The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s proposed 150 exemptions risk making Value-Added Tax (VAT) “too damn complicated”, a well-known businessman yesterday warning this would result in increased tax rates and non-compliance.

Dionisio D’Aguilar told Tribune Business that the key fiscal/VAT reform message delivered by New Zealand consultancy duo, Don Brash and John Shewan, was to “keep it simple stupid”.

Comparing New Zealand’s three VAT exemptions to the multiple ones proposed by the Christie administration’s draft November Bill, Mr D’Aguilar said the Government’s failure to involve the private sector in the fiscal reform process had resulted in minimal “buy in” to-date.

The Superwash president attributed this to the Government’s attempts to “ram VAT down the public’s throat”, and he hit out at the Ministry of Finance’s seeming belief that it was “the fountain of all knowledge” when it came to tax reform.

And, echoing Robert Myers, the Coalition for Responsible Taxation’s co-chair, Mr D’Aguilar urged the Government to “intimately involve” the private sector in designing the Bahamian VAT and take the lead in educating the public.

“The most important goal New Zealand had was to make it as simple as possible,” he told Tribune Business. 
“There were only three things exempt. Every single thing else faced full VAT.”

In implementing its fiscal reforms in 1985-1986, including the introduction of VAT, New Zealand treated just three sectors as ‘exempt’ from this tax - domestic rent, financial services and life insurance.

This contrasts sharply with the Bahamas’ proposed VAT legislation and regulations. While they also treat financial services and life insurance as ‘exempt’, the November 2013 draft lists 38 goods, and 15 services, as escaping the VAT levy.

Apart from numerous ‘breadbasket’ food items, the Government was also proposing that the likes of real estate transactions, health and education services, domestic transportation and gaming/lotteries be VAT ‘exempt’.

Contrasting the Bahamas’ approach with that chosen by New Zealand, Mr D’Aguilar said: “Right now, I’m told that the Government has got 150 exemptions on its VAT.

“What that’s going to do is make it so damn complicated, and drive the rate on everything else that’s not tax exempt so high, that you’re going to have widespread non-compliance.

“Right now, VAT as a proposal is too complicated. That’s what businesses are complaining about.”

Minimising the amount of VAT ‘exempt’ and ‘zero rated’ items is seen as key to producing the broadest possible tax base, something that would help to minimise tax rates.

The fear, as raised by Mr D’Aguilar, is that if the Government moves forward with all its originally proposed exemptions - including electricity and water bills below a certain consumption threshold - then those sectors and products treated as ‘VAT-able’ will bear the burden of increasingly high tax rates.

While the Government is aiming to limit ‘zero rated’ products largely to exports, industries treated as VAT ‘exempt’ will, while not levying the tax on consumers, be unable to recover or ‘net off’ the tax paid on their inputs.

Mr D’Aguilar, who is also chairman of BISX-listed AML Foods, singled out the food retail/wholesale industry as one sector that would be especially disadvantaged by the proposed widespread exemptions.

With companies’ inventories between 50-80 per cent VAT ‘exempt’, under the existing legislation, food stores would only be able to recover between 20-50 per cent of their VAT ‘input’ costs, inevitably sparking price rises.

Arguing that this was also tantamount to giving upper income earners a tax break on their food consumption, Mr D’Aguilar told Tribune Business: “The Government thinks they’re doing the people of the Bahamas a service by exempting basic food items.

“The people from New Zealand said they’re stupid to do that, because the middle and upper income people are the greatest purchasers of food in this country, and you are giving them a tax break. Their perspective was: It’s absolute madness. It makes no sense.”

Messrs Brash and Shewan have emphasised an expanded social security network as the best way to mitigate VAT’s negative impact on lower income Bahamians.

Pointing out that most Bahamian companies did not want to be VAT ‘exempt’, due to the impact on their input costs, Mr D’Aguilar told Tribune Business: “If VAT is the tax you ultimately go with, the overriding take away from the New Zealand consultants is: ‘Keep it simple stupid’.

“One of the consultants said it takes him 15 minutes to calculate VAT every six months. It takes no time at all. You would get a lot more buy-in, if VAT is going to be your tax of choice, if the overriding factor is to keep it simple.”

On this theme, Mr D’Aguilar backed the consultants’ suggestion that small businesses be allowed to calculate VAT on a cash basis, rather than on an accrual basis.

He described the latter method, which would require businesses to ‘carry’ or pay VAT on behalf of non-paying clients, as “absolute madness”.

“This is what happens if you don’t have the private sector intimately involved in the process,” Mr D’Aguilar told Tribune Business. “To think a bureaucrat in the Ministry of Finance knows better than the private sector how to calculate and collect this tax is absolute madness.”

He compared the 15-18 month private sector-led VAT education campaign employed by New Zealand pre-implementation with the ‘stop-start’ government-led effort in the Bahamas over the past 15 months.

Suggesting that VAT would have been “an easier sell” for the Christie administration had it employed the New Zealand approach, Mr D’Aguilar added: “Unfortunately, what happened here is the Government felt they were the fountain of all knowledge and tried to ram a system down the public’s throat. There’s been a negative reaction to this ‘take it or leave it’.

“There are certain elements in the Ministry of Finance that think they were anointed with the fountain of knowledge about this, and they are not getting buy-in by the private sector.”

Mr D’Aguilar said the two New Zealand consultants had made “quite a convincing argument” that, while no tax was a good tax, VAT was the best and simplest choice.