The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A top accountant yesterday backed the Government’s plans to slash mandatory Value-Added Tax (VAT) registrants by 1,000 firms, telling Tribune Business this would help to “maximize” revenues from the new tax.

Ed Rahming, managing director at KrYs Global (Bahamas), said that by increasing the annual turnover registration threshold from $50,000 to $100,000, the Government and its Central Revenue Agency (CRA) were ensuring they could focus all their attention on the 2,700 largest firms that account for 98 per cent of Bahamian GDP.

Looking ahead to VAT’s planned implementation come July 1, 2014, Mr Rahming described the deadline as “doable”, but acknowledged that the Government would face “challenges” in getting all the necessary information out to the private sector and Bahamian consumers.

And, while it was impossible to determine the likely level of fraud and tax evasion that would occur under a Bahamian VAT system, the KrYs Global chief said “the largest issues” were going to be unregistered sales by businesses; cash transactions that left no paper trail; and businesses with annual turnovers of around $100,000 attempting to avoid mandatory registration.

Describing ‘claims refunds’ (repayment of the VAT firms have paid on their production/distribution inputs) as “the Achilles heel” of any VAT system, Mr Rahming also acknowledged that the Bahamian economy’s cash-based nature made it “susceptible to VAT fraud”.

However, he defended VAT or some form of consumption-based taxation as the best option for the Bahamas and the Government’s financial needs. Mr Rahming argued that it was “more efficient in broadening the tax base”, increasing revenues and catching more people as taxpayers.

However, he backed the Government’s decision to focus on the “top 10 per cent of the economy” by raising the mandatory registration threshold from $50,000 to $100,000.

Michael Halkitis, minister of state for finance, last week said that the increase would mean that less than 1 per cent of Bahamian GDP would escape the mandatory registration net.

While 3,798 Bahamas-based businesses would have been required by law to register to pay VAT under the original threshold, the Government estimates this number will drop to 2,743.

Yet the increase to $100,000 will make little difference to the amount of economic activity covered, the Minister disclosing that 97.7 per cent of total Bahamian economic turnover would still be captured by VAT. This compares to 98.6 per cent at the old $50,000 registration threshold.

Backing the move, Mr Rahming said of the 2,743 remaining companies: “These are businesses that are established, have accounting systems in place and most of them have good practices of paying their bills on time.

“By doing this, they are eliminating administration costs associated with going after those businesses in the $50,000-$100,000 range that don’t have systems in place, and can’t make the investment. They eliminate the administration and human resources that have to be put on 1,000 companies.”

In turn, Mr Rahming told Tribune Business this would enable the Government to focus scarce resources on those 2,743 businesses that generated most revenues.

This, he added, “should increase the amount of tax” earned by the Government through VAT, as it would be “focusing resources where the money is.

“You don’t maximize collections by going after everyone. You maximise collections by shrinking the pool, and focusing resources on those who can pay VAT,” Mr Rahming told Tribune Business.

“You’re taking away 1,000 companies you don’t have to pay attention to. That’s fairly significant. You’re now not wasting time on additional assessments, guys at $75,000 that don’t have the systems and can’t afford it.”

However, he acknowledged that the economy’s cash-based nature “is going to be an issue for the Bahamas, and the Government needs to take that into consideration.

“That does make this type of economy susceptible to VAT fraud, as you can have the under-reporting of sales.”

Mr Rahming said a major problem would be large cash transactions between two businesses, especially if the companies involved had common ownership or knew each other.

This, he explained, would be especially hard to detect as there was no so-called ‘paper trail’ to follow.

And, while conceding VAT’s regressive nature, Mr Rahming told Tribune Business on tax reform: “We really don’t have many options/”

Noting that three available were income, payroll or consumption-based taxes, he added: “When you look at the three, the more efficient one in broadening the tax base, bringing more revenue in, ensuring more people are taxed, whether at a high or low level income, is a consumption tax.

“It’s a much more efficient tax, in my opinion, that any of the other tax systems.”