The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The private sector is preparing to fight “nonsensical” provisions that will force Bahamian businesses to ‘eat’ the 7.5 per cent Value-Added Tax (VAT) on pre-existing contracts post-January 1 if clients refuse to pay it.

Robert Myers, the Coalition for Responsible Taxation’s co-chairman, yesterday branded the Government’s position on this issue as “a ridiculous position to hold”, as it transferred the VAT burden from the consumer/end-user to the service or goods provider.

Arguing that this went against VAT’s founding concept (that it is the end consumer who pays the tax), Mr Myers said it was “completely implausible” for Bahamian companies to have made provision in existing contracts for the new tax when the details had not been finalised until last month.

He was responding after Tribune Business revealed a ‘catch’ in how the Government proposes to treat pre-existing goods and services supply contracts under VAT.

While these contracts will only be subjected to the 7.5 per cent levy after the January 1, 2015, implementation date, the VAT ‘transitional guidance notes’ make clear that the vendor will have to pay the VAT from sums due to them if the client refuses to pay the tax - and there is no contractual provision to force them to pay.

The guidance notes said: “Some contracts entered into prior to January 1, 2015, may not provide for the application of VAT to the price of the services.

“If the contract for services does not provide for the application of VAT to the price, and your customer does not subsequently agree to you charging VAT on the contract price......... the price charged for the portion completed on or after January 1, 2015 is deemed to include VAT.”

Such a tax treatment applies to both goods and services, and will heavily impact industries such as construction, where jobs will carry through the VAT transition.

Forcing contractors to pay the tax from sums due under their contracts will erode already-slim margins, and absorb a considerable chunk of their profits.

Another sector also likely to take a hit from this provision will be real estate and the commercial rental market, as the VAT guidance notes make clear.

“If the rental contract does not provide for the application of VAT, and it cannot be agreed with the tenant that VAT is charged in addition to the rent under the terms of the contract, the rent payments are deemed to be inclusive of VAT,” the guidance notes say.

In other words, the landlord will have to absorb the VAT in their normal rental payment, thus reducing their own revenues and profits.

Contacted by Tribune Business and informed of this provision, Mr Myers said the issue would be “contentious”, and likely cause a surge in disputes between companies and their clients in the Supreme Court.

He added that the Coalition would likely tackle this aspect of the Government’s proposed VAT transition plan at its meeting today.

“No one is going to eat the 7.5 per cent VAT,” he told Tribune Business. “It’s not our tax, it’s not the vendor’s tax; it’s the Government’s tax.

“That’s what they should be clear on law: The law of the land predicates and dictates that a person receiving the service is to be taxed. It’s nothing to do with the vendor; it’s the recipient of goods and services.”

Mr Myers urged the Government to place the VAT liability/obligation on the end-consumer, consistent with the tax’s founding ethos, rather than the business supplying the goods or services.

“All we are is a facilitator,” he said of the private sector. “We don’t mark-up the tax. We’re the unwilling collector, for want of a better term.

“The Government must support the vendor in making the beneficiary of the good or service liable to pay, not the company.

“It’s not our beef; it’s the Government’s beef. It’s a ridiculous position to hold,” Mr Myers added of the Government’s VAT ‘guidance notes’.

“It’s not a law we have imposed, it’s the law the Government has imposed, and the burden is on the service, goods recipient to pay the tax. We just remit those taxes by law to the Government.”

Mr Myers further described the ‘eat VAT on pre-existing contracts’ proposal as “rubbish”, saying that while the Government might want to enforce this, it was unfair to the business community.

“They’ve got to back us in making sure the recipient adheres to the law,” he said. “I can’t provide for liabilities I don’t know about in a contract.

“It’s completely implausible for us to provide for that in a contract. This could lead to a bunch of people saying: ‘It’s not in a contract, we’re not paying the VAT’.

“We could have the courts full of cases like that, and the business sector will back track completely. It’s the Government’s tax. They’ve got to back us in ensuring that’s not our liability; it’s the recipient’s liability. It’s nonsensical.”

Mr Myers, though, was more accepting of other provisions in the VAT guidance notes, including the two-month window that businesses will have to invoice transactions that occurred pre-January 1 before these become taxable.

The guidance notes state: “For services performed and completed prior to January 1, 2015, you do not need to charge VAT provided you raise an invoice within two months of January 1, 2015 (prior to February 28, 2015).

“Any invoices raised after February 28, 2015, are deemed to be for services supplied after January 1, 2015, and will be subject to VAT even if the services have been performed and completed prior to January 1, 2015.”

It is the same for goods, and Mr Myers agreed that there needed to be a “cut off” and “parameters” when invoicing pre-VAT transactions after the new tax came into effect.

And he also backed the Government’s plan to eliminate a potential “loophole” created by paying now for goods and services to be delivered after January 1, in a bid to avoid the 7.5 per cent levy.

The Government’s guidance notes propose: “As an anti-avoidance measure in respect of the introduction of VAT, where an invoice has been issued or payment received less than six months prior to January 1, 2015, but the services are completed or performed after January 1, 2015, the tax point moves to the date the service is performed or completed irrespective of the date an invoice is raised or a payment received.”

In response, Mr Myers told Tribune Business: “That’s reasonable. That makes sense. It stops a loophole.

“You could pay $1.5 million for a house now, and it’s not finished until November next year. That’s a potential loophole.”