VALUE ADDED TAX: FACTS FOR FINANCIAL SERVICES ALEXANDRA HALL ASSOCIATE Higgs & Johnson.

VALUE ADDED TAX:FACTS FOR FINANCIAL

SERVICESALEXANDRA HALLASSOCIATE

Higgs & Johnson

WHAT IS VALUE ADDED TAX?

A value added tax (VAT) is a consumption tax added to a product's sales price or to a service. It represents a tax on the "value added" to the product throughout its production process

The VAT Legislation is comprised of: VAT Act VAT Regulations VAT Rules (not yet circulated) VAT Guidance Notes (updated)

VALUE ADDED TAX:FACTS FOR FINANCIAL SERVICES

WHAT IS VAT CHARGED ON?

VAT payable on taxable supplies by taxable persons and on taxable imports by any person – unless exempt or zero rated

Most goods and services purchased or supplied locally or imported will have a VAT charge

Purchases on which no VAT will be charged will be classified as “exempt” or “zero rated”

No VAT is charged on exported goods and services Note: Special rules apply to the Port Area


VAT TERMINOLOGY

Taxable supplies A supply of goods or services given or provided in

relation to a taxable activity, other than an exempt supply

Taxable activity Any activity conducted regularly and continuously

whether or not for profit and includes a supply of public entertainment

Taxable imports Imports of goods or services that are not exempt


VAT TERMINOLOGY

Registered Person A person who is registered for VAT - These are the only

persons authorized to charge VAT on supplies of goods and service

Only registered persons can claim tax deductions for VAT paid on imports and domestic acquisitions

Taxable Person A person who is registered for VAT (registered person)

or a person who is required to register


VAT TERMINOLOGY

Input tax VAT paid on imports or on local purchasesOutput tax

VAT charged on taxable supplies of goods and servicesExempt supplies

Supplies on which no VAT is charged Persons who produce exempt supplies cannot deduct VAT paid in

making these suppliesZero-rated supplies

Supplies that are taxable at a rate of 0% Registered persons can deduct VAT paid in making these supplies


WHO MUST REGISTER? Persons whose turnover during a period of < 12 months was

$100k+ Turnover = gross revenues without deductions Note: Profit is irrelevant for this purpose

Persons who reasonably expect to have $100k of taxable activity in the next 365 days

Persons who hold a temporary licence under the Business Licence Act

VAT Registration Certificate must be displayed in a prominent place Government will also maintain a register of VAT registrants

A return must be filed with the VAT Department within 28 days after the end of any tax period (see later slide)


WHAT ARE THE VAT RATES?

Standard rate – 7.5% Zero-rate - 0% Exemption on some goods and services Note: Both the standard rate and the zero-rate are

positive rates of tax for VAT purposes Note: Invoices must indicate the VAT charged separate

from the cost of the goods and services


WHAT IS VAT PAYABLE ON?

VAT is payable at the Standard Rate on: Goods and services purchased locally (unless exempt or zero-

rated) e.g. utilities, office supplies, professional services

Imported Goods (unless exempt or zero-rated) When goods enter the country (unless a deferral is

requested) Imported Services (unless exempt or zero-rated)

If VAT would have been payable if the service was provided inside The Bahamas VAT must be paid if the services are imported into The Bahamas

e.g. legal fees from foreign lawyers, printing fees, advisory fees


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ZERO RATED SUPPLIES OF SERVICES

Services provided to a person treated as “non-resident” for Exchange Control purposes - zero rated (VAT Act): the benefit or use of the service is considered to be

outside The Bahamas or the “non-resident” recipient of the service makes

taxable from inside The Bahamas for benefit or use outside The Bahamas (VAT Regulations)


“‘Non-resident’ means a person who does not, and is not deemed to, carry on a taxable activity in The Bahamas” (VAT Act)

“Non-resident” for the purposes of the Exchange Control Regulations include: Persons not resident in The Bahamas Permanent Residents with no-right or a restricted

right to work Person who hold a Permit to Reside in The Bahamas


AREAS REQUIRING CLARIFICATION

How is VAT assessed where a person resides in The Bahamas for only a few months a year?

What is the VAT liability where a licenced trust company in The Bahamas obtain legal services to be paid for from trust assets where the settlor and beneficiaries are located outside of The Bahamas?


AREAS REQUIRING CLARIFICATION

WHAT IS THE VAT RATE FOR FINANCIAL SERVICES? Zero-rated: Financial services provided to an IBC

operating exclusively outside of The Bahamas or trust services where the settlor and all beneficiaries are non-resident

Standard VAT rate: Financial services provided to an IBC (non-resident) with premises in The Bahamas or trust services where settlor or any of the beneficiaries are residents


WHAT FINANCIAL SERVICES ARE EXEMPT?

Note: Exempt means 0% VAT rate but no deductions for VAT paid on inputs.

All insurance services until June 30, 2015 After June 30, 2015 - life insurance, annuities & savings

products only Financial services other than:

international financial services (i.e. services provided to non-residents which are exempt); or

domestic financial services (i.e. services provided to residents) for an explicit fee


WHAT IS AN ‘EXPLICIT FEE’?

VAT chargeable at 7.5% in respect of financial services provided for an explicit fee

An “explicit fee” is charge that is separate from interest and stamp duty and includes Arrangement or commitment fees for loans Overdraft fees ATM/ABM fees Returned cheque fees Charges for payroll payments Charges for safe keeping of documents and safety deposit boxes Cash handling charges Charges for the payment of utility bills


OTHER OPERATING COSTS ON WHICH VAT WILL BE PAYABLE

Building rent

Utilities (BEC, BTC, Cable Bahamas)

Office supplies

Vehicle purchases / leases

Professional services – local and imported


RECOVERY OF VAT ON PURCHASES

VAT charged on business purchases and expenses (i.e. inputs) can normally be offset against from VAT collected from customers in the course of business (i.e. outputs) Inputs can only be reclaimed when they relate to zero-

rated or standard rated supplies Inputs cannot be reclaimed when they related to

exempt supplies Note: Licensed financial service providers, banks and other

financial institutions can only claim input tax deductions in respect of inputs directly attributable to and used wholly for the provision of taxable supplies


HOW VAT WORKS


Minus =

(Output Tax) (Input Tax)

VAT charged on sales

VAT paid on purchased

VAT Due or Creditable

WHEN MUST VAT BE PAID?

VAT returns must be filed and VAT paid within 28 days of the end of the tax period in which the first of the following occurs: An invoice is issued Payment is received (in whole or in part) for goods

or services Goods are delivered or made available to a recipient Completion of performance of services


WHAT ARE THE TAX PERIODS?

There a two tax periods based on the amount of taxable activity per annum:

$5 million or greater - monthly

Less than $5 million – quarterly


WHAT DOES THIS MEAN TO YOU?

You must meet with your accountants and attorneys to ensure that your company and your billing systems are ready for VAT

Contracts must state which party is responsible for the payment of VAT

Standard terms and conditions must be amended to incorporate a section on each client’s Exchange Control status Written confirmation must be received from each client


You must be aware of the penalties for non-compliance: $100k fine or 12 months in prison for failing to

register $50k fine or 12 months in prison for failing to display

registration certificate personal liability for directors and/or similar officers temporary closure of businesses

WHAT DOES THIS MEAN TO YOU?


QUESTIONS


NEED ASSISTANCE OR ADVICE?

Contact:Christel Sands-Feaste

[email protected] T. Hall

[email protected]

Higgs & JohnsonOcean Centre

Montagu Foreshore East Bay Street

P. O. Box N 3247Nassau, BahamasTel: 242 502 5200


mailto:[email protected]

mailto:[email protected]

DISCLAIMER © 2014 “H&J” refers to Higgs & Johnson, Counsel and Attorneys-at-Law. The information contained in this publication is provided for the general interest of our

readers, but is not intended to constitute legal advice. Clients and the general public are encouraged to seek specific advice on matters of concern. This publication can in no way serve as a substitute in such cases.

No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, H&J, its partners, associates, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Higgs & Johnson is a full-service commercial practice that gives personal and reliable service to our clients built on exceptional experience, insight and excellence.

The firm’s affiliates, H&J Corporate Services, Ltd., H&J Corporate Services (Cayman) Ltd., H&J Management Services Ltd., and H&J Fiduciary Services Ltd. provide a full range of company formation and estate management services, respectively.


VALUE ADDED TAX: FACTS FOR FINANCIAL SERVICES ALEXANDRA HALL ASSOCIATE Higgs & Johnson.

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