By NEIL HARTNELL
Tribune Business Editor
Real estate is being taken “in the wrong direction” by the Government’s Value-Added Tax (VAT) policy, which will create costly “roadblocks” to closing transactions.
Mario Carey, Mario Carey Realty’s (MCR) president and chief executive, told Tribune Business that the Christie administration should eliminate Stamp Duty on all real estate transactions.
He argued that it should instead just levy 7.5 per cent VAT on residential deals, due to the “confusion” being caused by the current policy for transactions worth $100,000 or more.
The Government’s new real estate ‘VAT Rule’ requires that the tax burden on residential real estate transactions worth more than $100,000 be split between 2.5 per cent Stamp Duty and 7.5 per cent VAT.
This is designed to ensure no reduction in real estate-related taxes, given that the combined 10 per cent rate between the two will be the same as the old 10 per cent Stamp Duty rate.
Typically, real estate transactions usually see the tax burden equally split (50/50) between buyer and seller, with each paying equivalent to 5 per cent Stamp Duty under the old rate.
However, Mr Carey and others have warned that the new VAT structure has caused “confusion” among market participants, due to the fact that the buyer is deemed responsible for paying all the VAT to the Government.
This has led sellers to incorrectly believe their tax liability has shrunk, and they just have to pay the 2.5 per cent Stamp Duty. And buyers believe their liability has increased because they are responsible for paying 100 per cent of the VAT.
Mr Carey emphasised that this was incorrect, as the Government had set no stipulations on how the tax burden could be divided between buyer and seller. This means transactions can still maintain the traditional 50/50 liability split, with the vendor paying the Stamp Duty and 2.5 percentage points (one-third) of VAT.
This has been confirmed by the Government. John Rolle, the acting VAT comptroller, wrote in an e-mail to Tribune Business: “The VAT rules do not interfere with the how the transferor and transferee decide to share the payment of the tax between themselves.”
Yet Mr Carey and others are warning that misconceptions surrounding how the tax burden will be split, now that VAT has been introduced, are having an unsettling effect on the Bahamian real estate market.
“They should have got rid of Stamp Duty altogether,” Mr Carey told Tribune Business. “I was calling on the Government to get rid of Stamp Duty, and just have VAT.
“It puts more burden on the buyer, and caused more confusion, because the seller thinks they’re just going to pay 2.5 per cent, not 5 per cent.”
The ‘confusion’ has been created by clause six of the real estate ‘VAT’ rule. While confirming that the VAT comptroller is to collect the tax, it puts the responsibility for collecting in squarely on the buyer in any residential real estate transaction.
Clause six stipulates that the VAT “shall be paid by the person to whom the conveyance is made, and held to the account of the persons who have conveyed the property”.
“Under no circumstances, will the seller be allowed to collect the VAT directly,” Mr Rolle said via e-mail. “VAT invoices and tax receipts will be issued by the Comptroller, and in the names of the persons contained in the conveyance.”
Mr Carey was backed by Michael Lightbourn, Coldwell Banker Lightbourn Realty’s president, who confirmed: “This real estate VAT thing has caused confusion.
“You’re in the same position you were before, but some people have gone out there and said the buyer has to pay all the VAT, and the seller just pays the 2.5 per cent Stamp Duty.”
VAT’s arrival will also make it core costly and time-consuming to close real estate transactions, given that the parties involved and their advisers - realtors and attorneys - will have to repeat the same procedures twice.
Conveyances must first be presented to the VAT comptroller, who will collect the due VAT. Only then can the documents be taken to the Treasurer for stamping and payment of the 2.5 per cent, and the conveyances lodged for recording at the Register of Records.
And, as exists currently with Stamp Duty, should the VAT comptroller believe that the transaction price on the conveyance fails to reflect ‘market value’, he can require an independent appraisal be done.
“The VAT must be assessed and paid by having the conveyance presented to the VAT Comptroller, who is also required to collect the tax in each case,” Mr Rolle told Tribune Business via e-mail.
“The Comptroller must in each case also certify if a transaction is exempt. Only afterwards can the documents be presented to the Treasurer for Stamping, and then titles presented for recording by the Registrar General.
“As with Stamp tax, the market value is presumed to be the negotiated arms-length price. When the transaction is not suspected of being on market terms, an independent appraisal will be sought.”
Mr Carey summed up to Tribune Business: “It’s more paperwork, more bureaucratic, as well as more roadblocks to a closing, which does not make it more affordable to buy.”
A long-time advocate for economic policy incentives to stimulate the real estate market, given its spin-off impact for the wider economy, Mr Carey said VAT’s introduction had added another element of uncertainty to an already-tepid local segment.
“It’s an impediment. It’s an area of concern, because we all know that [VAT] number can increase,” he added. “It scares the market, because they don’t know what VAT will be two-three years down the road.
“It’s in the wrong direction. Any time the Government makes real estate transactions more complicated and expensive, it’s going in the wrong direction.
“My argument has always been to get the real estate market incentivised with short-term policies to create activity.”
Mr Carey said research had shown that every time a house was sold, two new jobs were created, thus making real estate one of the fastest employment-generating industries.
He reiterated that it was “key” to ignite an industry whose domestic market continued to struggle under the weight of an oversupply of distressed properties, and the inability of many buyers to meet the tougher lending criteria set by commercial banks.
“Real estate is the key, and nobody sees that,” Mr Carey told Tribune Business. “The key is that every time you sell a house, you create two full-time jobs.
“Simple as that. It is a proven, undeniable fact. Everybody makes money. Why not create more transactions?”
Besides realtors, Mr Carey said other professions that benefit from a buoyant real estate market are attorneys, insurers, title companies, gardeners, landscaping companies, maintenance persons and furniture/appliance stores.
The Government also benefited from increased Stamp, VAT and real property taxes, not to mention the construction industry - a sector that hires much semi-skilled and unskilled labour.
Mr Carey added that with lay-offs at businesses such as the One & Only Ocean Club, and potential terminations at the likes of the Bahamas Telecommunications Company (BTC), not to mention Baha Mar, reviving the real estate and housing market had never been more important.
Mr Rolle, meanwhile, said the ‘VAT Rule’ for real estate was in effect for 60 days to allow for public consultation.