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Last Updated: Feb 13, 2017 - 1:45:37 AM |
"Bahamas VAT System - Triumphs and Pitfalls" (Part 2)
By John S. Bain Managing Partner at UHY, Bain & Associates in The Bahamas and member of UHY International
Sep 24, 2014 - 2:16:49 PM
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 Likely problems in the short, medium and long-terms
All tax to a greater or lesser extent relies on the voluntary cooperation of the population. UHY’s experience with the tax regimes in many jurisdictions around the world 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 the 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 after introduction, the government can expect mistakes and errors by businesses in their accounting procedures and VAT declarations. The declaration of wrong amounts of VAT 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.
Unexpectedly, 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 seek to 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 and 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 of providing management information in order to manage operations and cash.
Also in the short-term, the government can expect a certain level of non-compliance and will need to tackle this urgently with education and information. This is likely to come either from deliberate non-compliance or from 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 business sector for some time, although larger multi-national 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 business from tax avoidance schemes, but it is just that the larger businesses with branches or connections to countries with other 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 addresses their problems of initial reluctance and non-compliance. During the longer short-term, perhaps six months to three years after its introduction, it is an opportune time to implement any changes to the legislation and guidance to resolve problems and confusion or combat the initial level of non-compliance. Now is not a good time to consider increasing the rate of VAT, 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 the tax as smoothly as possible and encourage compliance. Many countries around the world have very high non-compliance rates driven partly by public attitude 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 that 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 the 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 growth and inflation into account.
The government should now be seeing the prevalence of penalties and enforcement action settling down to a reasonably consistent level with a difficult balance between securing as much of the revenue as possible against being seen as too over-bearing and fostering the very non-compliance the government seeks to discourage. Although it will not be found in government publications, many governments around the world acknowledge that there will always be a certain level of non-compliance where the fiscal and political consequences of increased enforcement outweigh the final slice of 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 government has sufficient information to determine the percentage of ‘hard-core’ evasion with some degree of accuracy.
By now, the government’s fiscal budgets will also have settled down and it is at this interim period, perhaps three to five years after the introduction of VAT, that we might see an increase in the rate of VAT itself. The early cynicism will have died down and the accounting and VAT declaration procedures would have normalize by now, although we would advise against any sudden or significant increase in the initial rate of 7.5%. 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 of VAT experts, that any increase in the rate of VAT is likely to increase the prevalence of tax avoidance. This would have had less financial effect when rates were lower. The efforts of the Government 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 the fiscal viability of the tax as it moves from the initial uncertainties of the short and medium terms to the longer term.
The longer-term effects of the new VAT system will manifest in three broad areas:
Firstly, there will be a continuing need to provide information and guidance to the business sector by 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 the penalties and technical assistance.
Secondly, 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 that the tax authorities will objectively and fairly hear and deal with their arguments and concerns.
Thirdly and regrettably, the prevalence of fraud will also now be a permanent presence in the Bahamian VAT system as it is in every VAT 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 any goodwill amongst the compliant, tax-paying sector.
In conclusion, in well-managed tax systems in many countries around the world, 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 the tax. The government should seriously consider 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.
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. Bain assists attorneys, government corporations, individuals,
and companies involved in civil litigation matters that involve money.
Bain 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
.
"Bahamas VAT System - Triumphs and Pitfalls" (Part 1)
Disclaimer:
The views expressed here are solely those of the author in his/her
private capacity and do not in any way represent the views of
TheBahamasWeekly.com
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