Bahamians are getting ready to embrace a new more equitable tax regime in the country…

VAT will drive down prices and reduce customs fraud….

Nassau, Bahamas – Not one to sugarcoat the issue, Gowon Bowe, AA ’97, Partner at PricewaterhouseCoopers, told a packed gathering of college students and faculty on Wednesday, October 23rd, that the impending Value Added Tax (VAT) will bring with it a radical shift in the way that things occur now and The Bahamas cannot afford to have the tax reform system fail in its implementation.
Mr. Bowe, an alumnus of The College of The Bahamas, returned to his alma mater for the inaugural College of The Bahamas Alumni Leaders Series, where a panel of graduates shared frank disclosures on the implications of VAT in The Bahamas.

“Let’s be clear and not sugarcoat it; VAT is a regressive TAX, but I want to be very clear when we speak about regressive taxes. It is less regressive than the one we have now,” Mr. Bowe said. “When the term is used by economists about regressive taxes, it is really saying what the minister alluded to in the very beginning, that the higher earners pay less as a proportion of their income, than those that are the lower earners and so that inherently is regressive because the persons who can least afford it are the ones funding the majority and that is not unique to The Bahamas that is a challenge the world over.”

Presently, approximately 60 percent of total recurrent revenue comes from an intricate web of import and export duties and tariffs. However, as the government seeks accession to the World Trade Organisation (WTO), and in light of a growing momentum of tariff reductions and trade liberalisation, a more efficient taxation model is necessary.

“Is the implementation date feasible? I am not sure because…it is complex to put in place and we cannot afford to have it fail. What we need to be very mindful of as a populace is that we are really putting forward the arguments that say ‘how do we make this change, which will be a seismic change, successful?’ It is not to delay it for the purposes of I don’t want to pay taxes for six more months. It is more from the perspective of do I delay it to ensure that we don’t have a massive failure from day one that we can never recover from,” Mr. Bowe added.

He urged a reasoned debate without any hysteria.

Value Added Tax is a broad based consumption tax assessed on goods and services. It has been implemented in over 140 countries around the world. By July 1, 2014, The Bahamas will join that growing list as the tax is applied on goods and services proposed at a rate of 15 percent.

The audience, who gathered in the auditorium of the Harry. C. Moore Library and Information Centre, eagerly shared their questions and concerns, ranging from how the government will enforce measures to discourage tax evasion and the prudence of introducing VAT at a rate of 15 percent, to why alternative forms of tax reform are not more suitable for the economy of The Bahamas.

For Vaughn Roberts, AA ’91, Senior Vice President, Finance and Corporate Alliances at Baha Mar, the introduction of VAT will likely increase the cost of visitor experiences in The Bahamas, requiring more of an investment from hotel properties in marketing and advertising campaigns. He said at the moment the sector is taxed heavily, listing the hotel occupancy tax, hotel licensing fees, business license fee and casino win tax.

“We also see the administration of this tax scheme as an additional cost; a cost to the operator, a cost to the government to enforce, regulate and monitor and all of that is an additional cost that has to be borne by somebody and it will likely will be borne by the end user, the customer. Fundamentally, from an economic standpoint, I tend to think that there are inflationary impacts as a result of the implementation of this tax. The government is attempting to raise about $200 million in revenue and at the end of the day somebody has to pay for the increased revenue and that comes through end pricing,” Mr. Roberts said.

He also suggested that a tax on services will present a cash flow challenge that will have a larger impact on small business operations.

“Obviously if you are coming out of pocket to pay VAT on services to produce an offering, you are going to sell or close out at some point in the future and you are going to recover from the guest that cash, there is a tax flow issue there. These challenges are certainly more significant the smaller the business. Large organizations like ourselves and Atlantis will have the ability to absorb these administrative challenges, cash flow impacts quite efficiently,” he added.

In its White Paper on Tax Reform, the government is proposing that the existing Hotel Occupancy Tax is replaced with VAT at a rate of 10% and that food and beverage sales in hotels will be taxed at a VAT rate of 10%.

State Minister for Finance, Michael Halkitis, AA ’89, made it clear that any business operation that has a turnover of $100,000 – the proposed registration threshold – will be exempt from registering with the Central Revenue Agency for VAT monitoring. That leaves roughly 3,000 businesses in the net. Additionally, the government is proposing that food and agricultural products that currently benefit from duty free status under the Tariff Act; other imports that benefit from the same status and can be justified on social ground like medicines; health and education services; transfers and leases of land and residential buildings; financial services and social and community services will all be exempt from VAT.

He also addressed the matter of alternative tax measures to bolster government revenue.

“We looked at several options. When we came in, we developed a medium term fiscal consolidation strategy coming out of the recession that began in 2008 and lasted right up to 2011/2012 and what we are still trying to emerge from. There are four elements of our strategy: asking government departments to tighten their belts and reduce expenditure; trying to grow the economy, trying to get investments in here; doing a better job of revenue administration and trying to find new streams of revenue,” he explained.

“When we came in we didn’t just recognize this gap (in revenue) and decide to add this new tax. We recognized that you have to try to achieve this balance of not going too far in terms of cutting expenditure. Everyone looks at cutting the civil service, but if you send home approximately 1,000 civil servants, making about $20,000 a year, you save about $20 million but now you have 1,000 people who are unemployed, 1,000 less people going into the stores, 1,000 less people consuming other services and so if you err too much on the side of austerity, you put yourself into a vicious cycle,” Mr. Halkitis added.

The government will soon release the draft legislation and regulations that will bring the VAT regime into effect.