Wednesday, August 20, 2014
Wednesday, August 20, 2014
➢ 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.
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
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.
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.
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.
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.