By NEIL HARTNELL
Tribune Business Editor
The Bahamas Real Estate Association’s (BREA) president has backed International Monetary Fund (IMF) suggestions that Stamp Duty rates be reduced once the Government’s Value-Added Tax (VAT) revenue targets are hit.
And Franon Wilson told Tribune Business the Government should go even further and look at adjusting Stamp Duty rates “simultaneously with tax reform” to ensure real estate remains a job creation driver “second to none”.
The Fund, in its June 2013 report on Tax Reforms for Increased Buoyancy, noted that the Government had to balance the importance of Stamp Duty as a revenue source with its negative impacts on the Bahamian real estate market.
Noting that real estate transactions had been responsible for generating the “lion’s share” of the Government’s Stamp Duty income since the 2008 fiscal year, on average 61 per cent, the IMF said they added to the “considerable” cost of home purchases.
“Seen from an economic impact perspective, too-high transfer duty rates impede the proper functioning of property markets,” the IMF report said.
“Total stamp duty revenue in 2007-2008 from real estate transactions reached a high of $183.9 million or 2.41 per cent of GDP versus $39.1 million in 2002-2003 or 0.67 per cent of GDP - signalling a rising revenue importance.
“In 2010-2011, real estate transfer duties declined to $108.3 million or 1.35 per cent of GDP - and for the period 2003-2011, transfer duties revenues were on average 1.56 per cent of GDP.”
And while Stamp Duties on property conveyances were a common feature of English common law countries such as the Bahamas, this nation’s rates placed it at the top end of the scale.
The Bahamas levies 10 per cent Stamp Duty on property transactions worth $100,000 or more, but of all the countries listed by the IMF in its report, only Belgium, Greece and Mauritius had higher top-end real estate transfer tax rates.
The IMF added that English common law countries typically levied Stamp Duty at a 2 per cent rate, with civil law countries setting their transfer tax on average at over 6 per cent.
“The Stamp duty rates in the Bahamas are high, and the reasons for differentiating between 4 per cent and 10 per cent are not that clear,” the IMF said.
“In deciding on an appropriate duty rate on realty transfers, their distortive economic impact should be considered.”
This led into the IMF’s argument that Stamp Duty rates on real estate taxes should be reduced once the Government achieves its fiscal consolidation objectives, namely hitting its VAT and real property tax revenue targets.
“As VAT and the real property tax reforms gain traction and raise more revenues, a gradual duty rate reduction on property conveyances should be considered as high transfer tax rates may discourage business investment or may lock in investors into immovable property, resulting in suboptimal returns,” the IMF said.
“Furthermore, high transfer duty rates encourage misrepresentation of sales prices by buyers and sellers, which generally undermines tax morale. Perhaps most detrimentally, if taxpayers perceive the transfer tax to be too high, they are less likely to register the property transfer at all with an adverse impact on the coverage ratio. High rates, therefore, require effective anti-avoidance legislation.”
Still, the IMF agreed that the current “fairly steep” Stamp Duty rates on real estate transactions “will be maintained for the foreseeable future until enhanced collections from the reformed property tax regime would afford gradual rate reductions of this transaction tax”.
Backing the IMF’s suggestions, Mr Wilson told Tribune Business: “Real estate is a driver. When you look at the jobs it creates, it’s a driver almost second to none in the country. We need to do everything we can to stimulate that. We need to drive that.”
The Christie administration is targeting a ‘doubling’ of real property tax revenues to almost $200 million by the 2016-2017 fiscal year, and Mr Wilson suggested this might mean the Government has to move faster on Stamp Duty rate reductions than the IMF is advocating.
“I hope that adjustments to the rates happen simultaneously with tax reform, so there’s not a period where property taxes in general spike, even for a few months,” he told Tribune Business.
“We have to work at it, and it takes time. Even if there’s a couple of months before these adjustments kick in, that could have an adverse impact that lasts longer than those months.”
Mr Wilson agreed that adjusting Stamp Duty rates in conjunction with VAT’s implementation was something that needed to be assessed, but acknowledged that the ‘bigger picture’ was also a factor.
“Stamp Duty is a big part of the Government’s revenue,” he added. “It’s too big a part to look at in isolation, as government can’t afford to gamble with that and get it wrong.
“The main thing is that when we look at revenues, there’s no question Stamp Duty and real property tax are a big part of it, so those two topics require a meaningful conversation.”
Meanwhile, one area where the Government has elected not to take the IMF’s advice is in abolishing the first-time buyer Stamp Duty exemption, given that this was renewed in June 2013.
“On application, Stamp (transfer) Duty exemption for ‘first-time’ homeowners is granted up to a value of $500,000 per dwelling,” the IMF said.
“This tax expenditure can be exploited, as there is no anti-avoidance provision against, for example, a husband and wife both applying separately for this benefit and registering the home in their names, potentially benefiting from a total relief of up to US$1 million.
“This relief expires at the end of June 2013. Instead of its possible renewal, raising the general tax threshold to say $35,000 - indexed periodically - and which everyone is automatically entitled to would be easier to administer and fairer.”