The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Value-Added Tax’s (VAT) introduction will likely increase the Bahamas’ country risk profile for both investors and local firms, a KPMG executive yesterday warning it would “impact returns” on investment.

Shana Lee, an associate director in the accounting firm’s Nassau office, said VAT and the Bahamas’ $5 billion-plus national debt and high fiscal deficits, were the two key factors likely to increase the ‘risk premium’ associated with investing in this country.

Asked to outline the main Bahamas country risks that investors will have to account for. Ms Lee replied: “One would be the sovereign debt level, and there is the potential uncertainty with the introduction of VAT.

“Coming in as investors now, the costs [of VAT] are going to impact the returns you’re going to see.”

She was addressing a Certified Financial Analysts (CFA) Society of the Bahamas luncheon, and suggested that VAT would require “cash flow adjustments” whenever business valuations were being determined.

“That’s an adjustment that comes in with the cash flow as you project things out,” Ms Lee said if VAT’s impact on business valuation models.

“At this point we’ve not done that, as there are so many unknown factors, but it is a factor. You may want to factor that in as an adjustment to the discount rate.”

Ms Lee’s comments indicate that VAT’s impact, if it is introduced on July 1 this year, will reverberate well beyond this nation’s borders, impacting international investor perceptions of the risk associated with coming to the Bahamas and the likely returns on their investment.

But, by the same token, failing to tackle the Government’s looming fiscal crisis could have much the same - and potentially a worse - impact.

This illustrates the dilemma the Christie administration is in: Damned if you do, damned if you don’t when it comes to fiscal and tax reform.

Ms Lee, who heads KPMG’s valuation services practice, added that mergers and acquisition (M&A) activity in the Bahamian market, a key driver of business for her unit, had “room for growth”.

“We’re seeing a little bit of an uptick in mergers and acquisitions, but it’s not where it could be,” she said. “The mergers and acquisitions market is a little bit slow right now, so there is room for growth, but we are seeing some growth.

Ms Lee added that business volumes were likely to pick up as Bahamian economic activity improved.

“There is activity,” Ms Lee said. “We see activity potential with family businesses looking at succession plans and wanting to know the valuation of the business for that. Some companies are conducting transactions, so they need valuations for that.

“If you’re talking about family businesses, it’s internal mergers and acquisitions, and the other way it comes out, it’s dispute cases and arbitration, where you may need a valuation appraisal.”

Ms Lee added that another area of business valuations activity was when companies wanted to assess the value of goodwill they were carrying on their books.