In its continued effort to introduce a Value Added Tax (VAT) into Turks and Caicos, the Turks and Caicos Interim Government (TCIG) is claiming that “significant reductions (in import duty), many in excess of the 11% rate of VAT, provide the evidence that prices need not rise after VAT.”
However, careful and considered analysis of the figures provided in the VAT Ordinance and subsequent statements clearly indicates that price increases of 4-6% are likely in Turks and Caicos as a result of the introduction of VAT.
We urge member of the business community, political leaders, and citizens to study the figures and make up their own minds. A full response to the TCIG claims and accompanying spreadsheets are available for download below.
We also made a short movie which goes over the spreadsheets and figures -scroll to the bottom of the page to view the video.
Government Statement 24th September 2012:
“The Government is pleased to announce the levels of reduction in import duties is in line with previous indications, generally at least 10% across the board, with larger reductions, at 15%, on several key items such as vehicles, beer and some ‘green’ items….Clearly, these significant reductions, many in excess of the 11% rate of VAT, provide the evidence that prices need not rise after VAT is implemented from 01 April 2013. Given the new import duty rates provided by the Collector of Customs, it’s clearly scaremongering to continue to suggest so.”
The vast majority of items which will be impacted by the reduction in the duty rates fall into the 10% duty reduction category, with only a few select items benefitting from the 15% duty rate reduction.
The majority of products sold by a typical retailer fall into the 0% – 40% duty range and will only benefit from the 10% duty reduction where applicable. Examples of products falling into the various duty categories are shown below:
0% Duty Rate – Produce, fresh meat, flour, rice, grits, oats, maize, barley, frozen chicken leg quarters milk, eggs, corned beef, infant formula, cement, books, non-prescription medication
10% Duty Rate – Butter, cheese, processed meats, lumber, plywood, paint, building bricks & blocks, computers, printers, electronic storage devices, pet food
15% Duty Rate – Most grocery items: tinned peas, fruit juices, bread & bakery products, pasta, soup, breakfast cereals, ketchup etc
30% Duty Rate – Washing detergent, toilet paper, household cleaning products, tin foil, soft drink beverages (eg sodas, Gatorade etc), stationary, garden supplies, power tools, toys & games, electronic equipment, auto parts
40% Duty Rate – Chocolate, candies, cough syrup, fireworks, garbage bags (non-biodegradable)
The point overlooked within the Government’s statement is that the 10% reduction being made to the duty rate is applied against the first cost of the item, however, the 11% increase due to VAT is being applied to the sales price. Given that a retailer’s sales price may easily be twice that of the first cost of the product (after duty, CPF, freight and mark-up), the 11% VAT charge is being applied against a much higher figure. Hence, the VAT charged is significantly higher than the corresponding duty reduction.
As a very simple example, if the first cost of an item is $100 and it is currently sold for $200 by the retailer, the 10% duty reduction would result in a duty saving of $10 and reduce the retailer’s sales price to $190 (passing on this duty saving). VAT of 11% is charged on the sales price of $190, resulting in VAT of $20.90. Hence, the revised sales price is $210.90. This represents a price increase of 5.5%.
Government Statement 24th September 2012:
‘In addition to falling levels of duty, VAT registered businesses will benefit as they offset the VAT that they pay out against that which they collect’.
For a VAT registered business the cost of VAT when purchasing an item (input VAT) is not included when calculating the landed cost of a product as this input VAT is reclaimed. Only the VAT charged at the point of sale (output VAT) is included in price of the product on the shelf.
For a company that imports and sells products, the Government receives the full amount of VAT charged on any item sold in two stages. Firstly, the Government collects the input VAT paid at the point of import and, secondly, the Government collects the VAT charged at the point of sale (output VAT), less the amount of input VAT already paid. As such, the company remits the full amount of VAT collected from the customer at the point of sale, but the payment is split into two stages.
Consider a situation where $75 of input VAT is paid to the Government against an item at the point of import. When the item is subsequently sold, $100 output VAT is charged the customer. At the point of sale, the amount of VAT remitted to the Government in relation to the sale of the item is only a further $25 as the company has already paid $75 VAT at the point of import. Hence, the total amount remitted to the Government in respect of this transaction is $100, ie the full amount of VAT charged to the customer.
As such, in terms of VAT directly associated with selling a product, there is no real VAT offset, 100% of the VAT paid by the customer is remitted to the Government by the retailer (but in stages).
The potential impact on the operating costs of a business resulting from the ability to offset VAT paid against these indirect costs will depend on the nature of the business. This is further discussed below.
Retailers who are VAT registered and sell only taxable items will be able to claim back all the input VAT on their operating costs. In this case, certain operating costs may decrease providing the suppliers of these businesses pass on the duty reductions in their net sales price before adding VAT. Also, the cost of directly imported supplies will decrease as the VAT registered business can claim back the input VAT and benefit from the duty reduction. However, other operating costs may increase relating to purchases from suppliers who are not registered for VAT, who increase their prices to cover their increased costs following the implementation of VAT. Also, any operating costs directly related to third party labour costs are likely to remain unchanged as there is no associated duty saving. As such, only a certain element of the operating cost base of this type of business will decrease.
Retailers who provide only exempt supplies will not be able to reclaim any input VAT. For example, this will impact businesses providing medical and education services. For these type of businesses, operating costs will increase as no VAT can be reclaimed relating to the sale of an exempt supply.
There will also be VAT registered retailers who sell a mix of exempt and taxable items. These companies will only be able to claim back a portion of their input VAT based on the ratio of their exempt to taxable sales. For example, if 30% of a retailer’s sales relate to exempt items (eg produce, fresh meat, cement etc), the retailer is only able to claim back 70% of the input VAT paid in relation to operating costs.
For a company providing a mix of exempt and taxable items, there will be certain operating costs which will increase and others which will decrease. For example, security costs will increase as 11% VAT will be applied against a security company’s invoice each month. Given that a security company’s billable rates are based on their staff wage rates, not the importation of goods, VAT will be an incremental cost on their invoice with no corresponding reduction in the underlying billable rate.
Hence, companies supplying, for example, 30% exempt items would only be able to claim back 70% of the incremental 11% VAT, resulting in a 3.3% increase in their security cost. Likewise, any other third party expenses which relate directly to an individual’s time being billed (eg maintenance technicians, mechanic labour, attorney fees, advertising, IT technician, consultant fees etc) will result in an additional expense as only a portion of the incremental VAT cost can be reclaimed.
However, there will be operating cost savings resulting from the purchase of materials which are not sold onwards, as the company would benefit from the 10% duty reduction and would be able to claim back a portion of the 11% VAT charged (eg office supplies, cleaning supplies for the business etc). There would also be a benefit in areas where VAT replaces an existing tax which is already being paid by the business but presently can’t be claimed back, (eg Telecommunication Tax & Financial Services Sales Tax). There will also be savings on capital expenditure.
Hence, for businesses supplying a mix of exempt and taxable supplies, the impact of the introduction of VAT on operating costs will vary from business to business depending on the nature of their input costs and the mix of exempt and taxable services they supply. It is not certain that there would be an overall decrease in operating costs for this type of business and there may actually be an increase in operating costs.
Also, not to be overlooked, is the fact that VAT is chargeable on commercial rents. Hence, any landlord which exceeds the VAT threshold will have to register for VAT and charge VAT on the rental charge to any business renting their premises. This does not impact a tenant who is registered for VAT and provides only taxable supplies as they can claim back 100% of input VAT.
However, for a business too small to register for VAT or a business supplying exempt goods/services such as a school, doctor, dentist etc, they are unable to claim back any input VAT. Hence, if a business rents from a landlord who is required to charge VAT, their rental charge will increase by 11%, unless the landlord makes the decision to absorb the 11% VAT charge. Hence, either the landlord or the tenant is effectively taxed an incremental 11%. This may have a significant impact on businesses in the larger commercial plazas, or impact commercial building property prices if landlords reduce their rental yields by absorbing the 11% VAT themselves.
Download Excel Spreadsheet
VAT Impact CIF Model 27 sept
A quick movie that we hope helps you understand the figures on the spreadsheets.
If you need to hit the “fullscreen mode” to make it easier to view the figures. OR you can download the spreadsheets and follow along too !
VAT in TCI Some Figures from Brilliant by Tropical Imaging on Vimeo.