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Freeport 'Pacesetter' For Implementing Vat

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Fred Smith

By NEIL HARTNELL

Tribune Business Editor

nhartnell@
tribunemedia.net

The Government and private sector were yesterday urged to “emulate” Freeport’s bonded goods practices as a model for implementing Value-Added Tax (VAT) throughout the rest of the Bahamas, a well-known QC describing the city as a reform “pacesetter”.

Fred Smith, the Callender’s & Co attorney and partner, said a consumption-based tax was “nothing new” for the Bahamas, given that Grand Bahama Port Authority (GBPA) licensees had been operating what is essentially a sales tax for decades.

The QC said the ‘bonded goods’ system had proven “a boon” to both GBPA licensees and the Customs Department, reducing the former’s upfront inventory costs and the latter’s expenses associated with tax collection and administration.

While GBPA licensees are able to sell goods duty-free or ‘bonded’ to other licensees for use in the latter’s own business, they also sell ‘bonded’ products to individuals and households.

Those sales attract Customs duty post-paid, meaning that the due tax is calculated after the products are landed.

GBPA licensees collect this sum on Customs’ behalf and remit it to the revenue agency by the 15th of the following month, together with a report on ‘duty-paid sales’ against bonded inventory.

This effectively means a sales tax is being practised in Freeport against the Tariff Act, with the system sharing numerous similar characteristics to the way the Government’s VAT proposal would work.

Here, too, Bahamian companies registered to pay VAT will have to collect the due tax and remit it to the Government’s Central Revenue Agency (CRA) within 21 days of each month’s end, together with all necessary supporting documentation - chiefly books and accounting records.

Calling on both the Government and private sector outside Freeport to study and learn from this system, given that it could be of invaluable assistance to VAT implementation, Mr Smith told Tribune Business: “I think that the Government should engage in discussions with Freeport licensees to emulate the process that exists in Freeport, because it works quite efficiently and has been for many years.

“Freeport could be the pacesetter for the implementation of a VAT system throughout the rest of the Bahamas, and it would behove the Government and private sector in the rest of the Bahamas to consult and work with GBPA licensees and the Freeport Customs Department.

“Freeport is an excellent model and, as it has been in the past, will continue to be the pacesetter for the rest of the Bahamas.”

And the leading QC added: “The concept and operation of a VAT system of taxation in the Bahamas is nothing new.

“Freeport licensees, in particular Kelly’s (Freeport), have been operating what is essentially a VAT system with regard to the sale of non-bonded goods for decades.

“This has operated fluidly, efficiently, and to the mutual benefit of the Treasury and licensees. It is a boon to the licensee, who is not obliged to pay up front Customs duties on his entire inventory, and it provides a steady and administratively inexpensive income stream for the Treasury, because the collection, administration and accounting of the sales is conducted by the licensee.”

Mr Smith argued that Freeport, and GBPA licensees, should be exempt from paying VAT due to the Hawksbill Creek Agreement giving the city ‘free trade zone’ status.

That appears to be the position taken by the Government in its White Paper, with Mr Smith saying this would provide Freeport with a further commercial advantage.

“VAT should be regarded as a wonderful opportunity for commerce in the Bahamas, in that it removes the large up front import duties and Stamp duties costs for importers,” Mr Smith said.

“In addition, it is more equitable, for it doesn’t impose a disproportionate burden on those who are economically less fortunate than the wealthy in our society.”

The idea of using Freeport as a tax reform ‘test bed’ or learning centre was first raised back in 2007 by the Grand Bahama Chamber of Commerce, under then-president Christopher Lowe.

Curiously, knowing that tax reform was inevitable and VAT the likely choice, the Government never acted on it, possibly squandering valuable time to prepare both the private sector and ordinary Bahamians.

For instance the GB Chamber’s paper, which Tribune Business obtained, noted that the UK, US and Canada typically remitted back to companies 2 per cent of the tax it collected for their governments as an ‘administration fee’.

No mention was made in the ‘White Paper’ of the Government following suit in the Bahamas, but the 2007 paper suggested: “Freeport as it is, in limited form, is able to be used as a testing ground by the Ministry of Finance, as a proving ground, business by business, for the study of the collection and implementation of a sales tax without changing any existing legislation.”

A change in government policy towards Freeport would have been required, but the GB Chamber paper extolled the virtues of a bonded goods system or sales/VAT tax.

“No funds tied up in prepaid duty. No pre-burden. This allows for better cash flow and greater product availability on island for both Bonded and duty-paid customer,” the paper said.

“It allows for better Gross Return on Inventory figures, which is simply better business efficiencies. Most businesses practicing this have achieved better than national average inventory turns, thereby eliminating typically large spoilage and inventory losses.

“The result has been higher than average revenues for the Treasury, based on the broader product availability, with faster market response times. Supply and demand at almost international standards. There is at least one company in Freeport running on par with US like-industry standard benchmark ratios in retail.”

And the GB Chamber paper added: “Bahamas Customs receives its revenue constantly and in correct percentage of imported value in either pre-pay or post-pay.

“The effect on the business is direct in that operating cash flow is not as stressed. No pre-pay of duty, instead collect and remit.

“Any sensible wholesaler/retailer will translate this directly into increased inventory, therefore boosting local expenditures by business and individual alike. The increased inventory translates into increased local sales, which in turn creates expansion of business in physical plant and staffing requirements.”

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