The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE continued imposition of VAT on general insurance premiums is "riddled with danger" for that industry, the Government and wider private sector, a respected accountant warned yesterday.

Kevin Seymour, also a former Grand Bahama Chamber of Commerce president, told Tribune Business that the 7.5 per cent levy's "unintended consequences" appeared to contravene the spirit and intent of the VAT Act, as well as "repatriating" claims money that should be received by corporate storm victims.

Pointing out that the Bahamas is one of very few nations to levy VAT on property and casualty premiums, Mr Seymour said this was resulting in the tax being applied to 'foreign source income' - reinsurance monies that flowed into this nation in the wake of Hurricane Matthew.

He explained that this violates the principle that VAT only be collected on economic activity within the Bahamas' borders, while the 'input' credit due to insurers' on claims paid meant the Government was "unwittingly sanctioning" the return to overseas reinsurers of proceeds that should pay for local repairs and recovery.

Echoing recent insurance industry cries, Mr Seymour wrote in a 'position paper' sent to Tribune Business: "A closer look at the unintended consequences of such an aggressive policy by the Bahamian government may explain why most countries have opted not to go down such a perilous path....

"The Government should 'exempt' or 'zero rate' VAT on insurance products in order to make insurance more affordable for the insured and less complicated to manage and regulate. The present laws lack transparency (most insured entities are unaware that the claims proceeds that they receive include VAT and, therefore, once they are received they owe such amounts to the Government) and hence it is subject to manipulation."

Explaining his concerns through a hypothetical business in Freeport, where is based, Mr Seymour set out a case where 'Company A' paid an annual $200,000 premium for business interruption and asset coverage.

VAT worth $15,000 is paid on the premium, with the Bahamian underwriter assuming 2.5 per cent of the risk and passing the remainder on to a London-based reinsurer, which takes on the 97.5 per cent remainder.

This is a typical insurance industry scenario, and Mr Seymour's example outlined a situation where 'Company A's' losses were assessed by adjusters at $1.5 million once the 2.5 per cent deductible is paid. With the loss involving $500,000 in property damage, and $1 million in business interruption, the former Chamber president's example showed $37,500 as due from the Bahamian insurer, with the rest coming from its foreign reinsurance partner.

"Notwithstanding the fact that [the reinsurer] is a foreign entity, and is not a VAT registrant in the Bahamas pursuant to Section 1 (b) of the VAT (Amended Act) 2015, the total claim proceeds of $1.5 million is presumed to include VAT, assessed at the gross rate of 7.5 per cent," Mr Seymour wrote.

With VAT assessed on 'Company A's' claim proceeds, he added that the Bahamian insurer would seek a VAT 'input' credit on the payout that, in his example, worked out to a net $105,151.

"Pursuant to the VAT Act as amended, Company A is now indebted to the Government of the Bahamas, and therefore is required to remit $105,151 to the Inland Revenue Department," Mr Seymour added, representing the VAT on the insurance claims proceeds.

'Company A' is required to treat this as an 'output' for VAT purposes. Once this is paid, the Department of Inland Revenue will then pay the 'credit' to the Bahamian insurer. But, as the latter only assumed 2.5 per cent of the risk, the majority of this payment - some $102,522 in Mr Seymour's example - "is legally required" to be paid to the foreign reinsurer.

Analysing the impact, the accountant told Tribune Business: "Instead of receiving $1.5 million in settlement of its claim, Company A only receives $1.395 million, an amount which is less than the amount of that was agreed to by the loss adjusters and insurers.

"In other words, the value received compared to the cost of the premium is diminished, resulting in Company A's overall cost of insurance increasing. [The reinsurer] is refunded $102,522 by the [Bahamian insurer]. In essence, the Government is unwittingly sanctioning the return of the insurance claim proceeds to the foreign reinsurer, to the detriment of... the Bahamian insured.

"By definition, 'output' VAT is assessed on a company's revenues generated within the jurisdiction - the assessment of VAT typically stops at the border. The law, as currently drafted, contravenes this basic tenet by assessing VAT on 'foreign sourced income'."

Mr Seymour told Tribune Business that, through the Grand Bahama Chamber, his own research and business contacts, he had learned the Department of Inland Revenue was "very aggressively coming after" companies it claims should have paid VAT on their Hurricane Matthew insurance proceeds.

"I know of at least two instances where they have approached businesses saying they owe funds; in the industrial and retail sectors," he said. "Whoever could have made a claim in recent years, the VAT Department appears to be coming after them, and if they're coming to claim those amounts now they're coming armed to the teeth with penalties and interest."

Describing this as unfair, Mr Seymour suggested then Government had effectively been caught in a trap of its own making by electing to levy VAT on property and casualty premiums.

Hurricane Matthew's total nine-figure payout, he explained, had resulted in the Government owing a significant multi-million dollar sum in VAT credits owing to the insurance industry on claims proceeds that it was unable to pay.

This is largely due to the Public Treasury's cash-strapped state, and Mr Seymour said the Government now needed to collect from those companies that received insurance payouts so it could meet these credits.

Describing it as "bad law", he told Tribune Business that the Government needs to be "made accountable for it" and correct its VAT policy towards property and casualty insurance - possibly after a transition period.

"It's not transparent, it creates uncertainty and, at the end of the day, the funds flow is going in the wrong direction," Mr Seymour said of the current situation. "My research suggests very few countries have decided to go down this very thorny path. It's riddled with danger.

"We are going across borders to claw back and reel in as much money as we can get. We are paying the same people [reinsurers] back money they don't expect to get. The Government is really caught in a situation where insurance companies would like to get their input credits but it is hard pressed to do so because it doesn't have the money."

Mr Seymour said the Government's approach was "discriminatory" because it was only targeting corporate storm victims and not residential homeowners - likely due to the fact the latter are not VAT registrants.

He added that firms were also "trapped" when it came to VAT on business interruption insurance, as this cannot be 'netted off' against their inputs. All this, Mr Seymour, suggested, went completely against the rationale that VAT is a 'consumer tax' paid by the end user.