Published On:Friday, July 30, 2010

Tribune Business Editor

A MAJOR Bahamian contractor yesterday warned the increase in Business Licence fees it faced as a result of the Government’s abandonment of plans to levy a 0.5 per cent rate on the industry was equivalent to “25 per cent of our profit”, as the sector railed against what could be in many instances a 50 per cent tax rate rise.

Richard Wilson, Cavalier Construction’s managing director, said the implications of the amendments to first drafts of the revised Business Licence Bill were “huge”, certainly for his company, as it was now faced with being placed into the category of businesses who, with an annual turnover of $500,000 or more, will have to pay a fee equivalent to 0.75 per cent of turnover.

Initial drafts of the Bill, which were seen by Tribune Business, had included “all construction companies” as a special category who, along with agriculture and fisheries firms, would pay a lower rate equivalent to 0.5 per cent of their annual turnover.

Yet the final version tabled in Parliament completely omitted any mention of construction companies, let alone included them in a special category, thus exposing all Bahamas-based contractors to a potential Business Licence fee increase.

Not surprisingly, many in the construction industry reacted with alarm and fury to this development yesterday, fearing it will further retard growth, business and employment in an environment where contractors and their clients are already grappling with a depressed economy, plus the 2010-2011 Budget’s tax increases. Tribune Business was told that moves are now underway, through the Chamber of Commerce, to set up a meeting with Zhivargo Laing, minister of state for finance, in a bid to have the amendments reversed.

Asked about the implications for Cavalier Construction, Mr Wilson said of the move from a 0.5 per cent to 0.75 per cent rate of turnover: “It’s huge. It’s like 25 per cent of our profit.”:

Steven D’Alewyn, Cavalier’s chief financial officer, said the Business Licence Bill changes failed to accurately reflect the Bahamian construction industry’s realities, which were that it was a high turnover, low volume and low margin industry.

Under the previous Business Licence system, Cavalier paid a rate equivalent to 0.5 per cent of turnover, because its gross profit margin was less than 25 per cent. “I don’t know of any contractor making 25 per cent,” Mr D’Alewyn added. “We don’t get anywhere close to it.”

Pointing out that under the previous structure Cavalier paid a Business Licence fee of $229,000 in 2009, a sum equivalent to “over 25 per cent of the bottom line”, Mr D’Alewyn said the reforms would see Cavalier pay $114,500 more for a total of $343,500.

Margins of 7-10 per cent were more reflective of the construction industry’s realities, he explained, telling Tribune Business that the construction industry had several objections to how the new Business Licence was being calculated - the definition of turnover as applied to the construction industry, as well as the rate.

This was articulated in a Bahamian Contractors Association (BCA) discussion paper previously disclosed by Tribune Business, which noted that the Business Licence Act imposed itself repeatedly in “circumstances where businesses buy goods or services and sell them on to other entities which are also subject to the Act.

"It should be noted that the Business License fee can and does double or triple dip on corporate turnover......... The application of the system is felt more greatly as the transaction progresses, with the greatest effect being on end user."

The BCA paper used an example of a typical construction industry transaction to show how the end user, or general contractor ended up paying a Business Licence fee of $1,500 or 5 per cent of gross profit earned.

Assuming a 1 per cent of turnover Business Licence fee, the BCA laid out a situation where Company A sold Company B $10,000 worth of building materials, incurring a $100 fee on the deal.

Manufactured

Company B manufactured the raw materials into windows at a cost of $20,000, selling them on to the installation sub-contractor for $40,000, and incurring a $400 fee.

The installer performs the task for $80,000, and sells its services to Company D, the main project contractor, for $120,000, incurring a $1,200 fee. Company D incorporates the subcontractor's billing into its payment application to the developer and charges them $150,000, incurring a Business Licence fee of $1,500 on the deal.

Outlining how the double taxation occurred, the BCA discussion paper said: " Total Business License fees collected in this scenario are $3,200 ($100 + $400 + 1,200 + $1,500).

"The actual added value is $10,000 at stage one, $30,000 at stage two, $80,000 at stage three and $30,000 at stage four for a total of $150,000.

"At a 1 per cent fee level this equates to $1,500. Accordingly, an additional $1,700 (twice the fee on an added value basis) has been applied because the same revenues have been continually assessed up the production line."

Referring to such a scenario, Mr Wilson told Tribune Business yesterday: “This is more than triple dipping. The sub-contractors we employ pay the Business Licence, the suppliers we buy materials from pay the Business Licence, and we’re at the end and that’s included in the gross mark-up. It just isn’t fair.”

Mr D’Alewyn pointed out that while major Bahamian contractors might receive $50 million from a client to complete a major construction project, the firm in this instance was effectively acting as project manager.

As a result, this sum was being held in escrow, with the majority paid out to sub-contractors, tradesmen and suppliers, with very little - possibly 6-7 per cent - being retained as the major contractor’s fee. Gross profits on such a contract were often at $2-$3 million. “Some people need to be reminded of the proverb of the goose with the golden egg, because the goose is getting laid and is not enjoying it,” Mr D’Alewyn said. “We can’t pass the costs on to consumers, because they will go and build somewhere else. The attached risks are very high, and the margins are very low. There needs to be a proper reflection of where we stand in terms of profits, turnover and margin. I think we’re getting a major shaft, only because we’re perceived as big money makers.”

The Cavalier executive also pointed out the negative social consequences if the Bahamian construction industry downsized to minimize the Business Licence increase impact, given that it largely employed those workers who would otherwise be considered “unemployable”, including many ex-convicts.

If those persons were not employed on construction projects, they would have to look for other means for their survival, with all the attendant criminal and social implications.

Describing the Business Licence fee increases as “just outrageous” in comparison to those levied on Bahamian banks and trust companies, Mr D’Alewyn said: “There’s a lot of things going on out there, and none of them are particularly favourable to us, the industry and the people working in it.

“If we don’t have the work, electricians, plumbers and carpenters won’t have the work. They rely on us. There’s a big picture out there that is not being seen properly.”