'Exponential' business costs increase from VAT exemptions

Mon, Apr 28th 2014, 09:18 AM

Putting forward a position that supports the view of major grocery retailers in the country, John Shewan and Don Brash, value-added tax (VAT) consultants from New Zealand, have come out strongly against exempting breadbasket food items from VAT, suggesting it could increase compliance costs "exponentially".
Supporting the position of members of the Retail Grocers Association, who have expressed major concerns about the impact on their businesses of having to make certain products they sell "VAT exempt", Shewan and Brash said they will advise the government not to pursue this approach, explaining that there are more effective ways to mitigate the impact of VAT on the poor.
In a meeting with the press on Friday afternoon, the consultants explained that in their view, the evidence shows being a business that is considered VAT exempt is the "worst" position to be in. They added that in New Zealand, many more businesses - 180,000 rather than the 120,000 projected - ended up registering to be VAT registrants. A contributing factor is because there is a bias among businesses to do business with VAT-registered firms so they can reclaim VAT credits, said Brash.
Shewan and Brash were both leaders in New Zealand's efforts to implement a VAT system almost 30 years ago. Expressing their enthusiasm for VAT in the context of New Zealand, they said one of the reasons it has been considered simple and efficient is because compliance costs are low. This is because everything is taxed at the same rate and there are virtually no exemptions, other than financial services and rent.
"It's no surprise that the New Zealand VAT system has been heralded as being the best in the world. The reason for that is because of the adherence to a very firm principle that if you want the tax to be at the lowest rate possible and the simplest as possible for both the public and the business community, you need the widest base possible," said Shewan.
Under the present draft VAT legislation in The Bahamas, businesses with an annual turnover of less than $100,000 a year, as well as those offering medical services, education, day care, land or sea transportation and breadbasket food items, among other services and products, are considered VAT "exempt", meaning that they cannot charge VAT to consumers purchasing these items. Many other industries, including service providers such as marketing and public relations firms that believe adding VAT to their pricing will see more of their work outsourced to foreign companies, as well as a number of tourism service providers, have also called upon the government to make certain services they provide VAT exempt.
But Brash and Shewan said those companies which fall into this category can expect to be placed at a significant disadvantage. A better way to mitigate the impact on the poor, they said, is to provide targeted social welfare payments for low-income families.
Their position jibes with that of Rupert Roberts, president of Super Value Food Stores Limited, who has argued repeatedly that exempting breadbasket food items from VAT will leave supermarkets unable to reclaim millions of dollars in VAT input expenses and could cause many businesses to shut down or shed jobs due to cost increases that cannot be offset. He and other members of the Retail Grocers Association have said they are disappointed with the lack of progress made with the government on this point.
Exponential
Referring to retailers and the proposed exemption of breadbasket food items from VAT, which means they would sell both vatable and VAT-exempt items, Brash noted: "The challenge is knowing how much of the VAT they paid to buy their inputs they can claim back, and they can only claim back the VAT for inputs which go into making up the sales which are themselves vatable. If you are also selling things which are exempt you can't claim the VAT you would have paid on that input. So, for example, a retailer may be paying commercial rent and for electricity, and a range of other inputs, some of which they can claim back because they relate to a taxable supply (of goods sold), and some of which they cannot claim back. And trying to apportion your electricity bill between the things which are exempt and the things which are not, is a considerable challenge.
"So that's where compliance costs start going up, not by small increments but exponentially, and that's why we've said if you want to minimize compliance costs go for a lower rate and no exemptions," he said.
Shewan also highlighted the case of the general insurance industry, which had initially sought VAT exempt status in New Zealand, but ultimately determined this would have a negative impact on their business.
Another technical point highlighted by the consultants was the handling of bad debt under the draft legislation. Cash flow challenges could arise by forcing businesses to wait for an extended period to reclaim VAT paid on sales on which invoices ultimately went unpaid.
Shewan said: "We're simply going to be inviting the government to consider those points; it's not our role to tell them what to do, but hopefully our experience will benefit them. I would make the point that those quite technical and boring items, if not dealt with, are the ones that can cause a lot of grief. What you want with VAT is everyone paddling the same canoe in the same direction, not resisting, and that requires you to be accommodating in terms of some of these technical issues."
Gowon Bowe, co-chair of the Coalition for Responsible Taxation, which met with Brash and Shewan last week, told Guardian Business: "A lot of the issues they raised were no different to the issues in our October/November report. Compliance costs was the biggest issue. In their case (New Zealand) limited exemptions were given, and everything else was vatable. They said then the businesses didn't need elaborate systems and everything to make that sale was a VAT credit, so businesses didn't have the complexity. They said that would be a distinct difference in our case, given the way we are going down the path of a number of zero ratings and exemption; it would create more cumbersome calculations.
"They also said that by not having exemptions it enabled them to introduce VAT at 10 percent, although in their case they had a number of other taxes too. We said very explicitly that we hope everything they shared with us will be in their final report."
Brash and Shewan were invited to The Bahamas by the government to share their experience in New Zealand with the implementation of VAT, to offer observations on The Bahamas' preparedness for VAT, and to address any issues they see in the design of the legislation at present. Their report is expected to be completed by the time they depart tomorrow.
Shewan said he felt a July 1 implementation of VAT would be "extremely challenging" at this point for The Bahamas.
VAT was introduced in New Zealand in October 1986 at a rate of 10 percent. The most recent rate of VAT in New Zealand is 15 percent.

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