The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A well-known accountant yesterday urged the Government to extend its ‘light touch’ approach to Value-Added Tax (VAT) enforcement to a year, warning that six months was “not enough” given the “draconian” penalties in the law.

John Bain, managing partner at UHY, Bain & Associates, told Tribune Business that the Government’s own VAT Department, too, would need time to work out the inevitable “bugs” involved with any new tax’s implementation.

Writing on Page 2B of today’s Tribune Business section, Mr Bain called for leniency when it came to the first year of VAT compliance, given that it would be a “brand new experience” for both the Government and Bahamian private sector.

He told this newspaper that a ‘light touch’ regulatory approach was extra important because the VAT Act did not require accountants to sign-off, or verify, the accuracy of a company’s tax return to the Government.

As a result, businessmen could be exposed to fines ranging from $50,000 to $100,000 – and possible jail time – if they made an ‘honest mistake’, or miscalculation, in determining the VAT payment due to the Public Treasury.

“Anything new comes with its bugs,” Mr Bain told Tribune Business. “The Act is draconian in its fines for businesses, ranging from $50,000 to $100,000 to jail time.

“It’s very, very serious. Imagine if you’re a businessman and file a tax report containing an honest mistake. It’s brand new. You could make a mistake, and the Act does not require an accountant; it requires you, the businessman, to file it.”

The Ministry of Finance and its VAT Department have attempted to make allowances for this, with their ‘transitional notes’ agreeing not to impose fines for “genuine mistakes” for the first six months post-implementation.

The notes state: “Getting VAT compliance and reporting right will always be the responsibility of the registrant, and it is the registrant’s responsibility to gain the knowledge required to comply with the legislation.

“However, the [VAT] Comptroller intends to take a light touch [approach] to compliance for the first six months, with no fines imposed on those that make genuine errors (although any VAT payable will be collected). Fines will be imposed on those not registering for VAT when required to do so, not filing returns and paying on time, or intentionally filing incorrect VAT returns.”

Mr Bain, though, told Tribune Business that six months “isn’t enough”, and recommended that the ‘light touch’ enforcement period be doubled to 12 months.

“UHY believes that it will be of huge advantage if the Bahamian government were to publicly announce an initial period during which the regulations will be enforced with a ‘light touch’, where mistakes are not penalised and businesses are educated and encouraged to get the tax right,” he writes inside.

“We would suggest from experience of new taxes in other jurisdictions that 12 months would be a reasonable timeframe to allow the implementation of the tax to settle, and for many of the inevitable ‘teething problems’ to be ironed out. Given the likely political cost of introducing any new tax, the Government may consider this to regain some political capital by such a move.”

Mr Bain told this newspaper that a longer ‘light touch’ period would also benefit the Government, pointing out that the VAT Department, too, was “brand new” and needed to go through “a learning curve”.

“They need time to work out the bugs in their system,” he said. “They’re going to see the difference between theory and reality bite. They have the theory now, but when the papers start being filed and they see the transactions come in…. everyone could benefit from a relaxation.

“We’ll get it right three to four years down the road. As you go, the bugs, things you have not thought about, come to light.”

Other potential issues identified by Mr Bain included the $100,000 annual turnover threshold, at which businesses are required by law to register to pay VAT.

Describing this as the “cut off point” or ‘cliff edge’, the well-known accountant said this had created issues throughout VAT systems around the world. “We can expect some small businesses trading around the boundary to deliberately slow down, close one day a week, or delay the recording of accounting information to keep them below the VAT threshold,” he writes.

“Indeed, without the mandatory requirement for licensed accountants to verify the tax computations, we can also expect the late declaration of sales at tax year-end to ensure the amount of sales do not meet the threshold.”

Mr Bain said the Government’s plans to levy VAT on ‘in kind’ or barter transactions would create questions in terms of quantifying how much tax should be paid.

He suggested that other contentious areas would include the tax treatment of ‘mixed supplies’, where firms supplied goods/services that were both VAT-able and either ‘exempt’ or ‘zero-rated’.

Mr Bain also warned that it would be “very difficult to police” VAT on transactions where Bahamians purchased electronic services via the Internet.

“Looking at the proposals for services received in the Bahamas from suppliers outside the Bahamas, the quasi-import VAT due is a common feature of most VAT systems around the world and protects the home market from competition from non-resident suppliers who do not have to charge VAT,” he writes.

“An important difference for the Bahamas, though, is that the recipient in all cases must submit an import declaration to the tax authority, and pay the import VAT, even where the recipient is a private person.

“This is likely to result in many such people simply not reporting the receipt of services from a non-resident supplier, and it will be very hard for the tax authority to control this, particularly in the Internet age with the delivery of electronic services (for example the payment and download of software).

“There may be a reason to review this requirement in the future where the alternative is to require the non-resident supplier to register for VAT and itself declare Bahamian VAT.”

Mr Bain told Tribune Business that it was vital the Government “be fair, and be seen to be fair” over VAT enforcement if it was to maximise compliance and revenue intake from the tax.

He added that there would be greater acceptance once no one was excluded from paying, with “every race, creed, colour and political party” paying their fair share.

Mr Bain told Tribune Business that successive administrations had “kicked the can down the road” on tax reform for 40 years, with the Bahamas now having not choice but to embark on reform as its “back was against the wall”.

“We’ve lived with just a basic form of indirect tax for a long time,” he explained. “We’ve been running a constant deficit for years and years, and everyone knew we had to do something about it.

“They kicked the can down the road for 40 years, as they knew it was an unpopular decision that was going to cost them. That happens with any tax.

“We kicked the can down the road, running up bad deficits that were increasing every year, and have been downgraded by the credit rating agencies. Eventually your back is against the wall. We want to enter the WTO, and we can’t have Customs duties. We have to make a decision.”