• ‘Shocked’ so many first-timers for audits, financials
• DIR asks some: ‘What have you been working with?’
• 400 hit with late filing fines; 24 seek audit extensions

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian tax authorities are “shocked” and “alarmed” at the number of $5m-plus turnover companies who are being audited or preparing financials for the first time to meet the new Business Licence mandate.

Dexter Fernander, the Department of Inland Revenue’s (DIR) operations manager, told Tribune Business it had been forced to ask some firms “what have you been working with” after accountants reported they had to “replicate” a company’s accounts before an audit could be performed.

Disclosing that around 24 companies have so far requested an extension to end-August to produce their audited financial statements, he added that the tax authority was asking them to submit “preliminary figures” and basing their Business Licence fees on these so as not to block them from conducting business while the auditors’ sign-off was awaited.

Mr Fernander also revealed to this newspaper that some 400 firms with annual turnovers exceeding $250,000, and who at least needed to have their financials certified by an independent accountant, have been hit with late filing penalties for making no effort to submit preliminary figures or request an extension.

That number, though, is less than 1 percent of the 45,000 annual Business Licence applications that the Department of Inland Revenue processes. Mr Fernander said the tax authority is “still working on a case-by-case” basis to process filings, extension requests and the overall results, given that audited financials were required by the adjusted deadline of June 28..

“There has been a request by some who were required to have audited financial statements for an extension beyond July but we are reviewing, ascertaining the legitimacy of it,” he told Tribune Business. “We haven’t validated it as yet. So far we’ve had maybe 24 companies.....They are asking for an extension until the end of August, which sounds good, but at this point they should be able to give preliminary figures.” 

Companies with annual turnover exceeding $5m were this year required to produce audited financial statements for the first time ever as part of their Business Licence flings, which Mr Fernander hailed as “a worthwhile exercise”.

He added that the fee-related revenues collected had “met expectations”, with some 81.7 percent of the 2023-2024 fiscal year’s target collected by end-March this year. Data unveiled with the 2024-2025 Budget showed that some $115.307m in Business Licence fee revenues had been collected at that point compared to the full-year target of $141m.

Business Licence fees are one area targeted for increased revenues by the Government. They are projected to increase by more than $62.5m, or 44.4 percent, to $203.554m during the current 2024-2025 fiscal year compared to the prior one, before rising again to $237.828m and $240.182m in 2025-2026 and 2026-2027, respectively.

Mr Fernander, meanwhile, said it was “alarming” that some $5m-plus turnover companies lacked basic management accounts and financial statements that banks would require before providing overdrafts and other facilities.

“It’s alarming that companies with such large turnovers are being audited for the first time and are preparing financial statements for the first time,” he told Tribune Business. “That’s a bit alarming to the Department of Inland Revenue. 

“I’m concerned that there is a request by audited companies and entities that this is the first year that a company, which makes $5m, has never done audited financial statements before. Their overdraft facilities from the banking industry require this. How have they been able to operate these entities? That’s alarming to me. It is what it is. Maybe it’s to the point where they don’t need an overdraft.

“We are shocked at the amount of individuals requesting an extension because this is the first time the company has been properly audited,” Mr Fernander continued. “It’s amazing that accountants are saying they have to before an audit; in some instances they have to replicate the company’s accounts and it is making more than $5m.

“They have to create the accounts and then another accountant has to be hired to do the audit. I thought this would be something they [the private sector] could use as a measuring tool for yourself to know where you are. If you have not got certified or management statements, what have you been doing?”

Boards, management and owners all need to know a company’s financial numbers so that they can track its performance and address any problems before they become major. Mr Fernander said the extension requests, and novelty of audits and financial statements for some, raised questions about verifications and certifications provided by auditors for Business Licence filings in prior years.

“It shows us the depth of the work the accountants did in prior years,” he added. “Did they look at more than the VAT filings? Did they assess revenue and expenditure? What was the work sheet that they used in previous years to validate the figures?”

Voicing optimism that next year’s Business Licence fee filings, and the provision of audited financials, will be a much smoother exercise having gone through it once, Mr Fernander said: “We are seeing where there needs to be adjustments in VAT reporting and it has given us insight into where certain areas need to be tightened in terms of policy.”

Declining to identify those “areas”, he emphasised that the Department of Inland Revenue was seeking to work with companies seeking a filing extension rather than impede their business operations. “We are asking them to submit preliminary figures so that they don’t slow down. We are willing to work with those figures until they are signed off on by an auditor,” the operations chief explained.

“Those who are submitting the preliminary figures, we are assessing the Business Licence on those preliminary figures so there’s no delay in them doing taxable activities in the jurisdiction. It’s been working well for us, getting preliminary figures.

“There are some entities who have not made any effort to give preliminary figures or submit declarations so they will automatically have received on July 1 a late filing penalty from our system. We’re looking at maybe 400 of those entities that were reporting $250,000 and above turnovers that will have received late filing fees.”

A former Cabinet minister, though, told Tribune Business that this year’s Business Licence filings caused many businesses more “cash flow pain” than normal while numerous changes to the “definition” of revenue worked to the Government’s advantage and resulted in some companies paying much more than they did previously.

Dionisio D’Aguilar, Superwash’s principal, revealed that while the laundromat chain met the June 28 deadline it - and all other companies - were required to pay two years’ worth of Business Licence fees at the same time.

“What normally happened was, that in the first two months of 2024, you would calculate your revenue for 2023 and then you would pay your fee at the end of March,” he explained. “What they [Inland Revenue] did was say, OK, not only do we want you to do that but we want to change the system so that you pay in advance and settle up at the end of the year.”

Mr D’Aguilar said Superwash and others were asked to estimate their 2024 turnover based on 2023’s results and pay a fee on that as well.”Then, at the end of the year, when you get to the 2025 first quarter, you will file your 2024 results and either pay the difference or the Inland Revenue will have a credit waiting for you which you apply to the upcoming year in 2025,” he explained.

“This was in addition to the many changes to what is the definition of revenue. Not only did you have the cash flow pain of paying both a fee based on your 2023 numbers and the fee based on an estimate of your 2024 numbers, but they changed to their advantage the definition of revenue.

“There were a lot of transactions, international transactions, that law firms and others were treating as tax exempt transactions but they came back and reclassified them and said that’s not the case,” Mr D’Aguilar said. 

“They really clamped down on what could be excluded from the calculation of revenue for Business Licence purposes and VAT. There were a lot of changes and clarifications in that regard to the benefit of Inland Revenue. There was a lit of redefining and the like, and people ended up having to pay a lot more, based not only on having to pay the 2023 and 2024 fees but what made up the definition.”