The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Value-Added Tax (VAT) poses “no risk at all” to the Bahamas’ competitiveness as an international financial centre (IFC), a Cabinet Minister said yesterday, although offshore banks are still pushing to be ‘zero rated’ rather than ‘exempt’.

Ryan Pinder, minister of financial services, told Tribune Business that the Government’s policy of effectively ‘carving out’ international financial services from the VAT regime had “gone a long way to preserving” the Bahamas’s competitive position.

He acknowledged, though, that the sector’s main concern was whether banks could be treated as ‘zero rated’, as opposed to the current proposal of VAT ‘exempt’.

The former status would allow Bahamas-based international banks to avoid levying 15 per cent on their customers, while also reclaiming the VAT paid on their input costs.

This is a more advantageous position than being VAT ‘exempt’, which - while ensuring the international banks do not have to charge their customers VAT - would render them unable to recover the 15 per cent tax paid on their inputs.

As a result, international banks would suffer an increase in their operating costs. And, while this is unlikely to be as high as 15 per cent, some of these costs may be passed on to their clients.

Mr Pinder acknowledged the issue was likely to have been discussed during yesterday’s meeting between the financial services industry and the Ministry of Finance over the proposed VAT legislation/regulations and their implications.

He added that while the Ministry of Finance was “open” to the ‘zero rating’ call, it would need to find revenues from elsewhere to compensate for the monies it expected to earn from the banks being VAT ‘exempt’.

“Banks could or could not be considered differently,” Mr Pinder said. “There is an ongoing dialogue with the Ministry of Finance as to whether it’s possible for them to be zero-rated or exempt. I’m sure that’s an issue that was discussed.

The Minister explained that the likes of trust providers, attorneys providing services to overseas clients, and fund administrators were being treated as ‘zero rated’ under the draft VAT legislation because they were services exporters, servicing customers outside the Bahamas.

Whether services/products are consumed in the Bahamas is a key determinant of whether they attract VAT. International banks, as deposit-taking institutions, are being treated as ‘exempt’ because the funds are taken in here - they are not exporting services.

“That’s the key issue on the banking side with the industry, with respect to VAT,” Mr Pinder told Tribune Business.

“The Ministry of Finance’s position is that it is more than happy to explore the point, but there will have to be some revenue balancing. Finance was expecting some revenue from banks being exempt, as opposed to zero rated. There’s ongoing discussions over the financing gap.”

Mr Pinder explained that both the financial services industry and Ministry of Finance were examining areas of the sector that might be “under-taxed”, or fees below “best practice benchmark levels”, to see if they could be increased to fill that gap.

Still, the Minister expressed optimism that the Bahamas’ financial services competitiveness would not be undermined by VAT.

“I don’t see a risk to the industry from VAT at all,” he told Tribune Business. “I’m very satisfied that the financial services industry will be maintained. I think we’ve gone a long way to preserving that and the dialogue is ongoing.

“We wanted to try to not cause an extraordinary cost of doing business increase in the hope that, given that the industry is in a jurisdiction that is fairly cost friendly, we could encourage more financial services institutions to the country.”

While the Bahamas was at “a different level” with respect to financial services, Mr Pinder pointed out that the likes of Barbados, St Kitts and Antigua - each of which marketed themselves as financial centres - had previously implemented VAT with no obvious negative effects on that industry.