on the existing $31.5 million in annual Promotion Board levies, levying VAT at 7.5 per cent will create a $2.4 million tax obligation. This will increase visitor costs if added to the room rate, or reduce the advertising budget the private sector has to promote the Bahamas if absorbed by the industry.

When it came to pre-booked groups and businesses, the BHTA said the rates for rooms, food and beverage, amenities, services and other attractions were normally fixed via contract well in advance.

It warned that “added costs and double taxation” would result if 7.5 per cent VAT was applied to pre-booked business, and called on the Government to implement a transition arrangement.

“Implement an approach similar to that undertaken by industry, Ministries of Tourism and Finance in 2010, when room tax increased to 10 per cent,” the BHTA suggested.

“This required businesses to submit to government listings of groups contracted at the old rate, thus permitting payment to government at the rate prior to increase.” Full disclosure of these contracts was required, and the BHTA said such a VAT-related arrangement apply to all groups booked pre-January 1, 2015.

Otherwise, attempting to change pre-existing contracts would cost the Bahamas and its tourism industry business.

The BHTA also warned that levying 7.5 per cent VAT on overseas advertising and other expenses would create “an added and unnecessary administrative burden” that increased costs to both Bahamian businesses and their partner vendors.

The Association argued that VAT should not be levied, given that hotels and tourism-related businesses relied on overseas advertising for 95 per cent of their business. And, as VAT on overseas advertising would be treated as a business expense and ‘netted off’ against what was charged on sales, the BHTA described it as an “accounting function” that should not be required.

The August 11 presentation then expressed concern that the Ministry of Finance’s tourism industry VAT guidance notes suggested that all goods and services supplied internally be subject to the 7.5 per cent tax.

Calling for this idea to be abandoned, the BHTA said: “This appears to obligate the hotel to charge itself VAT on all employee meals, drinks, complimentary services (familiarisation tours), in-house entertaining, employees staying in-house over hurricanes - a straight 7.5 per cent increase on all these expense lines.”

Finally, the BHTA urged the Government to consider dropping the import tariffs for chicken, wine and linens to 5 per cent.

Mr Sands said the BHTA and wider hotel/tourism industry were now waiting on “official word” from the Government that it would indeed respond positively to address their concerns.

“We have indications that they’ve been positively addressed,” he told Tribune Business of the sector’s VAT issues. “The industry is very encouraged by our meetings with the Government of the Bahamas, and there are very positive indications that they are going to positively address a certain amount of those items.

“We still wait to receive official word. We are told that they’ve addressed a number of them, and continue to address the others that remain outstanding.”