By NEIL HARTNELL
Tribune Business Editor
Realtors yesterday warned that adding Value-Added Tax (VAT) to already “astronomically high” transaction costs would stifle home buying activity at a time when the Government should “be doing the exact opposite”.
The latest October draft of the proposed VAT Bill and accompanying regulations, which has been seen by Tribune Business, contains mixed news for realtors, with the positive development being confirmation - finally - that the Government will not apply the 15 per cent levy to commercial property purchase/sales prices.
That had remained the ‘big unknown’ since the ‘White Paper’ on tax reform was released earlier this year, and the Government had resisted publicly confirming whether commercial property transactions would be treated as VAT ‘Exempt’.
Both residential property sales and leases, and the transfer of vacant land, will also be treated as VAT ‘exempt’, the latest draft Bill states, there being no change to these positions since the ‘White Paper’s publication.
The Ministry of Finance’s explanatory notes accompanying the legislation said commercial and residential real estate purchases were being treated as VAT ‘exempt’ because of the already-high tax burden on these transactions.
“The sale of property is VATable in most systems,” it said. “In the Bahamas, these transfers already attract Stamp Taxes at a rate as high as 10 per cent in most cases, and will be exempted”.
Adding a VAT on top of this would have taken its combined burden with Stamp Duty to 25 per cent of the purchase price, something that would have killed the still-recovering Bahamian real estate market ‘stone dead’.
And adding 6 per cent realtor’s commission, and legal fees equivalent to 2.5 per cent of the purchase price, on top of that could have taken the tax burden to more than 33 per cent.
But while all Bahamian real estate market participants will likely draw some comfort from the Government’s intentions not to levy 15 per cent VAT on commercial property sales, all this could still be subject to change, as the Bill has not been passed into law.
And realtors yesterday expressed concern about the Government’s plans to levy 15 per cent VAT on the ‘realtor commission’ and ‘legal fees’ portions of a transaction.
This will still raise buyer/seller costs, though not as sharply, while companies that lease their office/business premises also face having to pay 15 per cent VAT on the lease payments they make to landlords.
“The VAT will apply in the case of commercial rentals,” the Ministry of Finance’s notes said. “Services provided in connection with property transfers, including legal fees and brokerage commissions, will be subject to VAT. Transfers of vacant land will be exempt.”
Companies/persons will only be liable to pay VAT if their turnover exceeds $100,000 per annum, but this threshold is likely to be breached by most realtors and commercial property owners.
Peter Dupuch, head of ERA Dupuch Real Estate, told Tribune Business he was more concerned about VAT’s impact on the residential buyer market than commercial rentals.
“We’ll have to add VAT on to our commissions,” he said. “They’re [the Government] just adding on to the cost of buying property in the Bahamas, which is already astronomically high.
“It’s not going to stimulate the economy; it’s going to cause people not to buy. Closing costs are already about 18 per cent [of the purchase price]. It just stifles the whole real estate purchasing.”
High transaction costs were one reason why no ‘property flipping’ market had developed in the Bahamas, Mr Dupuch said, as the only beneficiary from buying/selling property quickly was the Government’s taxes.
Arguing that commercial rentals were not as “price sensitive”, Mr Dupuch added: “When someone is scrapping to get the pennies to buy their first home, and now they have to get extra money, they’re not going to buy.
“They should be stimulating people to buy homes, not discouraging them, like they are now.”
Mr Dupuch said residential property buyers were already burdened by mortgage, real property tax, closing cost and electricity bill obligations, and he said: “There’s only so much people can bear.
“If they [the Government] collected what they’re supposed to get from Business Licences and real property tax, and get behind everyone to pay up, they’d have more money than they get with VAT.”
Mr Dupuch’s sentiments were echoed by Coldwell Banker Lightbourn Realty chief, Mike Lightbourn, who said of the Government’s VAT plans: “That’s ridiculous. These people don’t know what they’re doing.
“What these guys don’t realise is that we’re trying to bring things back, and doing that is just going to dampen people’s buying appetite.
“It’s making it cost more to buy real estate, and real estate expenses are high. They’re making it more and more difficult for people to buy, and they should be doing the exact opposite.”
Calling on the Government to consult more with Rupert Roberts and other leading figures in the business community, Mr Lightbourn recounted the first-hand evidence he obtained about VAT’s impact elsewhere in the Caribbean.
“I met the Chief Minister from Grenada while I was in London two weeks ago, and asked how VAT went down there,” Mr Lightbourn told Tribune Business. “He said it was terrible, a disaster. They had an election there earlier this year, and the Opposition won every seat.”
As for the proposal to levy 15 per cent VAT on commercial rentals, the Coldwell Banker chief added: “Commercial rentals right now are having a very, very hard time, and that’s the most stupid thing they could do.
“They’re messing up this country without thinking about it. They say they need $400 million extra a year, and are not thinking about the best way of doing it; without drawing away from our economy.
“These people don’t understand, they don’t have a clue. These people don’t know what the hell they’re doing. We want to make conditions better here, we don’t want to make them worse. The economy is hurting.”
John Christie, H. G. Christie’s president, said the Government’s proposals - as laid out in the latest Bill version - were “not great” for the real estate industry.
“It’s one more tax on the sale,” he said of VAT on realtor’s commission. “It’s more money. The extra 2 per cent Stamp Duty they previously put on killed the market stone dead.
“This new tax will just slow down sales, and with less sales you get less revenue, so it defeats the purpose.”