Commercial Real Estate Vat Change 'A Minor Victory'


Tribune Business Editor


The Bahamas Real Estate Association’s (BREA) president yesterday hailed the Government’s u-turn on commercial property Value-Added Tax (VAT) as “a small victory”, and expressed hope it would listen to the industry’s other tax reform concerns.

Carla Sweeting told Tribune Business that among the Bahamian real estate industry’s other key VAT-related concerns were plans to levy the 7.5 per cent tax on common area maintenance (CAM) expenses, which are commonly paid by business tenants and landlords to ensure a property’s upkeep.

Ms Sweeting, though, said BREA was concerned that pushing too hard for change, and securing VAT ‘roll backs’ in some areas, might “open up a Pandora’s Box” where the Government sought to gain revenues via other measures.

She was speaking after the Government announced, via a press statement, that it was dropping plans to levy VAT on commercial real estate purchases/conveyances.

John Rolle, the Ministry of Finance’s financial secretary, told Tribune Business that the Government had reversed course on this issue to eliminate ‘double taxation’, given that it already enjoyed significant revenues through the 10 per cent Stamp Duty.

He said that the proposal to ultimately replace Stamp Duty with VAT would boost the Bahamian commercial property market by lessening the associated tax burden.

While Stamp Duty is a one-time transaction payment, VAT on commercial property transactions would be recoverable as part of a business’s costs.

“Transfers of commercial property will only be subject to VAT on legal fees and commissions, and not the stamped conveyances. This will remain the practice until stamp tax on conveyances is reduced or eliminated,” the Ministry of Finance confirmed in its statement.

Mr Rolle emphasised to this newspaper that Bahamian businesses would have seen “no cost impact” had the Government maintained VAT on commercial property sales/conveyancing prices.

This is because the VAT would have been treated as part of a company’s ‘input’ tax payments, and thus could have been ‘netted off’ - or claimed back - against the ‘output’ tax paid to the Government.

And Mr Rolle said that, provided they remained in an operating company, business assets being transferred or sold were ‘zero rated’ for VAT purposes. This means no tax will be paid, and that VAT ‘inputs’ can be reclaimed.

“What we say, and that continues to be the case, is that assets transferred as part of a business, or staying in the business, those assets are transferred on a zero-rated basis,” Mr Rolle said.

“Most commercial assets are being transferred for continued commercial use. VAT is not a cost impact for businesses. Depending on the circumstances of the business, as long as that asset is contributing to taxable activities, that business will earn tax credits. ”

The Ministry of Finance is currently preparing a ‘position paper’ on how VAT could ultimately replace the existing Stamp Duty on real estate transactions.

Suggesting that this would benefit the commercial property segment, and help lubricate the market, Mr Rolle said: “Once that happens it will create added benefits for commercial transactions.

“The Stamp Duty, when it converts and becomes VAT, it becomes a recoverable outlay for businesses.

“What we’re saying is until we get to that point, VAT replacing the Stamp, we’re not going to maintain the dual approach with both.”

Mr Rolle was unable to give a timeframe for when VAT would replace Stamp Duty on real estate transactions, indicating that a key factor will be whether the Government hits its anticipated revenue targets with the latter tax.

“I can’t make a prediction, but I know it’s one of those areas where we can have a decision made in terms of it being high on the list to review, once we see how VAT revenues are performing,” Mr Rolle told Tribune Business.

He added that the issue would require a policy decision by the Government, once it determined which tax was more preferable.

BREA’s Ms Sweeting said the Government’s ‘commercial property VAT’ policy change was “a small victory”, telling Tribune Business: “I’m grateful, as it will not be a burden for someone trying to buy a commercial business.”

She was backed by David Morley, Morley Realty’s principal, who said of the Government’s decision: “I think it helps to relax the situation a little bit more.”

Mr Morley, a commercial real estate specialist, said the VAT legislation, and accompanying regulations and guidance notes, stated that the sale of property by one VAT registrant to another would be treated as ‘exempt’ from the tax.

“All this is doing is freeing it up a bit more, because if you’re selling it to another party, you will not have to worry about it,” Mr Morley explained. “It relaxes it a bit more, and I think it will be a benefit in the long run.

“The clarity is helpful. It just means you don’t have to go through hoops with the sale of commercial property from one VAT registrant to another.”

Ms Sweeting, meanwhile, added that a transaction involving one business acquiring another’s commercial property, and using it for the same purpose, would not have attracted VAT. The tax would have only applied where a buyer tried to change a commercial building’s use.

“We’re hoping that they’ll [the Government] listen to some of our other complaints on the commercial side, such as not levying VAT on the CAM charge,” Ms Sweeting told Tribune Business.

She added that another concern was VAT policy towards homeowners association fees, which were originally to be treated as ‘exempt’, only for the Government to then alter course and decide to levy the tax on those which involved more than $100,000 in revenues annually.

Ms Sweeting said it would also be “a big relief”, and boost high-end real estate sales, if the Government clarified VAT would not be levied on transactions at properties such as Atlantis’s The Reef and Baha Mar’s Residences.

Given that many of these properties are placed in a hotel rental pool, there is a possibility these may be looked upon as commercial, or income-producing, properties.

The Government, in its statement yesterday, said real estate services supplied to non-residents in the Bahamas would still be VAT-able, as the services were consumed here.

“Some non-residents have permission to hold real estate as income producing investments,” it added. “Under the VAT legislation these holdings will qualify as commercial properties.

“These properties would always be required to register and charge VAT if annual earnings exceed the $100,000 threshold. Once they meet and satisfy the registration requirements, they will also qualify like other commercial properties to claim input credits.”


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