The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas should include a ‘doubtful debts allowance’ in its Value-Added Tax (VAT) legislation, the two Zealand consultants suggesting that this “seems necessary” to alleviate “significant cash flow difficulties”.

Dr Don Brash and John Shewan, in their May 6 recommendations to the Government, acknowledged that the “severity” of the Bahamas’ ‘delinquent consumers’ problem meant that the existing VAT Bill’s provisions on bad debts needed to be reviewed.

The first Bill, designed for the initial 15 per cent VAT proposal, allows Bahamian businesses to reclaim tax on goods/services where the end consumer ultimately failed to pay for them “in whole or in part”.

While any credit would equal the VAT portion of the debt that is written-off, and would likely take the form of an ‘input tax deduction’, the existing Bill provides that this can only be paid to a business “a minimum of six months” after the good/service has been supplied.

“Several stakeholders expressed concern that the bad debt provision will cause significant cash flow difficulties,” the New Zealand duo warned.

“They noted that there are significant delinquent debtor issues in parts of the Bahamian economy. The utilities area, particularly electricity, was mentioned in several different forums.

“Based on these comments (which the mission has not attempted to verify), the level of arrears in debtor payments in the Bahamas appears to be more severe than in New Zealand.”

To combat this, Messrs Brash and Shewan suggested removing the “six-month restriction” from the Bahamas’ draft VAT Bill, noting that no such impediments were contained in New Zealand’s legislation.

There, VAT credits were issued to businesses when debts were written-off. The consultants said other options included allowing an input tax deduction on doubtful in situations prescribed in the regulations, plus allowing small businesses to account for VAT on a cash rather than accrual basis.

“The purpose of the doubtful debt provision would be to cater for what seem to be unusual but prevalent practices in the Bahamas around certain supplies, including electricity,” the New Zealand consultants wrote.

“The mission was advised that for accounting purposes overdue debts are retained on the books (so would not qualify for a credit under the bad debt write-off provision), so that they can be tracked and pursued. However, for accounting purposes, a doubtful debts provision is made at an early stage, often within weeks of the supply being made......”

They added: “A doubtful debts provision would be unusual in terms of normal VAT systems, and in designing and implementing it careful consideration would be required to mitigate opportunities for abuse. However, given the severity of the delinquent debtor issue it does seem necessary to accommodate it.”

To prevent abuse, the New Zealand consultants suggested additional reporting requirements and tracking measures that would monitor the percentage of doubtful debts on the books of companies in the same industries.

It is unclear whether the Christie administration has taken their recommendations on board, as it has yet to release the revised VAT Bill, plus accompanying regulations and guidance notes.

However, Messrs Brash and Shewan reiterated: “The provisions in the current draft legislation relating to bad and doubtful debts may need revisiting.

“ While clearly it would be very desirable to rectify that high level of delinquency, for VAT purposes it may be necessary to allow businesses to claim back VAT collected on ‘sales’ more quickly than currently proposed if in fact receivables turn out to be uncollectable.”

Elsewhere, the New Zealand consultants said it was “likely that many Bahamian businesses” with annual turnovers below the $100,000 mandatory threshold would choose to register voluntarily, so as to be able to ‘net off’ VAT paid on their inputs.

This contradicts early assertions by the Christie administration, which projected that few small and medium-sized businesses below the threshold would opt to register.

Messrs Brand and Shewan, though, said the likelihood of many small and medium-sized business registrants meant there was further “merit” in switching from an accrual to cash-based VAT reporting system.

And they also recommended that the Government alter the existing VAT Bill provision that allows refunds to be paid only after 90 days.

This applies to companies who pay more on their VAT ‘inputs’ than they receive on their sales. Under the current legislation, businesses have to carry their refund claim forward for three monthly periods.

“Businesses in a start-up situation, or which make unusually large purchases, whether of capital equipment or of inventory, could be out of pocket for potentially very large sums for several weeks,” the New Zealand consultants warned.

“The cash flow implications could be very serious for many businesses. In New Zealand, businesses can claim a refund at the end of each reporting period and expect to get a refund within two or three weeks of filing their return. There are provisions for even more immediate refunds where very large capital items are purchased.

“The Mission felt that provisions for refunds should be considerably improved [in the Bahamian legislation] to avoid the potentially serious costs of what is currently proposed.”