The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government could lose 10 per cent of its Value-Added Tax (VAT) revenues to fraud in the months immediately after its implementation unless it moves now to eliminate potential “loopholes”, a local expert has warned.

Kendrick Christie, the Bahamas Chapter of Certified Fraud Examiners’ president, told Tribune Business that fraud and tax evasion could “potentially” cost the Government double the ‘normal’ 5 per cent top-line loss that such crimes cost Bahamian businesses.

Mr Christie, a Grant Thornton (Bahamas) accountant and partner, said the Chapter was aiming to work with the Government’s VAT Department and compliance/enforcement unit to prepare it for the fraud/evasion techniques it would need to detect.

And he warned that among the practices Bahamian consumers and the Government needed to watch out for, apart from VAT, were companies and business owners failing to pass on import tariff reductions in the end price.

Some 100 tariff items have seen duty/Excise Tax reductions to mitigate the impact from the introduction of 7.5 per cent VAT, and Mr Christie said the Fraud Examiners’ Chapter was also “championing” a ‘consumer hotline’ that would allow Bahamians to report concerns about unscrupulous corporate behaviour to the Government.

Expressing concern that Bahamians might suffer in an environment where there was no developed consumer protection or established ‘watchdog’ to safeguard their interests, Mr Christie also called for firms with an annual turnover less than $400,000 to ultimately be ‘grandfathered’ into reporting VAT on an accrual rather than cash accounting basis.

“What has happened in other countries, we expect to happen here,” Mr Christie said in relation to VAT fraud and evasion. “We see initially that there’s going to a test of the system, to some degree.

“We expect that will be ongoing, like the duty system now, and there’ll be persons geared to dodging payment of due taxes.”

With Bahamian companies generally thought to lose 5 per cent of their annual top-line revenues to fraud, Mr Christie added of VAT: “This has the potential to be even more.

“I think initially the tax avoidance could certainly be higher than 5 per cent; it could be 10 per cent. Initially, you’re going to see more, but as the learning curve is established and precedent comes in, it will settle down.

“If we see the economy pick up, persons working and more disposable income, we will see more impetus [to comply]. The reduction in the VAT rate was a good thing, but if the economy does not improve we will see persons try to hold on to their taxes as capital.”

Widespread VAT evasion, a widely-held fear given the Government’s inability to collect its existing taxes, would be bad news for all Bahamians and businesses.

For if the Government fails to collect its due revenues and hit its fiscal targets, a persistent deficit and increasing national debt will result, leading to an increased VAT rate and potentially other taxes.

If Mr Christie’s 10 per cent estimate is realised, based on the Government’s own figures, it could lose $19.2 million of the $192 million gross in VAT revenues projected for the six months to end-June 2015.

And, for the first full VAT year of 2015-2016, that 10 per cent ‘fraud and evasion’ estimate would likely translate into a $40 million revenue loss.

Mr Christie yesterday said it was vital that the Government enforce full VAT compliance from the outset, adding that the first prosecution, VAT Appeals ruling or Comptroller’s decision needed to establish this as a “precedent” that will be followed.

He warned that just as all legitimate Bahamian businesses and entrepreneurs would now be readying to comply with VAT, the unscrupulous element would be doing the same - on how to evade payment of the tax.

The Grant Thornton partner pointed out that tax evasion/avoidance was already widespread under the current import tariff system, via dual and under invoicing; transfer pricing involving ‘dummy companies’ in Florida; the illegal entry of goods through certain ports; improper entries and false classifications.

When it came to VAT, Mr Christie pointed to the cash-based nature of the Bahamian economy and other Caribbean societies as a particular problem.

“A lot of entities prefer to deal in cash to minimise the paper trail and get around VAT payments,” he explained. “Persons are going to take advantage of any system that comes into play and take their chances. You can’t have too many loopholes and leakages.”

Suggesting that companies close to the $100,000 mandatory VAT registration threshold were particularly susceptible to the ‘cash-based transactions’ practice, Mr Christie added: “That’s going to be an impetus to avoid the VAT system, by saying: ‘You’ll pay an extra 7.5 per cent if you go to the other company’.

“Pay me in cash, and you avoid the 7.5 per cent. There’s no paper audit trail, no invoice, so the ability of the VAT Compliance Unit to detect that is very hard.

“It creates a black market kind of society, where individuals say, as they do now: ‘If you pay me in cash, don’t exchange invoices, it makes it much harder to detect’.”

Mr Christie warned that VAT refunds and credits were another area open to abuse, and he urged that businesses with annual turnovers under $400,000 eventually be graduated to accrual accounting as this better reflected their assets and liabilities.

Turning to issues related to VAT, the Fraud Examiners president said that even though some duty rates had been decreased, businesses might elect not to pass them on to consumers and instead capture it as profit in the product price.

“That duty reduction should be reflected in the price of the good plus VAT,” Mr Christie told Tribune Business. “I would almost call that fraud, if they’re received a duty reduction and it’s not reflected in the price. They’re charging the consumer as if they’re still paying the same duty rate.”