The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

More than 80 per cent of Bahamian companies, numbering more than 15,000, will not be mandated to pay Value Added Tax (VAT), with financial services and health/education among the industries exempt from paying it.

The Government’s White Paper on Tax Reform, finally released yesterday, confirmed previous Tribune Business reports that the threshold determining whether Bahamian companies must register to pay VAT is proposed to be set at a $50,000 annual turnover.

Based on 2011 data from the Business Licence Office, which was revealed by Ryan Pinder, minister of financial services, last month, some 15,455 out of 19,253 licensed companies had an annual turnover of $50,000 or less.

This means that 80.3 per cent, or more than four out of every five Bahamian companies, will not have to register to pay VAT.

These companies account for just a collective 1.4 per cent of total Bahamian economic turnover, leaving the VAT burden to fall on the remaining 3,798 companies that generate a combined 98.6 per cent of activity.

As part of its tax reforms, the Government is proposing that all Bahamian companies pay a flat annual Business Licence fee of $100 - the same sum that companies with turnovers of $50,000 or less pay now.

The only sectors exempt from the reduced Business Licence fee will be banking and insurance, where the tax structures will remain unchanged.

The Government said studies by both the International Monetary Fund (IMF) and Crown Agents had recommended eliminating the Business Licence fee.

“At present, no rebate of Business Licence tax is allowed for exports (thus hindering international competitiveness), and it also results in cascading of taxes (tax being imposed on tax) in the production chain,” the White Paper added.

Explaining why it was proposing a $50,000 mandatory VAT registration threshold, the Government’s White Paper noted the difficulties encountered by countries who set this benchmark “too low”.

Rather than maximising net VAT collections through an increased number of registered companies, the White paper said this had frequently overburdened the administrators of such a regime, resulting in inefficient collection and higher costs.

“In setting a VAT threshold, the critical criterion is the trade-off between, on the one hand, the need to reduce the costs of compliance to business and the cost of administration to government and, on the other hand, the revenue foregone from exempting businesses from the VAT,” the Government’s White Paper said.

“In this regard, it is clearly the case that the costs of compliance with a VAT, as a percentage of sales, fall with exceptional severity on small businesses, many of which fare poorly in the areas of record-keeping and accounting.”

The White Paper added that by foregoing VAT revenues generated by small Bahamas-based companies, government resources would be freed up to concentrate on medium-sized and large firms that generated the bulk of taxes. As a result, any lost revenues would be more than recouped.

The Government added, though, that while firms with an annual turnover of less than $50,000 would be exempt from mandatory VAT registration, there was nothing to stop them doing this voluntarily.

Confirming what had been previously reported to Tribune Business by KPMG Corporate Finance head, Simon Townend, the White Paper said it “may be in the commercial interests” of some firms to register voluntarily.

This was because they would be able to claim input tax credits, where a portion of the VAT paid was recovered by the company, if they sold products and services to another company.

Yet the Government acknowledged that “safeguards” were required to ensure small Bahamian companies, who registered voluntarily, could comply with the record-keeping and other VAT requirements.

Elsewhere, the Government is proposing that VAT be applied to all goods and services made domestically in the Bahamas.

The only products that will attract a ‘zero rating’, meaning that their VAT rate will be 0 per cent and credits can be claimed for inputs, are those made in the Bahamas for export.

The White Paper, though, added that the industries set to attract a zero VAT tax rate are financial services; health and education services; food and agricultural products that currently enjoy duty-free status under the Tariff Act; social and community services; the transfers and leases of land and residential buildings; and other imports that enjoy duty free status and “can be justified on social grounds”.

The latter description includes the likes of medicines. The Government is proposing that financial services, and the transfer/lease of land and residential buildings, attract a zero VAT rate because they are savings and investment activities.

It is arguing that they do not fall under the ambit of a VAT, which targets consumption, while “value-added” in the financial services industry was “difficult to measure”.

The Government is proposing that all VAT registrants file a monthly return 21 days after each month’s calendar end. They are to be submitted to the Ministry of Finance’s “soon-to-be-created” Central Revenue Agency (CRA).

Late payments will be subject to penalties and interest, while the CRA director will have the ability to issue an 
assessment” of any company’s returns are not accurate. There will be an appeals process, though.

The White Paper added that companies and investors currently receiving fiscal incentives under legislation such as the Hotels Encouragement Act, Industries Encouragement Act and Fourth Schedule of the Tariff Act would continue to get them under a VAT regime.

“However, they will be required to pay VAT ion imports and domestic purchases,” the White Paper said.

“Furthermore, they will be required to register, which will entitle them to charge VAT on taxable sales and submit a claim for VAT paid on inputs.”

The Government said it was still assessing whether these businesses should be able to claim VAT credit refunds immediately, or wait for “the standard three-month refund period”.