The Tribune

• Financial services cost cut back-dated to 2019

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The proposed VAT reforms are designed to cap “huge” multi-million dollar refund liabilities owed by the Government to two major transhipment providers, it was revealed yesterday.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business that eliminating the VAT “zero rating” treatment for these entities would halt “distortion” of the tax system and prevent “future problems” for a cash-strapped Public Treasury by stopping any further growth of these refund liabilities.

He declined to name the two companies involved, and was unable to specify how much they are owed in VAT refunds other than to say the sum is “significant”. However, several sources suggested the companies were likely to be some of Grand Bahama’s major industrial conglomerates, with Buckeye Bahamas, owner of the former BORCO oil storage terminal, thought to be one.

Other contenders cited by sources familiar with the situation were the Freeport Container Port, Freeport Harbour Company and the Statoil oil storage terminal. The Container Port is jointly owned by Hutchison Whampoa and Mediterranean Shipping Company (MSC), while the Hong Kong-based conglomerate is partners with the Grand Bahama Port Authority (GBPA in the Harbour Company.

The Government’s VAT refund-capping move involves the elimination of “zero rating” treatment for “services relating to the use of terminal or berthing facilities by commercial vessels in respect o goods” that have not been cleared for domestic consumption and “where the port of origin and the port of destination are not within the territory of The Bahamas”.

Similarly, “zero rating” treatment is also to be ended for “services in respect of the storage of goods, and any processes to optimise or maintain the integrity of those goods during storage”, where they have again not been cleared for domestic Bahamian consumption and the “port or origin and port of destination” are not in this nation.

These reforms are clearly focused on the transhipment, logistics and break-bulk sectors, while the Government is also seeking in the VAT (Amendment) (No.2) Bill tabled in Parliament yesterday to narrow the “zero rating” treatment afforded to “international transport services”.

In particular, it is eliminating VAT “zero rating” - which enables companies to avoid paying the tax on their input costs, while also escaping having to levy it on their consumers - for private aircraft and ships, including planes and ships that are chartered and “leave port in ballast”.

The Bill, which indicates the rate cut from 12 percent to 10 percent is intended to be permanent rather than last for a year, also restores the “zero rating” treatment for financial services provided to The Bahamas’ international clients. Mr Wilson said this was designed to boost the industry’s competitiveness by enabling it to recover its VAT input costs, thereby reducing its tax burden.

As for the transhipment-related reforms, the Ministry of Finance’s top official said these were designed to bring The Bahamas back into line with international best practices on VAT treatment for the sector.

Mr Wilson said such services should be VAT ‘exempt’, meaning that while no tax is levied on the end user, companies in the sector are unable to recover what they have paid on their input costs. Suggesting that the Minnis administration had strayed away from this, he added: “Some time, I guess after 2017, the Government made transhipment services zero-rated.

“There are only two companies that benefited from it being like this.....The companies are not selling services. They are transhipment services. They are not taxable supplies, but they’re generating huge refunds and that’s not the way VAT should work.”

VAT refunds, or credits, are typically owed by the Government to a tax-paying company if it is exporting goods and/or services, and is thus zero rated, or if the tax paid on its inputs exceeds what is received from consumers on its sales.

“In the case of this one company, they offer transhipment services but that is not where the bulk of its revenues are generated,” Mr Wilson explained. “By changing the definition slightly, it made the bulk of its revenues zero-rated, even though” it was not generating taxable activity in The Bahamas.

He added that the Government had received legal advice, both before and after the September 16 general election, to back the reforms now contained in the VAT Bill. Describing the VAT refunds owed to the two companies as “huge, huge”, Mr Wilson said: “We’re not talking a couple of million dollars. It’s huge refunds that have been generated in the system....

“A couple of companies were generating the bulk of the VAT refunds even though they did not earn taxable supplies; they are not in business in The Bahamas. They’re doing transhipment. They are not in the Customs area. We don’t collect any revenue from there. If you look at the export statistics, they’re not involved in any of that business.

“They’re outside the economy for all intents and purposes but generating huge refunds. It distorts the tax system, the VAT system, as you can imagine you are taking VAT income from taxpayers and giving it to companies who, because of technicalities, are able to get refunds even though they are not earning taxable supplies,” Mr Wilson added. “The business they’re in doesn’t generate outputs.

“It needed to be cleaned up in the Act or it would have created a major problem going forward because those refunds would continue to grow in size. It will continue to grow. I know the refunds are significant. They are significant.”

One well-placed source, speaking on condition of anonymity, confirmed that the Government “owes Buckeye a substantial amount of money in past due VAT refunds” and needed to cap this before the situation got out of hand.

“It’s a good way to bring in some quick cash,” they said. “It’s a smart policy. It’s going to be interesting to see how this turns out. I don’t think the Container Port is going anywhere, and I don’t think Buckeye is going anywhere because of its substantial investment.

“I think they’ll suck it up and, if they get push back from initiating increased fees, they’ll introduce VAT inclusive pricing so the clients will not know any better.”

Mr Wilson, meanwhile, revealed that the financial services industry’s “zero rating” treatment has been made retroactive back to 2019 so that “liabilities are erased” from when the former Minnis administration altered the sector’s status to “exempt”.

“What happened in 2019 was that they moved financial services to ‘exempt’,” he explained. “The financial services industry could not recover the tax paid on their inputs. They made specific representations to the Government to put them back into the zero rating category, specifically the small boutique firms who are purely financial services with no domestic operations.

“By being ‘exempt’ it increased their cost of operations in The Bahamas. The Government considered their case and put them back to zero rated. It’s back-dated two years to deal with the considerable liability. For any of those firms the liability is erased.”

Mr Wilson said the reforms will also bring The Bahamas into line with established practice for financial services globally, especially since the industry is a services exporter typically.