Nassau, Bahamas – Remarks by The Honourable Michael Halkitis, Minister of State for Finance (Second Reading) of the Value Added Tax Bill on August 19, 2014:
Introduction
Mr. Speaker,
I wish at this time to move for second reading and committal of the Value Added Tax Bill.
To that end, I will in this contribution make observations on a number of vitally important matters in respect of the Bill that I trust will serve to promote an enlightened and effective discussion of the Bill.
I will, specifically, touch on the following issues:
1.Setting the new VAT and tax reform more generally within the context of the Government’s overarching national development plan;
2.Outlining our concerted efforts to reform and modernize the administration of the major, existing taxes in order to enhance revenue collection performance;
3.Reviewing, once again, the many initiatives that we have launched to better contain and control public expenditure;
4.Expanding on the key elements of the VAT policy and administrative framework that are featured in the VAT Bill;
5.Elaborating on the reductions that have been announced for various tariff and excise rates and plans for the future in these areas; and
6.Updating Honourable Members on progress to-date on the VAT implementation plan and our state of readiness for VAT introduction on January 1 of next year.
The Government ’ s National Development Plan
Mr. Speaker,
The VAT Bill before us is about the introduction of a new broad-based tax on consumption in The Bahamas. However, it is critically important to properly situate this initiative in the broader context of the Government’s overall plan for national development. This plan, appropriately so, is about much more than tax reform and the introduction of a new source of taxation.
Indeed, as the Government moves ahead with the fundamental reforms that it was elected to implement, including fiscal and tax reform, focus must be maintained on our overarching plan for economic renewal, job creation and social progress. And very importantly all of these within the context of a nation of islands; citizens in all the islands and in the smallest settlements have a right and an expectation of access to government services.
The details of that plan were presented in the Government’s Charter for Governance and, subsequently, the Speech from the Throne. In it, we explained that our country’s need for change is widespread and that we simply cannot afford to continue with business as usual. We spoke of our commitment to a national development plan grounded in a vision of a stronger and more prosperous Bahamas of the future.
Our plan offers new and innovative solutions for the wide range of economic and social challenges facing the nation. To that end, we have charted a course of change with the specific goals and targeted actions that we will implement over the full course of our mandate.
Our plan is multi-faceted and it is targeted to fighting crime and bolstering national security, strengthening the economy and creating jobs, enhancing health and education and social development generally as well as promoting the further development of our Family Islands.
We fully recognize that the challenges that confront us are numerous and complex. Our plan of action is commensurate with those challenges. We are steadfastly committed to its full implementation for the sake of a better life and future for all Bahamians.
The achievement of the objectives that I mentioned above clearly is clearly dependent on stronger economic growth going forward. To that end, our plan encompasses a variety of measures including strengthening our key tourism industry; promoting additional foreign direct investment across the country, and particularly in Grand Bahama and the Family Islands; exploring avenues for further diversifying our economy, especially in the agricultural area through science and technology to improve our competitiveness in food production. We are also committed to further diversifying our financial services sector; the further development and expansion of our yachting and shipping registries; expanding our investments in education; and strengthening national training through the National Training Agency to establish a competency based training and job placement system that is flexible and responsive to the requirements of the workplace.
We have focused our attention on these and the other major areas of our change and growth agenda and we will persist in planning and further developing initiatives that will get our economy growing more strongly in the years ahead.
From the outset, we have been guided by the hard reality that the finances of the Government need to be returned to a position of sustainability if we are to strengthen confidence in the Bahamas as an attractive and secure place for investment, not only by foreigners but by Bahamian entrepreneurs as well.
If confidence is eroded by lax fiscal policies, we all bear the consequences: credit downgrades and higher interest rates for the Government and Bahamian businesses and citizens, as well as the potential for further downgrades and higher interest rates if we fail to act decisively and stop mortgaging the future to support today’s spending. History of deficit financing.
We have made it clear that we will implement priority initiatives within our plan to the extent that we can do so in a fiscally responsible manner while remaining faithful and focused on the commitments made in our Charter for governance.
We have also stressed that we will strive to reform and rebuild the basic structure of the public finances such that, over time, we return them to a self-sustaining basis with no need for continued annual deficit financing and borrowing.
At the same time, by putting the level of government debt on a downward path back toward more desirable and appropriate levels, we will recreate the fiscal room necessary to finance the full complement of our national development plan, including economic renewal and stronger job creation. Seen in this light, fiscal reform is at the heart of the Government’s plan for national economic and social development.
In turn, tax reform is a critical component of fiscal reform. These reforms are critically necessary to allow the Government to follow through in making its national development plan a reality.
For the sake of complete transparency, full disclosure, accountability and credibility, we set out the details of the various components of our fiscal reform strategy in the form of a Medium-Term Fiscal Consolidation Plan through 2016/17. This plan was published in February 2013. The plan consists of four key parts: growing the economy; restraining expenditure; enhancing revenue administration; and securing new sources of revenue. Many who still persist in the view that the government is focusing only on taxation.
Through this plan, and in combination with our actions to strengthen economic growth, we are fundamentally and, in a balanced way, reforming the structure of both Recurrent and Capital Expenditure as well as the structure of Government Revenues. This will allow us to:
• eliminate the unsustainable imbalance between Recurrent Expenditure and Revenue with a target of 2015/16;
• significantly reduce the GFS Deficit and set it on course to complete elimination; and
• arrest the growth in the Government Debt burden and move it onto a steady downward path to more prudent and sustainable levels.
Reform and Modernization of Major Existing Taxes
The Government’s actions on the revenue front begin with measures to improve the collection of existing taxes in line with what is rightfully due to the Government. We are fully cognizant that our revenue system is seriously deficient and we are moving to remedy this situation through a number of targeted reform and modernization measures. As I spoke at length to our actions in respect of Customs and Real Property Tax at the time of the 2014/15 Budget debate, I will merely recap these at this time.
Customs Operations
Mr. Speaker,
Since coming to office, we have been pursuing an aggressive plan of action in respect of Customs, to bring its practices and procedures up to best international standards.
Business Process Re-engineering
In the area of business process re-engineering, the final Inception report has been prepared and monthly reports have commenced. A cloud-based project management software has been set up to monitor activities, timelines and milestones.
Enforcement
As for enforcement, the consultants conducted their first mission and are developing preliminary findings for the “ As Is” reports. This work should conclude by September 12, 2014.
Customs Network Infrastructure
The final report assessing the Customs Network has been reviewed. As well, the Terms of Reference for the new Customs Network have received approval from the IDB, which is providing financial support. Work is underway on the RFP to solicit bids for the new customs network inclusive of IP phones, Network Topology, Network Equipment, Installation, Maintenance, Warranty and Standardization.
Mobile Communications Equipment
The procurement of some of the mobile communications instruments, such as handheld radios, Wifi solutions in port zone and PDA’s, is underway.
Marine Unit
Mobilization of the Marine Unit is proceeding with the RBDF guiding the procurement of the boats and maintenance management.
K9 Unit
Mobilization of the K9 Unit has been agreed and the RBPF/HMP will guide the procurement of the canines and maintenance management.
Portable Scanners
Customs is proceeding with the procurement of portable scanners and has identified several Family Island sites for deployment.
Human Resources Consultancy
The RFP for the HR consultancy is in development and bids will be solicited with a view to engaging a firm.
Training Sites Renovation
Customs is proceeding with the training sites renovation. They have identified several training sites for key Customs Operations on the Family Islands.
Audit
In the audit area, proposals are being reviewed and evaluated.
Modernization of the Real Property Tax System
As for progress being made on the modernization of the Real Property Tax system, concerted efforts are being focused on the following major initiatives in the Property Tax Unit of the Department of Inland Revenue:
• Introduction of a new Property Tax Management and CAMA System that will enable the RPT Unit to improve the coverage ratio of the tax system, provide accurate tax information, manage arrears and collections and lead to an overall enhancement in the efficiency of the department; the Government recently signed the contract with Tyler Technologies with respect to replacing the Real Property Tax System;
• Development and implementation of a General Re-assessment of properties on the register in the Fall of 2014, in order to get property values up to date, by either indexing or trending existing valuations to achieve better horizontal equity;
• Implementation of an Arrears Action Plan utilizing private collectors to assist with the collection of outstanding property taxes;
• Delivery of an effective programme of Taxpayer Education to inform taxpayers on the various aspects of the Real Property Tax; and
• Amendments to the Property Tax Legislation to ensure that it is in line with best practices.
Enhanced Containment and Control of Public Expenditure
As for measures to contain and control public expenditure, Honourable Members will recall that I spoke at length, during the Budget debate, on the numerous concrete actions that this Government has initiated since it came to office and which it is actively pursuing.
In summary fashion, on the Recurrent Expenditure front, we are taking a variety of measures to restrain the growth of spending and make that spending more efficient and effective. The overall framework for strengthened public financial management is taking place within the scope of the new Financial Administration and Audit Act. The Ministry of Finance is, in a determined fashion, enforcing strict expenditure discipline and accountability across all Government Ministries, Department and public corporations.
In this regard, the Government is committed to a fundamental review of its operations and its expenditure and revenue control mechanisms, seeking to instill best practices wherever feasible. The Ministry of Finance, in particular, is being restructured and strengthened to enhance its capacity to more effectively monitor the operations and expenditures of Government Ministries, Departments and public corporations. We are vigorously striving for higher levels of accountability and efficiency.
As regards public corporations, the Ministry of Finance is exerting more direct oversight of their financial affairs to ensure that they strive for greater levels of efficiency and effectiveness and that they are subject to greater accountability to the Government. This will allow our budgeting process to be more comprehensively informed by the budgets of public corporations, such that a truly comprehensive approach to fiscal discipline is achieved. The Government has asked subsidy dependent corporations to better align their expenditure plans with the resources that are available.
In addition, our planning function is being strengthened such that new investments and projects are reviewed in an economically and financially sound and effective manner. The government is also introducing new Public Sector Procurement procedures which impose greater controls and greater efficiency on public spending for goods and services for all public entities including public corporations.
Appeal for cooperation.
As well, we have bolstered our approach to the management of government debt. Through the Debt Management Committee comprising representatives of Finance, the Treasury and the Central Bank; a new debt management policy framework has been developed to minimize the financing costs of Government debt while also minimizing risk.
Through these actions, Recurrent Expenditure will be allowed to grow in dollar terms through the medium- term to allow the financing of new and emerging priorities such as the hiring of doctors and other staff for the new mini-hospitals. However, the plan does signal the Government’s commitment to a reduction in Recurrent Expenditure relative to the size of the economy; this will require the setting of clear spending priorities going forward.
Having said this, I believe it is important to delineate again the factors underlying the year-over-year increase of $103 million projected for Recurrent Expenditure in 2014/15. For one thing, not unexpected, debt servicing requirements next year will be up by $40 million from 2013/14, with public debt interest payments up by almost $30 million and debt redemption higher by $10 million. Of course, it goes without saying that the large cost overruns, under our predecessors, on the New Providence Road Project have been an important factor in the higher interest payments for which we have had to make provision.
Capital Expenditure over the last few years has been at exceptionally high levels relative to historical trends. However, due to the fiscal exigencies, our Medium-Term plan calls for these expenditures to be returned to their more traditional level of 3% of GDP. Given emerging requirements, this will require strict prioritization and timely profiling on the part of the Government.
How long do we ask people to wait?
Key Policy and Administrative Elements of the VAT Bill
Mr. Speaker,
As I stated at the time of the tabling of the VAT Bill on July 23rd, we indeed find ourselves at an historic moment in the history of our small nation. For, after seemingly countless years of seemingly endless discussion, debate and study, we are finally moving forward with fundamental reform of our system of taxation to bring it up to the modern standards of the 21st century.
I would go further in this vein and suggest that our intensive and extensive deliberations on the matter have truly borne fruit in that we have settled on the very best option for our country from both an economic and a fiscal perspective. In the words of Professor Richard Bird, an internationally renowned expert on VAT and taxation in general, the implementation of VAT has been, without a doubt, the most successful fiscal innovation since 1950. Allow me to repeat and stress the key words in the previous statement: without a doubt, the most successful fiscal innovation in over half a century.
More specifically, he asserts that:
“ no other significant tax, not even the income tax, spread so rapidly and quickly around the world to the point where VATs currently exist in over 150 countries ” .
And why has this occurred? Professor Bird attributes this phenomenal success to the fact that every country needs a tax on mass consumption to finance government programmes and services. More importantly, he states that, in addition, experience has shown that the VAT is the least distorting consumption tax and it is the tax that can be administered most effectively. In other words, VAT is the most economically efficient way to collect tax revenues and the cost of doing so is generally lower than for other forms of taxation.
According to an IMF tax policy mission that visited this country in March of this year, revenue yields from VAT generally outperform other types of taxes and this has been demonstrated in several Caribbean countries. For example, following VAT introduction, indirect tax revenue increased by at least 3 per cent of GDP in Antigua and Barbuda, Belize, Dominica and St. Vincent and the Grenadines. In the case of St. Kitts and Nevis, the increase was on the order of 6 per cent of GDP, on the basis of a VAT imposed at a rate of 17 per cent.
We have now deliberated on VAT for well over a year, since the release of the White Paper in February 2013. Following the issuance of the draft VAT legislation late last year, we have had consultations with the private sector. We have also had the benefit of further in-depth studies of VAT in the Bahamian context.
As well, our internal deliberations have been informed by experience gained in numerous other countries over the past many years. That experience has been catalogued in a best-practice framework that is generally acknowledged to be optimal. Interestingly, of all the VAT nations around the globe, New Zealand is the one country that has adhered as closely as possible to that so-called optimal VAT framework and it is thus rightfully and widely recognized as having the very best VAT system in existence.
It is for that very reason that the Prime Minister sought concurrence from his New Zealand counterpart for timely and focused policy and technical advice from VAT experts from that country. I have previously provided details on the findings and recommendations of the New Zealand tax mission and their final report is available on the Government website. I would at this time merely recap the key conclusions.
The success of the New Zealand VAT, and there are important lessons for us here, was very largely due to:
➢ an extensive education programme aimed at both the business sector and the wider public, with the programme largely driven by respected members of the private sector;
➢ a Government commitment to minimize the compliance costs involved with the new tax, particularly by having virtually no exemptions; and
➢ a Government commitment to offset the effect of VAT on the cost of living by reducing income taxes and, for families not paying income tax, introducing a form of negative income tax or cash transfer system.
As was explained in the Budget Communication, the government has accepted the New Zealand recommendation to enlist the private sector in the public education campaign. A three person Task Force will oversee this process and will be tasked to assist in explaining the VAT to the business community and the wider public. The Task Force will have a budget of $150,000 at its disposal to deliver the proposed campaign by the end of December 2014.
As for a VAT in The Bahamas, the New Zealand experts recommended that:
➢ while the Ministry of Finance VAT Implementation Team could likely cope with implementation as early as October 1, they are more likely to require time beyond then if there are design and implementation changes made in response to the draft legislation upon tabling.
➢ Moving to a single rate of VAT, other than zero for exports, with very limited exemptions would enormously reduce the compliance costs of the private sector and the enforcement costs for the public sector. This would also permit a potentially large reduction in the single rate of VAT, almost certainly to 10 per cent and quite possibly to below that figure.
➢ While the above approach would minimize compliance costs and allow a lower rate, it could also have negative effects on the well-being of low-income households. It would thus be vital to introduce mechanisms to protect such households. The team estimated that our proposed reforms to social assistance programmes appear to provide a suitable delivery mechanism for such assistance.
The impact of VAT structure and simplicity/complexity on private sector compliance costs is indeed critical. The issue has been documented in a study undertaken by Price Waterhouse Coopers on the basis of data collected by the World Bank as part of its Paying Taxes 2010 project. The study concluded that it is very important to streamline the compliance burden and reduce the time needed by business to comply if a VAT system is to work efficiently. The key underlying findings are that:
• Where electronic filing and payment is available and is used, the average time to comply with VAT is some 30 per cent lower;
• The frequency of returns is also important; where bi-monthly or quarterly returns are available, compliance time falls by some 35 per cent;
• The requirement to submit invoices and other documentation with VAT returns increases the time required to comply by a factor of 2; and
• Prompt refunds tend to reduce the time required by businesses to comply.
I am pleased to report that the VAT administrative framework that is in development for this country features a number of measures that will ease the compliance burden on business. We will, for instance, have electronic filing and payment; three options for filing frequency based on the size of a business; no invoices and supporting documentation will need to be filed with VAT returns but merely retained for audit purposes; and refund procedures have been accelerated.
Mr. Speaker,
The VAT policy and administrative framework that is presented in the VAT Bill has been duly shaped to reflect the very best advice that we have had at our disposal. As I did at the time of tabling, I will now briefly review the key features of the Bill for the benefit of Honourable Members.
The VAT will be administered by the VAT Department under the Ministry of Finance. This structure will function under an MOU with the Department of Inland Revenue which will allow a relatively seamless transition to the Central Revenue Administration that will in time emerge and encompass both VAT and Inland Revenue.
I want to stress that the Government clearly still adheres to its goal of creating the CRA but judges that an interim move to a VAT Department is prudent in the near term in order to secure the successful introduction and implementation of the VAT. A VAT Appeal Commission will adjudicate on tax matters and appeals will be possible to the Supreme Court on matters of law.
There will be one single rate of VAT at 7.5 per cent across the board. As is done around the world, exports will be zero-rated, thus allowing exporters to claim credits for VAT paid on inputs and thereby maintaining their international competitiveness. We judge a lower VAT rate than originally proposed to be desirable from both an economic and social perspective.
The importance of simplicity has been demonstrated in Switzerland which undertook a fundamental assessment of its VAT system in 2007. One part of the proposed reform involved transforming its three-rate structure of 2.4 per cent, 3.6 per cent and 7.6 per cent into a single rate of 6.1 per cent. It would also remove 20 of the 25 existing exemptions. Independent studies revealed that the introduction of a single VAT rate would be expected to reduce business compliance costs by at least 20 per cent and up to 30 per cent, and increase economic growth by 0.1 per cent to 0.7 per cent.
Zero-rating (i.e. applying zero VAT and allowing credits for VAT paid on inputs) should definitely be applicable to exports as a VAT is designed to tax domestic consumption. Other than that, zero-rating should be strictly limited, if utilized at all.
Adding other items to the zero-rated list undermines the VAT as a broad-based, neutral tax on consumption. It also adds to the compliance costs of the private sector, as well as the administration costs to government, by increasing the volume of VAT collections which are subsequently refunded. Zero-rating also provides opportunities for fraud.
VAT refunds have been frequently referred to as the potential Achilles heel of a VAT system and, accordingly, experts have argued against extensive zero-rating in order to minimize the magnitude of refund claims and payments.
Items that are exempted under a VAT are not subject to VAT but credit for VAT paid on inputs is not allowed. As such, exemptions are inconsistent with the fundamental logic of VAT and they break the VAT chain, thus making enforcement more difficult. Accordingly, the consensus view of tax experts is that a VAT should exempt as few sectors as possible. As seen in other countries, it is often the proliferation of exemptions that over-complicates a VAT and thereby undermines its chances of success.
The main drawbacks of exemptions are that they:
• narrow the VAT tax base, thereby necessitating a higher standard VAT rate to meet revenue requirements.
• lead to cascading: if an intermediate seller is exempt, it cannot claim credit for VAT paid on its inputs. The upstream producer then ends up charging VAT on VAT paid on those inputs.
• increase administration costs to government and compliance costs to the private sector, especially firms that sell both taxed and exempt goods and services.
• violate the destination principle for internationally traded items, where exports embody exempted inputs (exports are thereby disadvantaged in a competitive sense).
• lead to exemption creep as non-exempt sectors lobby for exemptions, which can quickly undermine the success of the VAT system.
Accordingly, we have decided, along with the significantly reduced VAT rate, that the list of exemptions should be pared substantially, compared to what was initially proposed. Specifically, no goods will be exempted. As for services, the list of exemptions has been tightened to include only the following:
• Financial services, i.e. credit and deposit/savings products. This covers all forms of lending and savings products issued by banks, insurance companies and other financial institutions. For insurance, the products affected are, in particular, life policies and annuities. In order to give the industry time to prepare, exemptions on non-life insurance and annuities (such as property, health and casualty) are to be preserved until June 30, 2015.
• The sale or rental of a dwelling.
• Education services, specifically only for explicit tuition-funded courses of study for enrolled students in pre-school, primary and secondary school; and in programs of study leading to the award of graduate or undergraduate degrees at the tertiary level. This does not include services or goods paid for outside of the tuition (such as meals, books, extracurricular activities), tutoring, professional development and continuing education, seminars, or diploma and certificate courses.
• Thesale of vacant land; the stamp tax on transfers remains in place.
• A lease of land to the extent that such land is principally used, or intended for use, for accommodation as a dwelling which is erected or to be erected on such land.
• Any services by a ministry, department, statutory body, agency, local government council, or other entity of Government, in connection with a taxable activity where the consideration for such services is —
o (a)nominal in amount; or
o (b) not intended to recover the cost of such goods or services.
• Services rendered by a daycare business, including the provision of after-school care.
• Services provided directly by a facility to persons in need of care, being persons who are —
o aged;
o indigent;
o infirm;
o disabled;
o handicapped.
• Health care, specifically for public services provided to “public patients” receiving free care at public facilities including children of school age or younger, the indigent, aged, government employees and other persons identified by the Minister of Health.
• Religious services by an institution of religious worship.
• Services by a recognized charity to the extent that such services relate directly to the charitable function of the charity.
• Games of chance, gambling and lotteries.
The New Zealand mission also brought the spotlight back to exemptions, an area on which we had a significant private sector lobby. Exemptions when they are socially motivated are intended to reduce the burden of consumption taxes on persons with lower incomes. The points that the mission reinforced however, are the following:
➢ The first is that it is a costlier method of trying to help the poor, because more revenue is sacrificed in the process to those who are not poor. Take food for example. While a low-income family spends a higher proportion of its income on food, a high-income family spends much more on food in absolute terms. So exempting food from VAT would provide a much larger dollar benefit to a high-income family than to a low-income family. Having the means to provide direct assistance to low-income families is thus a far more efficient mechanism than exempting necessities from VAT.
➢ Studies done in New Zealand at the time of VAT introduction showed that the bottom 20 per cent of households spent up to 29 per cent of their budgets on food while the top 20 per cent spent up to 10 per cent. However, upper income households spent twice as much on food as low-income households. For every $100 spent on food, the least well-off spent $6.50 while the most well-off spent $12. Thus taxing all food made more than sufficient additional revenue available to redistribute and supplement the incomes of the poor.
➢ In addition, as the Ministry of Finance has emphasized in its education campaign, VAT-exempt items can still experience a price increase under a VAT as sellers will not be able to claim credits for VAT paid on inputs. The New Zealand mission stressed that this increases the justification for limiting the list of items that are exempted from VAT, because it gives the businesses that are affected by such changes the opportunity to participate fully in claiming credits for VAT paid on their operating inputs. It also allows such businesses to be more transparent in undertaking the adjustments to explicitly include VAT in their prices.
➢ The case of electricity is instructive in this regard. As it will not be exempt, BEC will be able to claim credit for all VAT paid on its inputs which, for electricity, are significant as they represent fully 82.5 per cent of gross output. That suggests that value-added in the electricity sector is only 17.5 per cent of gross output. BEC will then add 7.5 per cent VAT to its bills. However, were electricity to be exempt, BEC would not charge consumers the 7.5 per cent VAT but, as VAT on its inputs would not be creditable, it would pass on the equivalent of 6.2 per cent of VAT in the form of higher electricity prices. BEC’s commercial customers would be particular hard hit as they would face higher electricity prices and would have no input VAT to claim as a credit. Their own selling prices, and the VAT that they charge, would also be higher. This clearly illustrates how tax cascading can result from VAT exemption.
We are now proposing a regime of VAT-inclusive rather than VAT-exclusive pricing. This is to simplify price comparisons by consumers, especially when navigating between VAT registrants and non-registrants. The price consumers see will always be the price they pay.
The registration threshold for VAT will now be universal at turnover of $100,000 per year. As well, we will allow group registration for related groups of companies, which will use a single VAT account and file a consolidated VAT return. This will eliminate the need to recognize input and output taxes on intra-group transactions.
There will be three filing periods for VAT which will be specified in the VAT rules rather than the Bill. Businesses with annual taxable sales exceeding $5 million will file monthly. Businesses below that threshold and with taxable sales exceeding $400,000 will be allowed to file quarterly. Other registrants would be allowed to file on a semi-annual basis and use more simplified cash accounting methods when compiling their VAT returns. This cash rather than accrual basis of accounting among small registrants would also eliminate working capital concerns over the treatment of bad debts.
A simplified VAT return using a “flat rate scheme” is proposed for businesses with turnover below $400,000. VAT due to Government would be calculated either as a fixed percentage of cash sales, with no need to account separately for input taxes paid; or the business would be allowed to calculate both input and output taxes on the basis of cash receipts or cash payments.
As well, businesses that qualify, including those that currently enjoy fiscal incentives on imports (such as tourism and manufacturing firms), may be allowed to defer payment of VAT until the return for the respective period is filed. At the time of filing, such VAT registrants would be required to report the deferred taxes. They would simultaneously claim any allowable input tax credit, and any cash flow impact of paying VAT would be minimized.
We will also implement less complex procedures for tax credits against bad debts. The simplified method relieves small business firms of the need for accrual accounting for VAT, and correspondingly all complications relating to bad debts. Large firms that must continue to use accrual accounting would face fewer hurdles when claiming credits for bad debts. These credits would be allowed when bad debts are recognized, as opposed to when collection efforts are exhausted.
As well, we have reduced the timeline for the payment of VAT refunds. Administrative procedures in the VAT Bill would allow businesses that file monthly returns to request refunds within two months of the period in which the net credits arise. Previously, wait times could extend up to 6 months. VAT registrants that sell zero-rated supplies and are always expected to be in a net credit position would not be subject to such waits. Such refund claims would be allowed at the same time as the VAT returns for the relevant tax period. Registrants that are allowed to file their returns on a less frequent basis would be able to claim refunds at the time of filing.
We are also providing an additional week to file VAT returns. Businesses will have up to 28 days after the end of each tax period to file their returns.
I would also flag section 64 of the VAT Bill in particular as it has garnered some attention in recent days. That section provides for the recovery of tax from persons leaving The Bahamas. Specifically, where the Comptroller has reasonable grounds to believe that a person liable to pay outstanding tax under the Act may leave the country for an indefinite or prolonged period without paying the tax, the Comptroller may issue a certificate in the prescribed form to the Commissioner of Police or the Director of Immigration requesting the Commissioner or Director respectively to take such steps as may be necessary to prevent the person from leaving The Bahamas until the person makes payment in full of all tax due and outstanding, or an arrangement satisfactory to the Comptroller for the payment of the outstanding tax.
I would wish to signal that such a provision is not unprecedented and that it is in fact in effect in countries in the region such as Grenada, Dominica, St. Kitts and Nevis, and Antigua and Barbuda.
Amendment.
Tariff and Excise Rate Reductions
It is evident that a lower VAT rate will yield somewhat less revenue than we had originally expected. As such, across-the-board reductions in tariffs and excises will not feasible at the time of introduction. There will, however, be selective reductions in certain areas, as seen in the amendments to the Tariff and Excise Acts that were tabled at the same time as the VAT Bill. Though not exhaustive, the following list is indicative of the areas in which the reductions are primarily focused:
• building materials, such as wood and wood strips, plywood, veneered panels, builders’ joinery and carpentry of wood, PVC lumber and composite wood, shingles and shakes, Portland cement;
• articles of apparel, clothing and footwear
• various food items such as turkey, dairy products, soybean milk, vegetables, fruits and nuts, fruit juices
• instruments and appliances used in medical, surgical, dental or veterinary sciences
• refrigerators, freezers, stoves and ranges, instantaneous gas water heaters, tableware and kitchenware and
• selected so-called tourist items such as jewellery, watches and clocks, cameras and trunks, suitcases and briefcases.
As has been stressed in the past, this is the first round of tariff and excise cuts that is, at this time, compatible with the revenue targets that we are seeking to meet with our programme of tax reform. As we garner hard evidence on actual revenue collections in the first part of 2015, we will be in a better position to assess the extent of additional reductions that might be feasible going forward.
Progress to-date on the VAT Implementation Plan
Mr. Speaker,
As we have repeatedly stated, effective implementation of VAT is critical to its success. We have therefore continued to devote ongoing attention and substantial resources to the work of our VAT Implementation Unit in the Ministry of Finance.
Honourable Members will recall that I provided an in-depth report on the state of work on our VAT Implementation Plan at the time of the 2014/15 Budget debate. I will at this time recap that progress and provide an update.
As was stressed in the Communication, the VAT Unit is geared to be fully ready for the beginning of implementation as of October 1 of this year, thereby securing our readiness for January 1, 2015.
Communications
Since the release of the draft legislation in November 2013, the VAT Implementation Team spearheaded or participated in a comprehensive communications exercise to educate various private and public stakeholder groups throughout the entire Bahamas.
As discussions with the various stakeholders evolved, the Ministry of Finance and the VAT Implementation Team placed greater emphasis on delivering basic VAT education to the wider public.
They have also given priority to presentations in the various Family islands. All of the Family Islands will be visited both in coordination with the Chamber of Commerce and the Family Island Administrators.
Communication Policy and Broad Strategy
Obviously, it is critical to the success of VAT implementation to establish a communication policy to which all relevant parties are expected to adhere. Accordingly, the objective is to provide effective, consistent and reliable communication, in a pro-active manner, on all aspects of the VAT implementation.
Our broad communications strategy includes plans to educate business registrants on how to use the web based Revenue Management System (RMS) for the purpose of filing returns and all routine transactions from businesses.
In addition, a public awareness campaign will be launched via various media outlets to include commercials, infomercials, town hall meetings, advisory visits, skits and a variety of other educational exercises.
The public awareness campaign to more fully advise the public on VAT commenced with the tabling of the VAT Bill for 1st reading and several public statements by myself and the Financial Secretary on various talk shows. The approach has been to give the general public an overview of the evolution of the legislative process, taking into consideration a wide cross-section of views from the private sector and international consultants. The Bill reflects those considered views and thus both the Financial Secretary and I have sought to position the VAT launch by speaking to the critical changes to the Bill since November 2013.
During the course of the debate, the VAT Unit will release educational materials targeted specifically at consumers. We want the average consumer to understand how VAT will impact him or her in their everyday lives, and those things that they should be aware of when VAT is implemented in January 2015. In that regard, the VAT Unit will, on a daily basis, utilize TV and radio commercials designed to give the public quick facts on VAT. There will also be weekly in-depth discussions on VAT. Information will be released using our Facebook Page, Youtube and Webpage.
Our intention is also to publish critical timelines for certain deliverables, for example the registration exercise. This exercise is expected to commence in the month of September and the VAT team will announce those dates in late August.
Intensive training of the VAT team commenced this week and for a period of two weeks the team will be introduced to the registration module of the Revenue Management System (RMS) in preparation for registration. On the heels of this phase of the systems training, the unit is expected to undergo four weeks of legislative training from VAT experts from the Isle of Man and from England.
The training continues with focus placed on those persons expected to engage business registrants in a tax advisory role. This training will be conducted by CARTAC, the technical assistance arm of the IMF in the Caribbean, for a period of approximately 2 weeks in September. This training programme is designed to equip those persons with the necessary skills to deal with a myriad of issues during visits or other interactions with taxpayers.
This block of training on the internal system and taxpayer services is expected to run from the beginning of August until the third week in September. At the completion of this exercise, the team will immediately launch into the registration of businesses for January 1 2015.
During all of these activities the public will be informed through a targeted PR campaign on events that will impact them.
The VAT Department ’s Taxpayer Services Help Desk is now operational and calls are being managed by a team of five persons. This headcount will expand as training is complete.
The VAT operations are presently located in the Gladstone Road Freight Terminal facilities.
In Grand Bahama, the VAT office will be located in the Regent Center. This office should be operational by the end of August with a full complement of staff, principally from Grand Bahama with support from the headquarters office in New Providence.
The key Family Islands will be supported by trained representatives of the VAT department based in New Providence or Grand Bahama.
Registration Strategy
The VAT Team’s registration strategy will involve the following steps:
• Corporate services firms and the top 100 large taxpayers will be catered to, specifically for VAT registration purposes, from September 2014;
• Workshops are being planned from October 2014 for small and medium taxpayers in New Providence and selected Family Islands;
• Permanent registration venues will be set up in New Providence and Grand Bahama from September 2014; and
• Taxpayers will be able to register on the internet from September 2014.
As well, the implementation team continues to support other Government departments that need to prepare for VAT.
IT Support System
The VAT Implementation Team is making good progress on the development of the IT system and business processes that will support the administration of the VAT.
Business processes for registration, filing and compliance are being finalized and currently being tested.
Work on enforcement and audit procedures will commence on completion of the business processes for registration.
Mr. Speaker,
We firmly believe that the VAT Bill sets out a solid, world-class policy and administrative framework for the new Bahamian VAT.
I am confident that our programme of tax reform, including VAT, will be successful in moving our nation to a system of taxation that is both economically efficient and adequate to serve the needs of modern governance.
