The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas Motor Dealers Association (BMDA) is moving to develop a ‘position paper’ on how Value-Added Tax (VAT) will impact their industry, with its members already raising concerns about how it will impact cash flow, inventory levels and the use of bonded warehouses.

Rick Lowe, director/operations manager of Nassau Motor Company (NMC), and the BMDA’s secretary, told Tribune Business the organisation had already held discussions with Raymond Winder, Deloitte & Touche (Bahamas) managing partner, about developing their study.

Disclosing that BMDA members had “raised a host of questions” about how the Government’s proposed VAT would work, and impact the industry, Mr Lowe said they were all seeking “more specifics” on the new tax.

Suggesting that it was inevitable that the cost of doing business, and the cost of living, would rise in the Bahamas as a result of implementing a VAT from July 1, 2014, onwards, Mr Lowe told this newspaper that businesses and households would likely be faced with the spectre of a 15 per cent increase in bills for a whole host of basic services – from computer repairs to plumbing.

“We’re meeting, and we’re going to attempt to do a proper exercise so we can raise particular questions and give specifics on how it will impact consumers, the cost of living and the cost of doing business,” Mr Lowe said of VAT.

“We’ve had discussions with him [Mr Winder] to consider how to put a proper representation together. We’re still waiting for his proposal. There’s a lot of questions that have been raised.”

“We’re still going to be government’s banker. We will have to pay it out of cash flow, whether we borrow it from the bank or it’s cash sitting in the bank, to float through until we sell our goods at the end of the day.”

Mr Lowe indicated that VAT would impact BMDA members differently, due to the individual nature of their businesses. Some were engaged purely in selling new or used autos, or a combination of both, while others were also involved in servicing and parts. Some were just in the parts and/or service segment.

While auto parts and services businesses may be able to claim back at least a portion of the VAT paid on their inputs (raw materials and equipment), the same may not be true for new and used cars themselves. Given that many are imported in the condition they will be sold in, it is likely auto dealers will be unable to claim inputs, but end up adding the 15 per cent VAT rate to the prices they charge consumers.

“Claiming the input is fine, but it’s what it’s going to cost the consumer at the end of the day,” Mr Lowe told Tribune Business. “The cost of living is going to increase; it’s impossible not to. When you go get your new car, you’ll have to pay that 15 per cent.

Under the current proposal, all Bahamas-based businesses with an annual turnover greater than $50,000 will have to register with the Government to pay VAT. This will require them to, by 21 days after the end of each calendar month, remit the required amount of tax to the Public Treasury, together with all supporting documents.

Auto dealers, like the manufacturers, are understood to be concerned about the impact on cash flow that may result from paying VAT prior to selling their finished products. They are particularly worried about the first few months following VAT implementation and, in a sign it recognises these issues, the Government’s White Paper on Tax Reform (VAT) refers to the use of bonded warehouses.

These would presumably allow Bahamian companies, such as auto dealers, to hold incoming inventory in warehouses, and only pay tax when product was taken out to be sold. However, details on these bonded warehouses, such as their location and how they would operate, are scant.

“They don’t have space here for it,” Mr Lowe said of the bonded warehouse plan. “Where would these facilities go? Will it go where they build the new building [the Gladstone Road break bulk terminal]?

“Without more specifics, we don’t know what to do. Obviously, you have to maintain inventory levels where you can. It’s all a matter of perception from the customer’s point of view. If you get a customer there today, and tomorrow the price is going to be 15 per cent higher, you know what will happen.”

He added: “In some instances, we’re on a six-month order cycle. You order a car today, and it takes six months to get here. You have no way of controlling when these things arrive. When do you stop orders? You build inventory for a hell of a long time, and if you’re out of inventory you can’t sell product to pay salaries and everything else. You can’t make money.”

A key objective in implementing VAT is to expand the tax base to services, the largest sector of the Bahamian economy. Services have largely been untaxed, but VAT’s arrival will likely result in an automatic 15 per cent increase to all bills issued by doctors, accountants and attorneys.

Walking through the consequences, Mr Lowe said: “If you have an electrician come in, or say the Armoury Company came in to fix a computer, all your fixed costs – the costs of doing business – will rise, but you will not necessarily be able to claim that back.

“It’s an immediate impact on the cost of doing business and the cost of living. The key is for people to understand the direct impact on their everyday lives. It’s the services you utilise in your everyday business. How do you claim that back.”

Another issue is that many professional, self-employed tradespeople – such as plumbers, electricians and contractors – are likely to earn in excess of $50,000 per year. That would place them above the threshold at which they have to register to pay VAT, but enforcing compliance in this area is likely to be difficult, especially given the history of poor self-employed contributions to the National Insurance Board (NIB).

And it is cash-based businesses which are typically the major source of VAT fraud and evasion in developed nations, such as the UK.