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Bahamas' FM Fleshes Out Value-Added Tax Plans

by Mike Godfrey, Tax-News.com, Washington

25 August 2014

Bahamas Minister of State for Finance Michael Halkitis updated Parliament on progress towards the introduction of value-added tax from January 1, 2015, and disclosed a number of new details during Parliament's second reading of the Value Added Tax Bill 2014.

Halkitis announced that registration will likely begin in September, with an announcement due from the VAT team in late August. Ahead of this, the VAT unit is expected to undergo four weeks of legislative training from VAT experts from the Isle of Man and England.

The VAT Team's registration strategy will involve the following steps, he said:

  • 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.

A three-person Task Force, with a budget of BSD150,000 (USD150,000), will oversee an education drive to alert businesses to their obligations under VAT.

He also disclosed that the Government's decision to go ahead with a lower VAT rate than had been initially planned, of 7.5 percent, means that extensive tariff reductions will no longer be possible. He said there will, however, be selective reductions in certain areas, as set out in the amendments to the Tariff and Excise Acts that were tabled at the same time as the VAT Bill. These reductions will generally apply to certain foodstuffs, white goods, building materials, items generally sold to tourists, clothing and footwear, and medical equipment, among other items.

Urging support for the legislation, he said that although the Bahamas has decided upon a comparatively low rate, according to an International Monetary Fund tax policy mission that visited the Bahamas in March 2014, revenue yields from VAT generally outperform other types of taxes, as has been demonstrated in several Caribbean countries. For example, following VAT introduction, indirect tax revenue increased by at least three per cent of gross domestic product (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 six per cent of GDP, on the basis of a VAT imposed at a rate of 17 per cent, he said.

Discussing the administration of the scheme, he said that during the development of the territory's regime and during consultations with VAT experts, the Government had sought to develop rules to minimize the administrative burden on businesses.

He drew attention to research that had shown that where electronic filing and payment is available and is used, the average time to comply with VAT is some 30 percent 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.

He told parliament: "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 [are to be] accelerated."

He disclosed that 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 BSD5m will file monthly. Businesses below that threshold and with taxable sales exceeding BSD400,000 will be allowed to file quarterly. Other registrants will be allowed to file on a semi-annual basis and use cash accounting methods when compiling their VAT returns. Businesses will have up to 28 days after the end of each tax period to file their returns.

A simplified VAT return using a "flat rate scheme" is proposed for businesses with turnover below BSD400,000. Halkitis explained that VAT due to the 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.

Certain businesses, 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, Halkitis said.

There will also be less complex procedures for tax credits against bad debts than in other Caribbean islands that operate value-added tax regimes, he added.

Moving on to discuss the structure of the VAT regime, he highlighted the importance of maintaining a single rate of value-added tax with very few exemptions. He drew on the benefits that Switzerland gained from moving from a three-tier regime to a single-tier regime in a revenue-neutral manner, with studies having estimated that the decision had reduced compliance costs by 20 to 30 percent, and provided an economic boost of 0.1 to 0.7 percent of gross domestic product. Urging support for the single-rate structure planned by the Government, he said a simple regime would further cut compliance costs as well as administration and enforcement costs for the VAT Department, which will be responsible for administering the regime.

No goods will be exempt. As for services, the list of exemptions has been tightened, Halkitis said, to include only the following:

  • Financial services, and namely credit and deposit/savings products. He explained 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. 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 tuition-funded courses of study for enrolled students in pre-school, primary and secondary school, or those for the award of graduate or undergraduate degrees at tertiary level;
  • The sale of vacant land;
  • 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:
    • nominal in amount; or
    • 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:
    • aged;
    • indigent;
    • infirm;
    • disabled; or
    • 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; and
  • Games of chance, gambling and lotteries.

Halkitis concluded by providing an overview of preparatory efforts that are underway and milestones achieved towards the implementation of VAT. He said the VAT Department's Taxpayer Services Help Desk is now operational and calls are being managed by a team of five persons, and this headcount will expand as training is completed.

Bahamas value-added tax regime is significantly changed compared with the proposals first announced by the Government, which were proposed to apply from July 1, 2014. A 15 percent headline rate was initially proposed, with a 10 percent rate for hoteliers. This higher rate was intended to facilitate the territory's future accession to the World Trade Organization by allowing the territory to significantly reduce excise tax and import tax rates. The Bahamas may need to increase the value-added tax rate from 7.5 percent in future years to support this effort.

TAGS: Isle of Man | compliance | Finance | VAT rates | VAT registration / deregistration | tax | business | Bahamas | training | VAT legislation | accounting | insurance | employees | budget | audit | Belize | tax credits | enforcement | food | internet | education | gambling | manufacturing | legislation | Antigua and Barbuda | Dominica | Switzerland | services | Education | Work | Other | Education | Tax

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