EDITOR, The Tribune

I read in the press lately that China Construction America (CCA) informed their subcontractors by email that the work done at Baha Mar Ltd is Value-Added Tax (VAT) exempt, which has provoked comments from different politicians due to the secrecy of the Government’s agreements.

However, all fail to understand how VAT works and also begs the question: is this really something new?

Only one person (Gowon Bowe) pointed out correctly how VAT works and the fact that it’s really not an exemption but a delay in the Government receiving its revenue in taxes, as all VAT paid now will be deducted from the VAT due when collected from Baha Mar Ltd clientele (the final consumer). And now we know via the CCA email that all VAT so-called incorrectly exempt means Baha Mar Ltd will have no VAT to deduct when they collect from their clients, therefore paying VAT in full once Baha Mar Ltd starts.

As Mr Bowe correctly pointed out, this is not a big deal because the Government is not losing a single dollar in VAT; the only thing this email points out is that the Government is delaying the VAT due to be paid at a later date, giving the construction of Baha Mar Ltd a break in cashflow in order for all monies available to be fully dedicated to finish the project as soon as possible and leaving the collection of taxes that are due until later. This only means that, for the Government, the first priority is to finish the project and open the resort.

Therefore I am very surprised by the comments made by politicians who are also business people and should know how VAT works, especially Dionisio D’Aguilar and Branville McCartney.

But the most important question is still unanswered: is this Baha Mar Ltd VAT exemption really something new? The truth is no, it’s not new because Baha Mar Ltd was enjoying this prior to Chapter 11 and I am surprised that Jerome Fitzgerald did not mention this as he well knows this through his family customs brokerage as it was one of the two main customs brokers for Baha Mar Ltd, the other being Elite Logistics with Jude Smith. Some, of course, may argue a conflict of interest for Mr Fitzgerald in this.

First, every company which reaches an agreement with the Government in a multi-year project normally puts in a clause to safeguard it from new taxes and tax increases during the term of the agreement; that is use in every country internationally and is common in all contracts with governments during the duration of the project because it changes the overall cost. I worked on projects during Hubert Ingraham’s second term in office and in another during Perry Christie’s first term: in both we had to claim back the increase in taxes and the Government quickly refunded those monies. For example in Mr Christie’s first term there was an average increase of 10 per cent in customs duty in 2004; therefore we filed a claim during Mr Ingraham’s third term requesting the refund of that on all customs duty paid that had the increase, and again it was well documented the the Government quickly paid those funds without disputing a single claim once they had reviewed and agreed with the supporting paperwork provided.

In the agreement between Baha Mar Ltd and the Government, at the time of Mr Ingraham’s third term, this common clause that safeguards Baha Mar Ltd from any new tax and any tax increase during the project was included. Therefore when VAT was introduced from January 1, 2015, Baha Mar Ltd’s lawyers questioned if VAT was applicable.

Due to the special nature of VAT not being a direct tax, the Government considered that the clause was not applicable as it was a tax on the final consumer - Baha Mar Ltd’s clientele. However it admitted that it provokes a cashflow burden on Baha Mar Ltd that may be protected by the clause in the agreement. Under these talks between Baha NMar Ltd’s lawyers and the Government, when VAT was introduced it was agreed that Baha Mar Ltd would have a break in VAT, meaning they did not have to pay VAT but must account for the VAT debt as VAT deferred. Therefore, as Mr Fitzgerald’s family customs broker firm well knows, all VAT payable to the Customs Department due after January 1, 2015, was recorded but not paid to customs on all main shipments as Baha Mar Ltd was exempt, but VAT was paid on all small shipments and airway bills, FedEx, DHL, UPS, that were submitted on behalf of Baha Mar by the mail shipper, because they were not aware of Baha Mar Ltd’s VAT delay payment agreement. Some subcontractors that were not aware also paid VAT on imports.

This agreement put an enormous accounting challenge on Baha Mar Ltd as there was VAT paid to be deducted, VAT owed mainly to Customs, and also VAT exemptions, for example between Baha Mar Ltd and its operating subcontractor, Melia. In other words VAT paid, VAT deferred and VAT zero. There was a need to file properly monthly all these VAT distinctions in a short time, and all companies in the Bahamas went through this accounting challenge. Baha Mar Ltd faced a bigger challenge due to its efforts to account properly for the different VAT particulars from the beginning that most companies did not have. And all this was from before Chapter 11.

Therefore, now that the lead construction company has changed from Baha Mar Ltd to CCA and the VAT must be paid by the new owner, it is understandable that CCA received a break in VAT, the same as Baha Mar Lfd already had, as its first priority is to finish the resort and let the new owner deal with VAT.

FACTS AND FIGURES

Nassau

January 10, 2016