The Tribune

The Bahamian banking industry is hopeful it might be able to recover ‘double’ the amount of Value-Added Tax (VAT) inputs than previously thought, as one institution yesterday revealed its total tax burden will increase by $6-$7 million in two years.

Ian Jennings, Commonwealth Bank’s president, told Tribune Business that based on a “final formula” developed by the Ministry of Finance, the commercial banks believe they will now recover 10 per cent of their VAT input spend - as opposed to initial 5 per cent estimates.

He added that BISX-listed Commonwealth Bank was predicting VAT and other taxes/fees would add a further $1-$2 million to its operating costs in 2015, although precise estimates for some areas were still being developed.

Mr Jennings revealed that several of VAT’s fine details had produced the highest costs, identifying late fees and loan fees as two areas requiring major upgrades to its technology systems.

“Some of the small things in VAT turned out to be the highest costs,” the Commonwealth Bank chief told Tribune Business. “One of the biggest things for us has been the assessment of VAT on late fees.

“It’s been a challenge to do it system-wise. It’s not complete yet, but we’re getting a major adjustment in the system. The costs associated with that particular aspect are around $250,000 - VAT on late fees and loan fees, systems work.”

Mr Jennings added that Commonwealth Bank was still awaiting estimates from its third party credit card processing vendors on how much it would cost to adjust their software systems for VAT.

He told this newspaper that because key details relating to VAT were only decided in late 2014, the bank did not have enough time to inform its processors and discuss the necessary coding changes until after the new 7.5 per cent tax was implemented.

“When you get large companies, their development cycle is very expensive, innovative and time consuming,” Mr Jennings told Tribune Business. “With everything being finalised very late, we didn’t start talking to the processing companies until this year.”

He added: “We’re not the first country in the world to implement VAT, but every nation has its own idiosyncrasies that mean you can’t just take something off the shelf.”

Commonwealth Bank, in its 2014 annual report, told its shareholders that VAT, and other Government fees/taxes, would add a further $1-$2 million to its expense base during the 2015 financial year.

“In 2015, the bank will face new challenges as the Government has introduced Value-Added Tax, with the majority of the bank’s revenue being exempt under the law,” it told its investors.

“Because of this, Commonwealth Bank will not be able to reclaim the input VAT which it pays on its expenses, as most other businesses will. Consequently, Commonwealth Bank projects another increase in operating costs in 2015 between $1-$2 million as a result of Government fees and taxation.”

Mr Jennings yesterday confirmed those numbers remained an estimate, and Commonwealth Bank was still “trying to get a handle on the total costs”.

While interest-based products (loans and savings) are treated as VAT ‘exempt’, banks’ fee-based income and products do attract the 7.5 per cent levy.

With savings and loan products accounting for the bulk of Bahamian commercial bank income, institutions such as Commonwealth Bank will only be able to recover a small portion of the VAT they pay on their inputs due to their ‘exemption’.

Mr Jennings had previously told Tribune Business that Commonwealth Bank was unlikely to recover 95 per cent of its VAT ‘input’ expenses, but he yesterday revised this estimate upwards.

“The indications we’re getting, based on the final formula the Ministry of Finance has come up with for the banks, dealing with [the apportionment of VAT] between exempt and taxable services, is that we’ll recover about 10 per cent of our VAT spend, as opposed to about 5 per cent.”

Mr Jennings added that a further VAT burden would be imposed come July 1, when its wholly-owned subsidiary, Laurentide Insurance and Mortgage Company, would join the insurance industry in coming under the new tax’s umbrella.

Its life insurance products will also be ‘exempt’, meaning that Laurentide/Commonwealth will, again, be unable to recover the VAT paid on its ‘input’ costs.

“We’re still estimating around $1-$2 million,” Mr Jennings said of VAT’s impact. “With the estimate of $1-$2 million from VAT, our tax burden has gone up somewhere between $6-$7 million in the last two years between that and Business Licence fees.”

Commonwealth Bank to-date has been able to shrug off the increased tax burden, with its 2014 net income increasing by almost 7 per cent to $53.3 million.

However, its efficiency ratio for the last financial year, while still ahead of industry average, jumped by 5.28 per cent from 45.99 per cent in 2013 to 48.42 per cent. An increase in this indicator is a negative sign, and Commonwealth Bank said it was driven by increased Business Licences.

“Our efficiency ratio dropped last year,” Mr Jennings told Tribune Business. “Everything is increasing in cost.

“A lot of other industries have had a significant increase in Business Licences, so they’ve been carrying the burden as well.

“Businesses in general have been hit with increased taxation. Between increased regulation and increased expenses, it’s been an interesting time for the banking industry.”