The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government was yesterday estimated to have “foregone” up to $250 million in real property tax revenues from Freeport over the past decade, a top accountant urging that there be “no blanket roll over” of the investment incentives expiring in 2015.

Ed Rahming, managing director of KRyS Global’s Bahamas office, told Tribune Business that the supposed benefits from Freeport’s ‘catch all’ real property tax exemption were failing to offset the potential revenue loss to the Government (see article on Page 3B).

Implying that the Bahamas was receiving a ‘negative return’ from this incentive, Mr Rahming explained that this was because real property tax breaks were “immaterial” in influencing investors and businesses to come to Freeport.

Pointing out that real property taxes averaged less than 1 per cent of a business’s annual costs, Mr Rahming said the Government should end the ‘one size fits all’ real property tax exemption for Freeport when it expires in August 2015.

He suggested that it instead be offered on “a case by case basis” when the Government and Grand Bahama Port Authority (GBPA) were negotiating with potential new investors, and only granted for a limited period of time, such as three to five years.

Arguing that the renewal of real property tax exemptions for commercial investors be contingent on them fulfilling their development obligations, Mr Rahming called for real property tax to be levied on all residential properties - buildings and lots - in the Port area come September 2015.

While urging caution to ensure that real property tax did not create an insurmountable burden, when added to existing annual service charges, Mr Rahming said the latter often amounted to just $40-$50 annually in many cases.

But to mitigate any such burden, Mr Rahming suggested that LUSCO and the GBPA create a ‘two-tier’ structure where those paying “material service charges” were subjected to lower real property tax rates.

Mr Rahming’s views carry some weight, as he was once president of the Lucayan Service Company (LUSCO), and is a former GBPA vice-president, so he knows from where he speaks.

He thus adds to a growing debate over the future of both Freeport and its soon-expiring investment incentives, with both the Government and Grand Bahama Chamber of Commerce understood to be developing their own respective position papers for what should happen come 2015.

Kevin D. Seymour, the Chamber’s vice-president, last week in expressing his own personal views, suggested that Freeport’s investment incentives be extended to 2054 on condition that the GBPA/Hutchison Whampoa fulfill their 1993 obligations and several new ones.

Meanwhile, Mr Rahming told Tribune Business his estimate that the Government is foregoing $15-$25 million in annual real property tax revenues from Freeport was at the lower end of the scale.

“I’ve been very conservative with that number,” he said. “The majority of that is based on lots owned by foreigners. They have no incentive to develop it, as they are not paying real property tax, which is standard in other parts of the Bahamas.

“We have a situation in the Lucayan area where more than 60 per cent of the lots are assessed service charges [by LUSCO] but pay no real property tax to the Bahamas government.

“If we simply focus on those lots, that’s $15-$25 million annually to the Government.”

Mr Rahming said 60 per cent, or 15,000 out of the 25,000 active service charge accounts in the Lucayan area, were owned by foreigners. Of that 15,000, the majority were vacant lots or undeveloped land.

The KRys Global (Bahamas) chief, though, said real property tax would have to be implemented carefully to prevent Freeport’s residents and businesses from being overwhelmed by a too-high cost burden.

“You assess how much of a burden you are putting on to investors and residents in Grand Bahama, as this is another cost on top of that if they are already paying a significant service charge,” Mr Rahming told Tribune Business.

“Unfortunately, there’s been a lot of inequity in the service charge system that the Port Authority has implemented. It’s no secret, and something that needs to be fixed....

“I’d like to say that will not impact the way real property tax is implemented in Freeport. There are residential and commercial lots paying an inordinate amount of service charges, and to pay real property tax on top of that may be a burden.”

Mr Rahming suggested that those falling into this bracket pay a lower real property tax rate than those facing lower GBPA/LUSCO service charges.

He blamed the 
“inequity” with service charges on their “multiple categories”, which included tariffs that were adjusted for the cost of living, plus pro rata charges designed to maintain particular areas in Freeport.

While these could be increased, other Freeport residents and businesses were paying a fixed charge or ‘lump sum’ where they took care of all payments one-time.

“It’s something that needs to be addressed,” Mr Rahming said, “and could impact the way real property tax is implemented in Grand Bahama.

“Some people in inner city areas pay more than those in higher-end residential areas.”

While not suggesting that the Government/GBPA completely abandon real property tax incentives for Freeport, Mr Rahming told Tribune Business: “I don’t think anyone wants to see a blanket roll over of the incentives.....

“From my perspective, looking at it longer term, I don’t see the need, certainly on the real property tax side, to roll it over for another 50 years.

“There needs to be a careful assessment, and make sure the benefits accruing to the Bahamas work out and that they meet the threshold, because we’re foregoing so much in terms of tax revenue.

“We need to make sure that if we have these incentives in place, that they’re done in the right way. In my opinion, each investor, resident that comes in, there should be something in there to make sure the benefits accrue. We need to look every three-five years to make sure it’s happening.”

Mr Rahming questioned why Freeport should be exempt from real property tax when Bahamians and foreigners in Nassau, and other parts of the Bahamas, were subject to the tax.

This was especially given that the incentive was not “a material factor” in enticing investors and businesses to Freeport, and had minimal impact on companies’ total costs.

“I think real property tax as a cost factor is immaterial,” Mr Rahming told Tribune Business, “because businesses making a decision to come to Grand Bahama, it doesn’t make up much of their cost base.”

He described real property tax as a “complementary incentive” when part of a larger tax breaks package and the “bigger picture”. But on its own, it was unlikely to be a difference maker.

“It’s definitely not a primary concern when a business is going to the negotiating table,’ Mr Rahming said. “I’m not saying completely do away with it. Certainly, if investors ask if it’s on the table, the Government should look at offering it.

“But generally, the Freeport area, the Lucayan area, should not be exempt from real property tax. I don’t think there should be a blanket, 50-year real property tax incentive.”

Mr Rahming added that the Government needed to assess whether the benefits from real property tax incentives matched the costs. The only way to do that, he added, was to examine whether investors had delivered on their development promises, and created jobs and boosted the economy.

A failure to fulfill these obligations, Mr Rahming said, should mean that commercial investors in Freeport will not receive an extension to their initial five-six year real property tax incentive.