{"id":80670,"date":"2014-09-23T09:37:08","date_gmt":"2014-09-23T13:37:08","guid":{"rendered":"http:\/\/www.bahamasb2b.com\/news\/?p=80670"},"modified":"2014-09-23T09:58:37","modified_gmt":"2014-09-23T13:58:37","slug":"bahamas-vat-system-triumphs-and-pitfalls","status":"publish","type":"post","link":"https:\/\/www.bahamasb2b.com\/news\/2014\/09\/bahamas-vat-system-triumphs-and-pitfalls","title":{"rendered":"Bahamas’ VAT System \u2013 Triumphs And Pitfalls"},"content":{"rendered":"

By John S. Bain Managing Partner at UHY, Bain & Associates in The Bahamas and member of UHY International <\/em><\/span><\/p>\n

PART 1<\/p>\n

Introduction of the tax<\/p>\n

\"john-bain-bahamas\"In 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.\u00a0 Additionally, a more comprehensive guidance has been published and, presumably in a move to \u2018soften the blow\u2019 of a new tax in a jurisdiction where there were few such fiscal obligations previously, the starting rate has been halved to 7.5%.<\/p>\n

UHY welcomes the participative approach demonstrated by the government.\u00a0 We believe that\u00a0 the VAT debate (although healthy and necessary in a democracy) was beginning to generally follow the concept of saturation \u2014 when, in qualitative studies, the collection of new data does not shed any further light on the issue under investigation.\u00a0\u00a0 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.<\/p>\n

Presentation to businesses and the taxpaying public<\/p>\n

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.\u00a0 The consumer will see the manifestation of this tax in the form of higher prices.<\/p>\n

Because of the administrative burden, the business sector needs comprehensive guidance on any tax regime, particularly during the initial introduction.\u00a0 For taxes on income, their structure can be very simple \u2013 work out what you earn and pay a percentage in tax.\u00a0 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 \u2013 VAT on your sales less the VAT paid on your purchases would equal the net VAT you pay to the government.<\/p>\n

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.<\/p>\n

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 \u2018light touch\u2019, 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 \u2018teething problems\u2019 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.\u00a0 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.\u00a0 They too may need some time to work out the bugs in the governments systems of tax collection and enforcement<\/p>\n

Some difficulties<\/p>\n

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.\u00a0 The broad framework of the tax is therefore well understood and less likely to generate fundamental problems of implementation.<\/p>\n

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.\u00a0 The government can expect difficulties around the boundary where businesses just above and just below the threshold will be in competition with each other.\u00a0 This is the \u2018cliff-edge\u2019 and this is a common problem in many countries.\u00a0 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.\u00a0 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.<\/p>\n

Additionally, non-trading organisations such as charities or similar not-for-profit organisations may encounter difficulties.\u00a0 Often, such organisations do fall within the VAT system and have difficulties in meeting the requirements from a cost and administrative perspective.\u00a0 However, many such organisations will find themselves at the centre of a dispute over whether their activities are subject to VAT or not.\u00a0 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.<\/p>\n

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.\u00a0 Under section 29 of the Act, a supply of goods includes \u201csupply of goods for a consideration in goods or services\u201d meaning payment for VAT purposes can include money and barter transactions.\u00a0 It is possible that this will trigger disputes.<\/p>\n

Another area where disputes are likely to arise is that of single vs. mixed supplies.\u00a0 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.\u00a0 Consider a supply of two things, one being subject to VAT and the other being exempt or zero-rated.\u00a0 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.\u00a0 The tax authority of course will want to treat the entire activity as a single supply at the standard-rate.\u00a0 Additional examples where disputes could arise include the following:<\/p>\n

–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The supply of a car on finance;
\n–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The supply of rent and services to tenants;
\n–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The supply of goods with delivery included;
\n–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The rent of furnished accommodation;
\n–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Education supplied together with goods or services outside the exemption for a single price;<\/p>\n

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.<\/p>\n

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.\u00a0 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.<\/p>\n

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.\u00a0 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.\u00a0 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).\u00a0\u00a0 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.<\/p>\n

In Part 2, we will examine some of the problems to be expected in the short, medium and long term after the implementation of VAT.<\/p>\n

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\u2019s most respected accounting and economic analyses firms.\u00a0 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. \u00a0He can be contacted at john@uhy-bs.com.<\/p>\n","protected":false},"excerpt":{"rendered":"

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