The Tribune

By John S. Bain
Managing partner at UHY, Bain & Associates’

A German economist first devised a system of Value-Added Tax (VAT) in the 18th century, with the modern system developed in 1954 by a French public servant. Since then, it has spread around the world with only the US, a few remaining Caribbean islands and the Middle East resisting its introduction.

As we know, the Bahamian government is under pressure to raise additional tax revenue and widen the tax base. There have been cries from businesspersons, members of the Opposition, and a group calling themselves ‘the Tax Coalition’, which features a diverse membership of Bahamian professionals. There has also been resistance from the general population, who appear to be against anything with the word ‘tax’ appended to it.

For this reason, when the Bahamas government implemented the Business Licence tax, the Pindling government, and then-minister of finance, Arthur Hanna, termed it a ‘Business License Fee’. The Government needed the revenue urgently, but read the mood of the population and the international community, who still expected the Bahamas to be a non-tax jurisdiction.

The intention of this article is to enlighten those businesspersons who want to prepare themselves for the upcoming implementation of VAT. The intent is not to debate the ‘good or bad’ effects of VAT, but to give the objective person some advice on the implementation and what they, as businesspersons, can do to prepare themselves and be ready for this paradigm shift. Of course, there are persons who think that accountants themselves are not objective on the issue of VAT because they may earn more money in consultancy fees from businesses affected by the tax. While this may be true, the local accountants are part of society and, like everyone else, will feel any macroeconomic effects.

From the outset, our position is that the cries of ‘doom and gloom’ and ‘the destruction of the Bahamas’ from VAT’s implementation are not supported by fact. Neither is the thought that the Government should delay it, or that Bahamians cannot manage anything. Governments have the right to impose tax on their citizenry, and have been doing so since the system of government was first conceived. Indeed, those persons who feel the doom and gloom may consider moving to another country - say Canada or Barbados, where they can escape VAT and all other taxes - if those countries did not have extreme forms of taxes already. It is also safe to say that all first-world countries have systems of taxation. Only third-world countries are known as ‘tax-free jurisdictions’. Indeed, our view is that the implementation of VAT is 20 years too late.

Of the various choices of taxation available, VAT is by far the most attractive to the Bahamas at this time for a number of reasons. These reasons include the following:

• It is not a tax on business profits or turnover.

• It is a tax on the final consumer, although collected from each business in the supply chain.

• For a normal taxable business, the VAT should ‘wash through’ the accounts, be collected from the customer and paid over to the Central Revenue Agency (CRA).

“It is the least costly tax for a government to collect, as businesses do virtually all the work. The tax authorities simply need to enforce a regular programme of inspections to ensure the tax is being accounted for correctly.

• Although the business community has a lot of work to do to get up to speed on the accounting requirements, the tax will end up being invisible to final consumers (as the US sales tax has become to Bahamians shopping in the US).

This will not be the initial reaction, of course, because businesses will need to add VAT to their prices, and will no doubt do so as visibly as possible to shift the blame for higher prices on to the Government.

Over time, though, as retail prices settle down, consumers will largely forget they are paying tax within the retail price. This reduces the headline impact of the tax, which will reduce the pressures on the current government and make them very happy. For this reason alone, the Government must not delay the implementation of VAT, or will suffer the consequences.

• There will be an immediate impact on inflation when the tax is introduced, not just because of the VAT, but also because many businesses will try to sneak their prices up anyway and blame the Government.

There is sufficient evidence to support this thesis by reviewing other countries during their VAT implementation cycle. For this reason, along with the implementation, the Government bodies responsible for price control should be educated and increase their monitoring of businesses to protect the final consumer from price gouging.

VAT is coming to the Bahamas. Indeed, all leading political parties agree, along with international bodies such as the International Monetary Fund (IMF), the Inter-American Development Bank (IDB), and the credit rating agencies, including Standards & Poor’s (S&P), that VAT is an appropriate form of tax for the Bahamas at this time.

What can the typical business do to prepare itself to minimise any adverse effect that VAT may have on their sales, trade or service? We are of the opinion that not preparing for anything that affects businesses can have an adverse impact, be it a lack of potential employee talent, the reduction of the exchange rate, technological changes, or the introduction of new taxes.

VAT is charged on taxable supplies of goods and services by taxable persons. All supplies are taxable supplies, apart from items which are specifically exempt. According to the draft legislation, there are currently three rates of tax - the standard rate of 15 per cent, 10 for special businesses (hotels), and the zero-rate. At this point during the consultation period, those suggested rates are subject to change. Supplies that are zero-rated are technically chargeable to VAT at a nil rate, and thus bring the supplier within the scope of VAT.

One of the most significant changes for businesses in the Bahamas is that they will need to maintain suitable accounting records. The lack of an income or corporation tax, or the need for compulsory audits, have all done a disservice to the typical Bahamian businesspersons who, as many accountants can attest, does not keep good or adequate records of their transactions. Larger businesses are more likely to be keeping good records because their survival demands it. All is not lost for smaller business, and the process can be simple.

For smaller businesses, the essential parts are:

• A sales ledger showing sales prices and amounts of VAT charged. This VAT is due to the Government.

• A purchase ledger showing purchase costs and any VAT charged by suppliers. This VAT can be offset against the VAT charged on sales, and only the net difference paid to the government.

• Some form of VAT account showing the VAT due to the Government and the VAT that can be offset on purchases.

• Invoices will need to add VAT at the appropriate rate on top of the sales price.

• For smaller businesses without such accounting systems, they can implement something simple from the start. Larger businesses may have more difficulty as their current accounting systems may not deal with VAT at all. They will have to either adapt their current accounting system if possible, or change it.

Alternatively, they could run a simplified VAT record-keeping system alongside their main accounting system, and some with simple affairs may choose to do this.

• The draft legislation stipulates the accounting records that will be required.

• When the CRA carries out inspections, and they will, either by themselves or outsourced to firms of accountants, they will probably follow the process in most other countries with a VAT system and understand the business first so that they know what to expect in VAT returns.

They will inspect with a view to seeing if declarations match that understanding, and check the accounting system by tracing sales and purchase ledger items through the system to the VAT return, then do the same in reverse – check the audit trail from the VAT return to the source documents and transactions.

Other checks they will carry out will be to reconcile the VAT declarations with the annual turnover and, if things do not look right, compare the VAT declarations with the owner’s lifestyle and any other sources of income.

• Business activities that are taxable for VAT (standard, special or zero-rates) allow the offsetting of input VAT on associated costs.

• Business activities that are exempt from VAT do not allow input VAT on associated costs to be reclaimed, so the exempt business is effectively treated as a final consumer.

The theory behind this is to remove VAT from certain activities in the public interest, since the VAT the business loses on its costs and has to factor into the sales pricing will be less than the VAT that would otherwise be charged on the sales prices if the activity were taxable.

• It follows that a tax-free activity is one that is zero-rated, since this allows input VAT on costs to be offset whilst the supply remains tax-free. Exemption still raises some revenue for the Government.

• If an entity earns more than $100,000 per annum, then registration for VAT is compulsory. This registration is voluntary for businesses under $100,000.

If the business is not registered, however, the business still must pay VAT, without the right to charge it onwards. The business must be registered to charge VAT, so it may make business sense to register for VAT even if the business earns less than the threshold.

This advice should be looked at from an individual perspective, because the circumstances of the business may be different. Your accountant can advise you, based on your past purchases and sales, whether you purchase zero-rated or exempt goods, etc.

Some businesses may be in a net refund position if their allowable input VAT exceeds the output VAT on sales. The draft legislation says this is to be carried forward in the VAT declarations, and after being carried forward three times can be reclaimed from the CRA.

Such input VAT can therefore be reclaimed but with a slight delay. This delay in refunding input VAT to such businesses could cause cash flow issues, which will need to be taken into consideration by the management of the business at the planning stage.

The draft legislation has penalties for a variety of offences and, judging by enforcement actions in other countries, we can expect these to be enforced rigorously. Having said that, it would be appropriate for the Government to enforce with (or approach with) a ‘light touch’ for a period until things have settled down and businesses have got used to their obligations.

We can expect, however, a number of disputes to arise between companies and the CRA on a number of issues. From the experience in other countries, we can expect these to fall largely in the following categories:

• Late declarations or payments of VAT due

• Disputes over which VAT rate applies to a particular product or service

• Disputes over the evidence for exports of goods;

• Valuation of imports;

• Disputes over the value of a supply and the amount of VAT due

• Disputes over the amount of input VAT that can be offset against output VAT due.

This paper intends to introduce businesses to what they should do to prepare themselves for VAT. In concluding, your accountant is your friend and will be able to tailor advice for your particular business.

The Government has announced the implementation of VAT on July 1 this year. That, too, is subject to change, but until we hear otherwise, we urge businesses to prepare for it by getting themselves ready. If the implementation of a single tax destroys your business, then maybe the business model in use may not be working for you. VAT is not a tax on businesses or profits.

• NB: John S. Bain, a chartered accountant and a certified forensic accountant, is Managing Partner at UHY, Bain & Associates in the Bahamas and a member of UHY International, one of the world’s most respected accounting and economic analyses firms.

Mr Bain assists attorneys, government corporations, individuals and companies involved in civil litigation matters that involve money. He is a Fellow of the Association of Chartered Certified Accountants based in the UK, where there is a requirement to pass a VAT tax examination to qualify as a chartered accountant. He is one of the first 40 individuals worldwide to become a Certified Specialist in Asset Recovery (CSAR), and is the winner of the 2007 ACCA Achievement Award for the Caribbean and the Americas.