Effective July 1, 2014, a Value Added Tax (VAT) is being introduced in the Bahamas.  The VAT will offset reductions in import duty rates and will provide a path to accession to the World Trade Organization and potentially new regional trade agreements.  The new VAT rate will be 15% on goods and services.  Currently over 130 countries impose VAT with rates ranging between 5% and 27%.  In the Caribbean, a number of countries have imposed a VAT including, Trinidad and Tobago, Saint Kitts and Nevus, Guyana and Barbados.

As the time for implementation quickly approaches, the financial services industry, in the Bahamas, is lobbying for a ‘zero rated’ status rather than VAT ‘exempt’.  The zero rating would allow the financial services industry to avoid collecting the 15% VAT from their customers, while reclaiming the VAT paid on their input costs.  If declared exempt, financial services companies, including banks, would avoid collecting the VAT from customers, but would not be permitted to reclaim the VAT on their input costs.

An exempt rating could reduce profits, drive costs up and the financial services industry is concerned about losing a competitive advantage.  It is relatively certain, however, that services provide to overseas clients would be zero rated since such services are being exported.  This means that trust and fund administrators, and attorneys will be zero rated.  While banks, as deposit taking institutions are supplying services within the Bahamas and therefore, may therefore be treated as exempt, rather than zero rated.  The decision is not yet final, but the Minister of Finance is confident that the impact on the financial services industry will be minimal.

The significance of the introduction of this VAT should not be understated.  Income tax free countries where the financial services industry enjoyed a brisk business for many years are losing the advantage they once held.  With the imposition of back breaking withholding tax penalties and the weakening of secrecy laws, these countries now must become more creative and adjust to economic realities.  Nevertheless, the Bahamas should continue to grow and maintain its place as a leading offshore jurisdiction.