By NEIL HARTNELL
Tribune Business Editor
The Bahamas Real Estate Association (BREA) has objected to three revenue-raising proposals in the private sector’s Value-Added Tax (VAT) alternatives package, its president fearing they will have “grave consequences” for the industry if adopted.
Franon Wilson told Tribune Business that the elements BREA and its members took issue with included the proposal to levy a 25 per cent capital gains, or withholding, tax on the net profits earned by foreigners from Bahamian real estate sales.
And the other two elements causing difficulty were the suggestion to levy real property tax on developed properties in the Family Island, plus seizing people’s homes and land if the amount of outstanding real property tax exceeded the “cost of collection or seizure.
Mr Wilson, who is also Arawak Homes’ president, told this newspaper that in light of BREA’s opposition, he understood the Coalition had removed these three proposals from the list of VAT alternatives it ultimately presented to the Christie administration.
BREA is now set to meet with the Coalition for Responsible Taxation this week, both to explain its problems with those three proposed measures, and inform it of its own VAT concerns.
“The last series of alternatives to VAT had listed some things that had to do with real estate,” Mr Wilson explained. “We advised them BREA has issues with three things in it, in particular.”
The situation with BREA illustrates just how hard it is to advance new tax and fee revenue-raising measures without upsetting any specific industries or businesses.
It may also encourage the Government into believing the private sector cannot maintain unity over VAT and wider fiscal reform, enabling it to push ahead with its plans regardless.
Apart from the negative impact on the second home market, and potentially discouraging foreign buyers from coming to the Bahamas, Mr Wilson said the proposed capital gains/withholding tax would also hit local realtors in a more direct way
Noting that the likes of Bahamas Realty, Damianos Realty and Lightbourn Realty all had international partnerships or strategic affiliations with global networks, Mr Wilson said such a tax would also cut their commission/profit margins.
This was because international buyers often came to Bahamian realtors through their global network alliances, with sales commissions split 50/50 between the two sides.
“If someone comes to them [Bahamian realtors], a portion goes to the international networks,” Mr Wilson explained.
“Now you’re saying 25 per cent is coming out, and you’ve already given up a substantial amount of the net, what’s left? How are they going to make a profit and re-invest?”
As for the real property tax proposals, Mr Wilson said imposing this on developed Family Island properties could have a potentially chilling effect on the real estate market in those islands.
Noting that many major developments relied heavily on real estate sales to drive cash flow and finance build-out, Mr Wilson told Tribune Business: “Living on a Family Island is not cheap.
“You need money to buy a second home in Nassau, but need even more to own a home in the Out Islands. It’s not as if houses in the Family Islands are flying off the shelves; I could understand it if that was the case, but it’s already more of a challenge than Nassau.”
Describing the Family Islands as “a challenging market”, Mr Wilson said the imposition of a further levy on top of higher transportation, shipping and logistics costs threatened to undermine their price competitiveness.
“Now you’re telling them to pay more tax?” he questioned. “They may say: ‘Forget it, let’s go somewhere else’.”
As for seizing people’s homes and real estate if the sum of property tax owed was greater than the cost of collection or seizure, Mr Wilson said this would only exacerbate a housing crisis where 3,000-4,000 Bahamian borrowers were already delinquent on their mortgage loans.
“For the Government to kick people out of their home and on to the street, you’re sending them to social services,” he added. “That’s one where the Government would be hard-pressed to take that step.”
Mr Wilson reiterated that BREA’s main VAT-related concerns were that the Government’s proposal to make residential real estate sales ‘exempt’ could have “very serious” implications for new housing projects and property developers, one describing it as “a death sentence”.
This is because developers of subdivisions, gated communities, condo complexes - any form of residential real estate - will be unable to recover the 15 per cent VAT paid on contractors’ bills as a result of their ‘exempt’ status.
Unable to ‘net off’ this sum against property sales, Bahamas-based developers will likely be faced with having to increase prices to absorb the additional VAT burden - something that might put new housing out of reach for hundreds, potentially thousands, of Bahamians.
The situation was flagged up in an analysis of the VAT Bill and regulations that was disseminated by the KPMG accounting firm.
It said: “One particular observation in respect of the exemptions is that the construction of a new dwelling will be subject to VAT, and as the sale of a dwelling is exempt from VAT, a developer will be unable to recover the VAT charged by the contractor.
“This VAT cost will no doubt be passed on to the home buyer, making new housing more expensive.”
BREA’s other problems include the absence of VAT exemptions for the construction or renovation of homes.
This means homeowners have to pay 15 per cent VAT on the construction contract, increasing the amount of money a person will need for their down payment and closing costs.
And Mr Wilson also suggested that 15 per cent VAT on commercial rentals will make “the rate of return significantly lower for someone that owns a commercial building”.