The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government was yesterday warned that imposing a 7.5 per cent Value-Added Tax (VAT) on premiums will cause a drop in the number of Bahamians covered by property and casualty insurance, with one senior executive describing the new tax as “a big disaster”.

Emphasising that he was speaking in a personal capacity, and not for the company or in his position as RoyalStar Assurance’s managing director, Anton Saunders said VAT was not the ‘best fit’ for a nation such as the Bahamas.

He told Tribune Business that imposing VAT on the “undisciplined country” that is the Bahamas would ultimately result in more collection/compliance problems than the Government currently endures with real property tax.

“This is me personally, Anton Saunders, not the company’s position,” he told this newspaper. “It is impossible to introduce a highly-disciplined tax in a highly undisciplined country. You’re going to have a big disaster.

“It’s [VAT] a very disciplined tax structure to try and introduce in an undisciplined financial system at this time. You will have more problems than with real property tax.”

Back speaking for RoyalStar, Mr Saunders was joined by his Bahamas First counterpart, Patrick Ward, in expressing concern that fewer Bahamian individuals, households and businesses would be able to afford property, auto and other coverage types with 7.5 per cent VAT added to the premium price.

The Government has seemingly performed its second VAT policy ‘u-turn’ with respect to property and casualty insurance premiums and their treatment under the new tax, based on the legislative/regulations package tabled in the House of Assembly yesterday.

The Christie administration initially proposed levying 15 per cent VAT on these products, only to back away under industry pressure and agree that property and casualty insurance should be treated as ‘exempt’.

While this was seen by the Bahamian insurance industry as ‘the lesser of two evils’, as it will be unable to reclaim or ‘net off’ the VAT paid on its ‘inputs’, the belief was that ‘exempt’ status would result in premiums increasing by a lesser amount than if they were VAT-able.

Yet, in its explanatory notes to the revised VAT draft Bill, the Government said it had “narrowed” the range of financial services that will be ‘exempt’ from the tax to credit and deposit (loan and savings) products offered by banks, insurance companies and other financial institutions.

The Government specifically identified life insurance and annuities as products that will be treated as VAT ‘exempt’, meaning that health insurance, as well as the property and casualty variety, will be taxable at 7.5 per cent.

To soften the blow, the Government said: “To give the industry time to prepare, exemptions on non-life insurance and annuities (such as property, health and casualty) would be preserved until June 30, 2015.”

This means that health, property and auto insurance policies will only be hit with the 7.5 per cent VAT levy come June 30 next year, the ‘grace period’ seemingly acknowledging that the Government’s policy change was going against industry expectations.

Not slow in pointing out the potential consequences, Mr Saunders told Tribune Business: “If you stick 7.5 per cent on those already-high premiums in this country, it is going to cause a greater degree of non-insurance and underinsurance.

“Those consequences are going to rear their ugly head when there’s a major catastrophe that hits the Bahamas.”

Mr Saunders added that increased premium costs would also affect Bahamians’ ability to afford, and access, mortgages and various types of investment products, as these all required some form of insurance cover.

“Whatever the consequences are, we’ll all know. It won’t be unforeseen to us. We know what to expect,” Mr Saunders said.

Both he and Mr Ward said the Bahamas Insurance Association (BIA) would now reform the committee that was dealing with VAT, which would likely study the potential industry impact in-depth, then engage in extensive technical consultations with the Government.

Mr Ward, Bahamas First’s president and managing director, told Tribune Business that the Government’s revised VAT policy was “disappointing”, as it was a departure from the position that the insurance industry thought had been already agreed.

“We’re going to have to assess the extent to which it impacts the industry, both from a premium and cost base,” he said.

“We thought we had an understanding on that basis. This now alters the position, and one way or another we have to make a determination on how to respond as an industry.

“We’re disappointed that it’s changed. We thought we had a position that was already agreed. If premiums are subject to VAT, we expect, given the prevailing economic environment, there will be some fall-off in coverage across the board.”

Mr Ward explained that determining just how VAT would impact the insurance industry was a “complicated exercise”, given that the tax would affect claims costs as well as premiums.

“What we now need to know is the extent to which claims that property and casualty companies have to administer and fund will be impacted - the extent to which vehicle repairs will go up as a result,” he explained.

“Vehicle repairs, medical services, personal injury claims, legal advice are all subject to VAT. All of these have an influential impact on our claims.... We’re not the end user of the profits that relate to the claims expenditure.”

The Government appears to have been influenced by the New Zealand VAT consultants, Dr Don Brash and John Shewan, who recommended in their May 6 report to the Government that it consult with the general insurance industry on making it ‘VAT-able’ “within one or two years” of the new tax’s implementation.

The June 30, 2015, timeframe is sooner than that, but the New Zealand consultants said both their country and Australia treated property and casualty insurance as ‘VAT-able’.

Messrs Brash and Shewan said in their report: “Once the general insurance industry understood that being taxable meant that they could recoup all VAT paid, relative to a recoupment of close to zero if they were exempt, they recognised the commercial benefits of being included.

“While there was a significant education campaign required, and the actual implementation phase was complex due to the role of reinsurers, agents and other intermediaries, within a couple of years of the October 1986 start date, the system had settled down and operated smoothly. There have been no calls to apply exempt status to the industry, and if efforts were made today to change their status to exempt, there would be significant resistance.”

New Zealand no longer exempts general insurance from VAT as it is possible to “separate and value the service or value-add component”.