The Tribune

All taxes, to a greater or lesser extent, rely on the voluntary co-operation of the population. UHY’s experience with the tax regimes in many jurisdictions indicates that there are some well-trodden paths in the short, medium and long-term when different problems will be apparent at different stages of implementation. These problems can be circumvented, or mitigated, to at least some extent by forewarning, education and pre-planning.

In the short-term, probably within the first six months post-introduction, the Government can expect mistakes and errors by businesses in their accounting procedures and Value-Added Tax (VAT) declarations. The declaration of incorrect VAT amounts and the omission of transactions, whether inadvertently or otherwise, is a probability. Businesses will need to organise their cash flows with far greater control than previously in order to retain the VAT cash until it is due to be paid over.

This burden will fall more heavily on smaller businesses filing quarterly or semi-annual VAT returns, since they will have to manage their cash flow for possibly several months before the net VAT is payable to the Government. Larger business are not only likely to already have a degree of cash flow, and accounting management, already in place, but are required to file monthly VAT returns, thus lessening the cash flow problem.

The Government can also expect considerable resistance from consumers, as businesses increase their prices to add the new VAT charge. Unfortunately, experience across the world has shown that when such fiscal changes occur, many businesses use it as an opportunity to increase prices and blame the Government. Larger businesses will simply add VAT and blame the Government, whereas smaller businesses - exposed to much greater competition at the local level - will be under different pressures. Many may have to absorb a large part of the VAT charge rather than pass it on in full.

Regrettably, therefore, the Government can expect a small but significant number of smaller businesses, operating at the local retail end, to find the pressure too much. The businesses must adapt to the new paradigm in order to survive. Excellent record keeping is the first step in providing management with information to manage operations and cash.

The Government can also expect a certain level of non-compliance in the short-term, and will need to tackle this urgently with education and information. This is likely to come either from deliberate non-compliance or persons being wilfully blind to their new legal requirements. Tax avoidance, and schemes entered into to reduce or mitigate the tax payable, are not likely to appear in the small and medium-sized business sector for some time, although larger multinational businesses will already be aware of tried and tested ways of doing this from their exposure to VAT in other jurisdictions. This statement does not absolve small and medium-sized businesses from tax avoidance schemes, but it is just that the larger businesses - with branches or connections to countries with VAT regimes - probably have a head start when it comes to avoidance.

Overall, the Government can expect a rapid increase in the revenue take from the amounts initially declared, as taxpayers iron out and address their problems of initial reluctance and non-compliance. The longer short-term, perhaps six months to three years after VAT’s introduction, is an opportune time to implement any changes to the legislation and guidance notes to resolve problems and confusion, or combat the initial level of non-compliance. Now is not a good time to consider increasing the VAT rate, whether for fiscal or political reasons, although the authorities can consider changes to the scope of exemptions to tidy up any uncertainties, and clarify some areas for reasons of social policy.

The Government’s agenda and primary concern in the short-term should be to manage the implementation of VAT as smoothly as possible, and encourage compliance. Many countries have high non-compliance rates, driven partly by public attitudes to tax and a general distrust of their governments. Once this social attitude has embedded itself in society, it is virtually impossible to shift and equally difficult to turn around.

We would suggest, therefore, that the Government continue to work with media and business organisations to ensure a consistent and co-ordinated message to both the business sector and the public who, after all, will be the ones ultimately suffering the burden of the tax.

In the medium-term, the accounting and VAT procedures should have settled down, and only new businesses will need education and encouragement in these areas. However, the Government can now expect an increase in tax avoidance schemes, and may notice the overall revenue intake actually decreasing, once it takes their growth and inflation into account.

The Government should now be seeing penalties and enforcement actions settling down to a reasonably consistent level, with a difficult balance to strike between securing as much of the revenue as possible against being seen as too over-bearing and fostering the very non-compliance it seeks to discourage. Although it will not be found in official publications, many governments acknowledge that there will always be a certain level of non-compliance, where the fiscal and political consequences of increased enforcement outweigh the revenue to be collected. Where the tipping point is in any particular jurisdiction is a matter for the Government, and will not become apparent for several years until the tax has settled down, and the administration has sufficient information to determine the percentage of ‘hard-core’ evasion with some degree of accuracy.

By now, the Government’s fiscal budget will also have settled down, and it is in this interim period, perhaps three to five years after the introduction of VAT, that we might see an increase in VAT rate itself. The early cynicism will have died down, and the accounting and VAT declaration procedures would have normalised, although we would advise against any sudden or significant increase in the initial rate of 7.5 per cent. Occasional, smaller increases were easier to introduce in many countries, particularly if the Government hypothecates the increase for a particular fiscal purpose.

The Government should be aware, however, from the consultation with VAT experts, that any increase in the rate is likely to increase the prevalence of tax avoidance. This will have less financial impact when rates were lower. The Government’s efforts to recognise and tackle this in the first few years and limit, as much as possible, the opportunities for tax avoidance, will be critical to maintaining VAT’s fiscal viability as it moves from the initial uncertainties to the longer term.

The longer-term effects of the new VAT system will manifest themselves in three broad areas:

* First, there will be a continuing need to provide information and guidance to the business sector through education and technical assistance to encourage compliance. Enforcement and the imposition of penalties will be part of this, but the Government must find the right balance between penalties and technical assistance.

* Second, there needs to be an accepted procedure for managing disputes over the tax payable, particularly on the boundaries between whether a supply is taxable or exempt for example, or on the form and accuracy of partial exemption calculations, to name but two likely areas of dispute.

Ideally, the resolution of disputes will be efficient and independent. The critical aspect in any tax regime is that the business sector has confidence the tax authorities will objectively and fairly hear and deal with their arguments and concerns.

* Third, and regrettably, the prevalence of fraud will also now be a permanent presence in the Bahamian VAT system, as it is in every other such system around the world. After the initial settling down period, when education and assistance were the primary concerns, the tax authorities will now have to deal with fraud and tax evasion severely, since not doing so will lose goodwill amongst the compliant, tax-paying sector.

In conclusion, in well-managed tax systems, there is a ‘social contract’ or an implicit voluntary agreement between the state and the tax-paying public. This contract posits that if the state deals with the tax fairly and reasonably, the tax-paying public will generally comply with their obligations. Everyone should pay. The tax should apply generally and there should not be a special group of persons with the ability to avoid it. The Government should seriously note, in its political and fiscal agenda, that mass non-compliance arising from losing this ‘social contract’ is the nightmare of any government.

UHY supports the Government’s effort to restructure the taxation regime in the Bahamas. For businesses, your accountant and your lawyer are your friends, to hold your hands and guide you through this difficult period.

• NB: John S. Bain, a chartered accountant and a certified forensic accountant, is managing partner at UHY, Bain & Associates in the Bahamas, and member of UHY International, one of the world’s most respected accounting and economic analyses firms. Mr Bain assists attorneys, government corporations, individuals and companies involved in civil litigation matters that involve money. He is a Fellow of the Association of Chartered Certified Accountants based in the UK, and is the winner of the 2007 ACCA Achievement Award for the Caribbean and the Americas. Further information is located at www.uhy-bs.com. He can be contacted at john@uhy-bs.com.