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Bahamas Budget Waters Down Upcoming VAT

by Jason Gorringe,, London

03 June 2014

The Bahamas is to introduce a value-added tax regime with a 7.5 percent headline rate from January 1, 2015, according to the territory's latest Budget for 2014/15, released on May 28, 2014. As well as delaying implementation for three months until January 1, 2015, the rate is halved from earlier proposals for a 15 percent headline rate, and the regime will include fewer exemptions.

After taking on advice from international experts, the Bahamas will instead adopt a simpler regime featuring a single rate with only exports to be zero rated. Fewer exemptions are to be allowed, and a list of such is to be released by the Government shortly.

Input was received from the International Development Bank, the International Monetary Fund, a private sector company commissioned to provide a report on VAT impacts, and the advice of two New Zealand VAT experts. The Government agreed with the recommendations that the economy is too fragile to sustain the 15 percent headline rate previously proposed. In addition, taking on advice from the New Zealand experts, it has agreed that providing numerous exemptions would be an ineffective method of administering tax relief for those on low incomes, and that social transfers would be a more effective way of providing tax relief.

According to the Government, a three-month extension will allow for more time to educate taxpayers about the changes and for businesses to prepare. It said that authorities were ready to implement the regime from October 1, 2014, but that it had decided to accept advice that it should be deferred.

Other salient announcements in the Budget included that the Bahamas will require businesses to display VAT-inclusive prices, after previously proposing that VAT would not be included in selling prices. The Government has also announced that it will introduce a cash accounting special scheme for small businesses, and will seek to simplify procedures for obtaining tax credits against bad debts, and to streamline the VAT refund process generally.

According to IMF estimates, VAT from 2015/16 will provide revenues representative of three percent of the Bahamas's gross domestic product (GDP), worth about BSD300m (USD300m). Revenues of BSD150m are projected for 2014/15. The Government said that VAT will drastically reduce the Bahamas's deficit by 2016/17, when VAT revenues are projected to grow to BSD312m.

It said that, following criticism of the Government's decision to adopt VAT, that it had sought advice on potential alternative measures, such as a payroll tax, but had been advised that this would provide inadequate revenue, and that VAT would be a "superior new tax policy instrument for the Bahamas." The Government-commissioned private sector study also pointed out that a VAT would be more equitable as wealth would be taxed, whereas under a payroll tax it would not.

It disclosed the outcome of consultations with the Bahamas Hotel and Tourism Association. A 6 percent rate had been put forward in talks with the Association, but the Government said such a rate would not be feasible as it would not provide sufficient revenue. The Budget has however highlighted that the 7.5 percent will be lower than the 10 percent rate in place under the room tax, which will be repealed with the introduction of VAT.

The Bahamas is to introduce VAT to expand the territory's tax base, which is heavily reliant on indirect taxation and in particular trade tariffs. These tariffs must fall as part of the territory's efforts to join the World Trade Organization. The Government said that it would not reduce trade tariffs in this Budget, but that it would consider whether it is in a position to adjust its tariffs at the time of the 2015/16 Budget.

TAGS: VAT rates | VAT tax authority guidance | VAT special schemes | tax | small business | business | value added tax (VAT) | Bahamas | VAT legislation | VAT cross-border transactions | accounting | gross domestic product (GDP) | tariffs | payroll | tax credits | tax authority | legislation | New Zealand | trade | services | VAT goods & services classification | Other

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