The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is expecting to achieve Value-Added Tax (VAT) compliance rates in the 75-90 per cent “high range” enjoyed by other Caribbean nations, a senior Ministry of Finance official has revealed.

John Rolle, the Ministry of Finance’s financial secretary, told Tribune Business that he did not expect the Bahamas “to fare any worse” than Barbados when it came to collecting the VAT sums due to the Government.

He described Grenada as a “very encouraging” example for the Bahamas, noting that “more than 75 per cent” of VAT was paid in that nation on or before the due date, with compliance levels reaching 90 per cent within days of that deadline.

Suggesting that there was no reason why the Bahamas could not emulate this performance, Mr Rolle told this newspaper: “We expect that we’re going to see compliance rates in the high range. That is the experience in the Caribbean.

“We don’t expect it to fare any worse than Barbados and other countries in the Caribbean which have had success with VAT.”

And the Financial Secretary added: “I think in Grenada, on the day VAT registrants are required to submit their returns, it collects more than 75 per cent of the taxes that due from the businesses.

“It is not long afterwards that they see themselves in the 90 per cent range of taxes that should be remitted. That’s very encouraging for us in terms of the registrants, and those required to remit taxes to government.

“So there’s no reason why we should see a compliance rate any less, or significantly less, than those other Caribbean countries have experienced.”

Concerns that VAT-related tax evasion and fraud will be widespread have surfaced frequently since the Government identified this form of taxation as its reform centrepiece. These fears have stemmed largely from the extensive tax evasion known to take place under the Bahamas’ current system, plus the fact that many businesses lack the accounting and bookkeeping systems/practices needed to collect and manage VAT.

Indeed, the National Insurance Board’s ninth actuarial review, released this week, highlighted the potential compliance issues the Government might experience with VAT.

That report noted that “almost 50 per cent” of Bahamian companies were over three months late in paying NIB contributions on behalf of their employees. And only 23 per cent of NIB contributions were paid on time in 2011.

Mr Rolle, though, indicated to Tribune Business that the Government was not expecting the same compliance issues with VAT as NIB had seen with its contributions.

By increasing the mandatory registration threshold to a $100,000 annual turnover, Mr Rolle implied this would allow the Central Revenue Agency (CRA) and its VAT unit to focus all their administration and enforcement efforts on the 2,800 companies estimated to account for 98 per cent of Bahamian GDP.

“If there are enforcement issues, we will have focused resources,” he added. The NIB actuarial review also indicated why the Government has exempted businesses with an annual turnover below $100,000 from having to register to pay VAT by law, that report finding small businesses accounted for the majority of contribution non-compliers.

“It may take just as much energy to verify compliance by a small business as a large business,” Mr Rolle said.

To ensure VAT compliance, the Government will also likely rely on the self-enforcing nature of VAT. To claim refunds for VAT paid on their inputs, businesses at all levels in the production chain will have to keep accurate receipts and records. If there is a break, or any falsification, companies face either losing their refund credits or prosecution.

The final element in the Government’s enforcement efforts will be the CRA and its team of auditors, who will check that the returns submitted by companies some 21 days after month’s end are correct. Fines and court prosecutions will be the ultimate weapon in the compliance armoury.

Elsewhere, Mr Rolle said suggestions that the cash-based nature of the Bahamian economy made it susceptible to VAT fraud were “not a major concern”.

He argued that the Bahamas was effectively ‘selling itself short’ with such a suggestion, and that its payments and transactions systems were far more sophisticated than given credit for.

“We are a more modern economy in terms of transactions than we give ourselves credit for,” Mr Rolle told Tribune Business, “so that’s [cash-based fraud] not a major concern for us now.”

The experience among the 140 countries that have implemented VAT to-date has been that much fraud and evasion occurs with cash-based businesses and transactions. This was highlighted by Ed Rahming, accountant and partner at KrYs Global (Bahamas), during a recent presentation to the Bahamas Institute of Chartered Accountants (BICA).

However, Mr Rolle pointed to the former Soviet bloc countries, many of whom have implemented VAT, as an example of nations that had much less sophisticated private sectors at the time they chose to implement tax reform.

“Countries that are far less developed in terms of their business sectors than the Bahamas, they’ve also introduced VAT and had relative success,” the Financial Secretary told Tribune Business.

“I don’t think we should be too concerned about whether the Bahamian business community is going to be somewhat unsophisticated in terms of recordkeeping and administering their VAT obligations.

“This is a very modern economy, and more sophisticated from a transactions standpoint than we may acknowledge from time to time.”

Mr Rolle also denied that the decision to effectively split the Bahamian insurance industry into two, and levy the 15 per cent VAT rate on property and casualty insurance premiums, was intended to replace revenue lost by the likely decision not to impose it on electricity and other utility bills.

Many Bahamian insurance industry executives have asserted that this nation would be almost alone if it decided to levy VAT on property and casualty premiums, as most countries treat this sector as VAT ‘exempt’. This status means that while insurers do not levy VAT on consumer premiums, they cannot claim refunds on the VAT they pay on their inputs.

Mr Rolle, though, said “some modern frameworks” had begun to levy VAT on property and casualty insurance premiums. He confirmed that the life and health insurance sector was likely to be treated as ‘exempt’, because it was seen as a savings and investments activity where financial intermediation created “value added”.