By DANA SMITH

Tribune Staff Reporter

dsmith@tribunemedia.net

Under 4,000 Bahamian companies would likely face having to pay a Value-Added Tax (VAT), a Cabinet Minister describing as “mind blowing” the fact over 85 per cent of businesses might be exempt.

Suggesting that switching to VAT as the main form of taxation could generate an extra $100 million in annual revenue for the Government without any increase in tax rates, Ryan Pinder told the Rotary Club of Nassau that most licensed firms would be exempt from paying it if a $50,000 annual turnover threshold was used.

Noting that more than 85 per cent of licensed companies generated annual revenues below this threshold, the Minister of Financial Services said government calculations indicated just 3,798 Bahamas-based companies would be liable to pay VAT.

Indicating that the burden would fall mainly on larger businesses, Mr Pinder said the statistics indicated that these 3,798 companies accounted for 98.6 per cent of the Bahamas’ total gross turnover and gross domestic product (GDP).

“It is thought that a reform to a VAT system in the Bahamas could result in more than $100 million in extra revenue for the Government - with no increases in net tax rates,” Mr Pinder said.

He noted, though, that revenue yields depended on the status of the economy when the tax was imposed. He also spoke on the “difficulties” associated with enforcing VAT on smaller companies.

“Certainly we would look to learn from our regional counterparts, who have exempted certain companies from the whole VAT regime,” Mr Pinder added.

“We used the number $50,000 in turnover in a number of our current regimes as kind of a threshold,” he said, adding: “I was astonished by this figure, frankly. Over 85 per cent of licensed companies have less than $50,000 in turnover, so you’re only collecting from a very small percentage.”

Mr Pinder continued: “Using the threshold of $50,000 in turnover, it would result in those required to register under this VAT regime [numbering] only 3,798 firms - accounting for 98.6 per cent of the gross turnover in the country. Some 3,798 firms account for 98.6 per cent of the gross turnover in this country.

“That’s an amazing statistic. That tells you one of two things - that tells you that we’re very successful with getting small businesses to graduate, or the failure rate of small businesses is tremendous. But it’s a mind-blowing statistic.”

It does, though, fall into line with a report produced by the Inter-American Development Bank (IDB), which found that despite accounting for around 95 per cent of all licensed businesses in this nation, small and medium-sized enterprises produced just 5 per cent of this nation’s per annum GDP.

Noting the push for tax reform, Mr Pinder said yesterday: “One form of tax system that has been advocated by a number of different arenas for the Government is a Value-Added Tax or the VAT tax,” Mr Pinder said.

“The International Monetary Fund, Moody’s, and Standards and Poor’s, the Wall Street credit rating agencies, all have urged the Bahamas to implement a VAT.

“These international institutions argue that it will address the issues of international trade agreements, plus it will address poor revenue yields that are really endemic in our current tax system.

“Frankly, the Bahamas government over the years, through different administrations, have been advised professionally on Value Added Tax.”

Although stressing that the Government will not implement any new form of taxation without “thorough” public consultation, Mr Pinder pointed out that “most major industrialised countries” have employed VAT for years.

In the Caribbean region, Haiti, Jamaica, Barbados, Trinidad and Tobago and others currently use VAT taxes. Globally, over 140 countries employ VAT.

“It generates revenue yields and is levied at each stage of a production process. In addition, a VAT will capture the services industry - the majority of what the Bahamian economy is today, which is currently relatively untaxed,” Mr Pinder said.

“The argument in favour of a VAT is that it is a tax on consumption. The VAT is charged at each stage of production or distribution - at the manufacturing level or the import level, and at the wholesale level, at the retail level. Only the difference in value at each one of these stages is ultimately taxed.

“The business enterprise at each stage of this, what we call the production cycle or distribution cycle, claims a credit for the part of the VAT that is not due. The argument is that this underlying policy of credits and refunds in the VAT system along the chain is a self-enforcing mechanism.”

Meaning the tax will “force compliance,” the minister said.

Mr Pinder added that if a business was charged a 10 per cent VAT rate, but incremental costs are only 2 per cent, a refund or credit would be claimed for the 8 per cent difference.