From:TheBahamasWeekly.com
"Bahamas VAT System - Triumphs and Pitfalls" (Part 1)
By John S. Bain Managing Partner at UHY, Bain & Associates in The Bahamas and member of UHY International
Sep 19, 2014 - 1:45:59 PM
Introduction of the Tax
I
n
a previous paper, we posit that VAT was probably 20 years too late. The
July 1, 2014 was the original date of the proposed system of Value
Added Tax (VAT). Some persons thought it was too soon, and the
government listened. The announcement date did, as was expected,
generate much debate from the intellectual community, the business
community and the general population. Now the debate is over
and The House of Assembly passed the modified Bill. The original
guidance was limited in its detail and an earlier exposure may have
invited earlier comments.
Today, however, after the delay and further
studies by interested parties, the government of The
Bahamas has announced a new date of implementation as
January 1, 2015.
It has also published the updated bill and a set of regulations, as
well as embarked on a public relations system using social media, public
broadcast, town meetings, and partnership with
non-governmental organizations, including The Bahamas Institute of
Chartered Accountants.
Additionally, a more comprehensive guidance has
been published and, presumably in a move to ‘soften the blow’ of a new
tax in a jurisdiction where there were few such
fiscal obligations previously, the starting rate has been halved to
7.5%.
UHY
welcomes the participative approach demonstrated by the government. We
believe that the VAT debate (although healthy and necessary
in a democracy) was beginning to generally follow the concept of
saturation — when, in qualitative studies, the collection of new data
does not shed any further light on the issue under investigation. We
believe however, that the debates were healthy and,
as a result, the country is better off in terms of understanding the
technical and compliance issues associated with implementation.
Presentation to businesses and the taxpaying public
At
the onset, it is important for us to remind the readers that although
the business collects and pays the tax to the government, and it
is the business sector that will suffer the administrative burden and
cost of doing so, ultimately, a VAT is borne by the final consumer. The
consumer will see the manifestation of this tax in the form of higher
prices.
Because
of the administrative burden, the business sector needs comprehensive
guidance on any tax regime, particularly during the initial
introduction. For taxes on income, their structure can be very simple –
work out what you earn and pay a percentage in tax. VAT however, is a
tax on each and every individual transaction and, even then, if
everything was subject to VAT it could be quite
simple – VAT on your sales less the VAT paid on your purchases would
equal the net VAT you pay to the government.
Where
VAT differs from that simple structure is that not all transactions are
subject to VAT and, in many cases, do not allow the reclamation
of VAT paid on associated costs. The distinctions can be very
complicated, and for business people focused on their businesses, very
difficult to understand and work out not only what VAT they have to
declare on their VAT returns, but also what VAT they have
to charge to their customers in the first place.
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. 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.
From an administrative perspective, such an initial period can also
assist in identifying problems with the tax generally at an early stage
so they can be addressed, rather than allowing them to fester later.
Indeed, the teething problems mentioned will also
extend to the tax authorities, who will now see the differences between
theory and practical implementation of the tax. They too may need some
time to work out the bugs in the governments systems of tax collection
and enforcement
Some difficulties
It
is very positive that the Bahamian government structured its VAT system
on the legislation and principles in use around the world, which
itself are a derivation from the original European system. The broad
framework of the tax is therefore well understood and less likely to
generate fundamental problems of implementation.
We
note that the government maintains the initial VAT threshold is
$100,000 in the revised Act, and this will exclude a number of very
small
businesses from the tax. The government can expect difficulties around
the boundary where businesses just above and just below the threshold
will be in competition with each other. This is the ‘cliff-edge’ and
this is a common problem in many countries.
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. 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.
Additionally,
non-trading organisations such as charities or similar not-for-profit
organisations may encounter difficulties. Often, such
organisations do fall within the VAT system and have difficulties in
meeting the requirements from a cost and administrative perspective.
However, many such organisations will find themselves at the centre of a
dispute over whether their activities are subject
to VAT or not. Experience in many jurisdictions with a VAT system
suggests that the distinction between services provided under a contract
and grant-funded activities can frequently be very difficult to analyse
for VAT purposes.
Some
persons co-mingle funds between their private transactions and the
business operations, although this should only affect a very small
number of persons. More generally, although it may seem unlikely at
first, experience shows that disputes can be expected over whether
someone has actually received payment for a service or not. Under
section 29 of the Act, a supply of goods includes “supply
of goods for a consideration in goods or services” meaning payment for
VAT purposes can include money and barter transactions. It is possible
that this will trigger disputes.
Another
area where disputes are likely to arise is that of single vs. mixed
supplies. This has resulted in many cases through the European
Domestic Courts and the European Court and the matter is still very
unclear after many years of apparently final, landmark decisions.
Consider a supply of two things, one being subject to VAT and the other
being exempt or zero-rated. The business will want
to argue either that the exempt or zero-rated elements are the
predominant supply, or treat them as separate supplies to reduce the VAT
payable. The tax authority of course will want to treat the entire
activity as a single supply at the standard-rate. Additional
examples where disputes could arise include the following:
-
The supply of a car on finance;
-
The supply of rent and services to tenants;
-
The supply of goods with delivery included;
-
The rent of furnished accommodation;
-
Education supplied together with goods or services outside the exemption for a single price;
The
likelihood of such disputes is less than in other more established VAT
systems as the Bahamian system has fewer exemptions and zero-rated
items, but there will be disagreements, which will require resolution
through the dispute resolution system.
For
input tax deductions, there are several exclusions from the right to
claim and these will inevitably cause many corrections to VAT returns,
as businesses are likely to claim more than they are entitled to, in
most cases inadvertently. We would recommend that the tax authorities
publish as much information and guidance as possible to help businesses
compute the correct VAT and receive any returns
due to them.
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.
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.
In
"Bahamas VAT System - Triumphs and Pitfalls" (Part 2), we will examine some of the problems to be expected in the
short, medium and long term after the implementation of VAT.
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
.
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