• Polymers fears for competitiveness, Bahamas presence
• Manufacturer says ‘might as well be in US’ on status loss
• GB Chamber chief urges Gov’t to ‘reverse’ VAT treatment
By NEIL HARTNELL
Tribune Business Editor
A Freeport manufacturer yesterday warned its competitiveness will be undermined, and presence in The Bahamas endangered, by VAT reforms that have seemingly removed its ‘zero rated’ status.
Greg Ebelhar, Polymers International’s chief operating officer, told Tribune Business it is “not going to take this sitting down” given that the inability to recover, or offset, its VAT ‘input’ costs from January 1 will generate a significant cost increase for a business that operates on relatively thin margins.
Disclosing that the company has been unable to-date to obtain clarity from the Department of Inland Revenue (DIR) on whether its VAT ‘treatment’ has changed, he said it was working with its attorneys to determine the precise impact, but added: “If they keep adding taxes I might as well be in the US.”
Mr Ebelhar, confirming that the loss of ‘zero rating’ status would threaten Polymers’ continued presence in The Bahamas, also bemoaned the lack of warning and consultation with the private sector before the reforms were introduced via the VAT (Amendment) (No.2) Bill.
The Bill, which has been passed by both houses of Parliament and now awaits the Governor-General’s signature to become law, “came out of the dark”, Mr Ebelhar argued, while adding: “The ease of doing business did not get any easier”.
The Davis administration has sought to reduce VAT ‘zero ratings’ and ‘exemptions’ to the bare minimum as part of its strategy to cut the levy to 10 percent, and revert to a lower rate, broad-based structure for the Government’s main revenue earner.
However, when the last PLP government first introduced VAT at the then-7.5 percent, export activities - such as Polymers’ expandable polystyrene (EPS) products - were among the few to be ‘zero rated’ as a stimulus to what were viewed as valuable sources of foreign exchange earnings for The Bahamas.
VAT ‘zero rating’ allows the recipients of such treatments to avoid having to charge the tax to their consumers, while also escaping the levy on their input costs. In essence, they escape having to pay VAT or charge it to their consumers.
However, Mr Ebelhar said Polymers’ reading of the reforms suggested that it may have lost that status and is being treated as VAT ‘exempt’. This means it will have to pay VAT on its input costs but, as an exporter, cannot charge the tax to its overseas customers. As a result, it cannot net off or recover the ‘input’ VAT, resulting in a significant increase in costs.
“Correct,” the Polymers chief added of this explanation. “As far as what we’ve seen right now, that’s what we’re looking at.” And the Government’s decision to reverse the transhipment industry’s VAT ‘zero rating’ status to ‘exempt’ will mean a rise in container costs that the shipping companies will also pass on to Polymers and others in Freeport’s economy.
“We operate on tight margins. This is not going to sit very well with us,” Mr Ebelhar told Tribune Business. “It’s everything we’re looking at. We understand VAT is going to be charged on all the containers, and that’s going to be flushed right through.
“MSC (Mediterranean Shipping Company) and Tropical are not going to absorb it. They will pass it right on to us. These are things we are still studying. It’s hurting us.” He added that efforts to clarify Polymers’ VAT treatment moving forward had not met with much success.
“We’re still trying to find out. We’re trying to get an answer from the Department of Inland Revenue. It’s not easy right now,” Mr Ebelhar said. “We’re having to go through the Act and work with our lawyers to see where it will hit us. It’s not going to be good, and it’s not going to be taken sitting down.
“I’m competing against plants in the US that have lower power costs, lower shipping costs. I’m competing against somebody in a totally different regime. There is a tax regime there, but if they’re going to start adding taxes here I might as well be in the US.”
Michael Halkitis, minister of economic affairs, yesterday urged Mr Ebelhar and Polymers to formally submit their concerns to either himself or Simon Wilson, the Ministry of Finance’s financial secretary, rather than the Department of Inland Revenue (DIR).
However, he did not respond to Tribune Business questions on whether the VAT ‘treatment’ of Polymers International has changed with the passage of the new Act into law. Mr Ebelhar, meanwhile, queried why the Government had not consulted the company or other Freeport-based industrial players before seeking to enact the changes.
“This is not going to help us one bit,” he said. “It’s one of those that came out of the dark. I understand the Government is cash-strapped after COVID, but sometimes there are things where you can sit down and work in a co-operative manner and talk to the people you are going to throw it on, rather than slap it in and let it in like this.”
Mr Ebelhar likened the situation to previous Customs Management Act reforms, which introduced the 1 percent Customs processing fee “ad valorem” tax up to $50,000 on incoming and outgoing shipments. “We got no forward notice at all,” he added of that and the VAT changes. “It’s just launched. We’re scrambling.
“We’re starting to understand how this works. It’s fairly easy to see what’s happening, and we’ll prepare our response. It’s going to take us a while to get that together. We will just let them land where they fall.
“It’s not easy to have this, and have to take all your resources... You end up having to drop everything at the time and try to figure out what you’re going to do,” Mr Ebelhar continued. “The ease of doing business did not get any easier.
“I still do not understand why these things cannot be brought to the industrial community to have a sit down, meet at any time and give our input and things like that, but they don’t. It’s handed down and we have to react to it one way or another.”
Polymers International, according to trade data from the US International Trade Commission, exports 90 percent of its output to the US. It exported some $55m worth of product to the US in 2020 which, although down on the $155m peak in 2014, still represents a valuable foreign exchange source not to mention jobs for the Grand Bahama community.
Greg Laroda, the Grand Bahama Chamber of Commerce president, last night urged the Government to “reverse” course not just on the VAT treatment for Polymers but also for the island’s transhipment sector - and the likes of BORCO (Buckeye Bahamas) and Equinor - which is being moved from ‘zero rated’ to ‘exempt’ status.
Revealing that the Chamber had previously helped make the case for ‘zero rated’ status to then-Minnis administration, as anything else would have been “detrimental to their business”, he added: “I know the minister of Grand Bahama [Ginger Moxey] would have said the intent is not to harm persons in the transhipment sector, but that’s exactly what this is going to do.
“It’s a highly competitive business, and tacking this VAT on adds 10 percent to their costs of doing business, and it takes away a lot of the competitive edge they would have. We are concerned. We are reviewing it, and will be engaging the Government on it.
“If they said their intent is not to harm the transhipment sector, and they know it will, we would expect them to do something about it. Changing it, and not allowing those companies to be zero rated, will make them less competitive in terms of doing business with the way the economy is now.”
Mr Laroda said this was “not the best way to show appreciation” to Freeport’s transhipment and industrial sectors over how it had kept Grand Bahama’s economy going during the “crunch period” of COVID-19 lockdowns.
“They don’t collect VAT on behalf of the Government, so there is nothing to offset against,” he added. “It’s just an additional cost of doing business. I’m hoping they see fit to reverse that position that they’re taking now, especially as it relates to those companies. I’m hoping they see the light and leave it as is.”
Mr Wilson, the Ministry of Finance’s financial secretary, previously said the proposed VAT reforms were designed to cap “huge” multi-million dollar refund liabilities owed by the Government to the two major transhipment providers, BORCO and Equinor.
He told Tribune Business that eliminating the VAT “zero rating” treatment for these entities would halt “distortion” of the tax system and prevent “future problems” for a cash-strapped Public Treasury by stopping any further growth of these refund liabilities.
The Government’s VAT refund-capping move involves the elimination of ‘zero rating’ treatment for “services relating to the use of terminal or berthing facilities by commercial vessels in respect of goods” that have not been cleared for domestic consumption and “where the port of origin and the port of destination are not within the territory of The Bahamas”.
Similarly, ‘zero rating’ treatment is also to be ended for “services in respect of the storage of goods, and any processes to optimise or maintain the integrity of those goods during storage”, where they have again not been cleared for domestic Bahamian consumption and the “port or origin and port of destination” are not in this nation.
Mr Wilson said the transhipment-related reforms were designed to bring The Bahamas back into line with international best practices on VAT treatment for the sector. He added that such services should be VAT ‘exempt’, meaning that while no tax is levied on the end user, companies in the sector are unable to recover what they have paid on their input costs.
However, Mr Laroda argued that the move could hurt the Government “in the long run” if the affected companies were forced to downsize their operations and/or lay-off staff as a result.