By NEIL HARTNELL
Tribune Business Editor
The Bahamas will have to eliminate its nationality-based real property tax exemptions that discriminate in favour of locals before it becomes a full World Trade Organisation (WTO) member, a report warning the current system is “not in accordance with international practice”.
The ‘Conditions for improving real property tax in the Bahamas’ report, never before revealed to the Bahamian people, thus warns that the exemptions enjoyed by Bahamian ‘vacant land’ owners in New Providence, and in every Family Island, will either have to be completely changed or abandoned.
The report’s authors, Dr Roy Kelly, Dr Graham Glenday and Wayne Forde, said: “Exempting property based on the nationality of the property tax owner is not in accordance with international practice.
“This nationality-based exemption will need to be changed when the Bahamas joins the WTO, since the Bahamas will not be allowed to differentially tax based on nationality.”
The Government, via the Ministry of Financial Services, has already given notice of its intention to continue with the WTO accession process, with new minister, Hope Strachan, effectively saying she has picked up where her predecessor, Ryan Pinder, left off.
Messrs Kelly, Glenday and Forde thus called for the Government to review all property tax exemptions extended to Bahamians only, reiterating that these would need to be eliminated upon WTO accession.
“This means that the current exemption on unimproved land owned by Bahamians on New Providence will need to be adjusted. In addition, the current exemptions given to Bahamians on all property on the Family Islands will need to be restructured,” they warned bluntly.
This provides further evidence of how the ‘rules of the game’ for the conduct of business in the Bahamas will change suddenly, and dramatically, once this nation accedes to full WTO membership.
It is unclear how many in the private sector, and wider Bahamian society, have been paying attention to this, given that Value-Added Tax (VAT) and possibly now National Health Insurance (NHI), have dominated the policy agenda.
The ‘Conditions for improving real property tax in the Bahamas’ report, meanwhile, went further in calling for the Government to review what it described as “several unique and generous tax exemptions and relief schemes” when it came to real property tax.
In particular, it called for the $250,000 ‘exemption threshold’ for owner-occupied real property tax to be reduced back to $100,000.
Explaining the rationale for this recommendation, it said: “First, the current owner-occupied exemption of $250,000 is substantially higher than those in the neighbouring United States.
“Second, the exemption is not means-tested, meaning that the exemption is given to rich and poor alike, perpetuating inequity. Third, the level of exemption was increased without a systematic updating of property tax roll values. Fourth, the exemption is difficult to administer to ensure that second homes are not also receiving a second exemption.”
Messrs Kelly, Glenday and Forde said the $250,000 Bahamian exemption was more than 2.5 times’ higher than the largest equivalent in the US, where exemptions ranged from $7,500 to $100,000.
“Increasing the exemption levels, while not systematically adjusting the property assessed values to be closer to market values, means that many properties drop off the property tax roll through reverse ‘bracket creep’,” the report said,
“It is reported that the increase in the exemption level from $100,000 to $250,000 reduced the number of taxpayers substantially, eliminating many properties from the tax roll. Due to the lack of an effective reassessment process, many of the owner-occupied houses have not been revalued in many years. “Thus, increasing the exemption by 150 per cent, while not reassessing the properties to keep up with real market value, meant that many houses fell below the valuation threshold.”
Messrs Kelly, Glenday and Forde also described the exemption Bahamians enjoy from paying real property tax on any Family Island as “overly generous”, because it made no distinction between rich and poor persons, plus high value and low value properties.
“Both rich and low income Bahamians are tax exempt from the property tax, thus not directly contributing to the payment for government services on the Family Islands,” the report said.
“There is no good reason why richer Bahamians (owning expensive properties) on the Family Islands should not be contributing to the payment for government services.”
And, significantly in the current context, Messrs Kelly, Glenday and Forde recommended that real property tax be imposed in Freeport from August 2015 onwards.
“As with the exemption granted to hotels, the Hawksbill Creek Agreement provisions on property taxation should also be reviewed, with property brought into the tax net upon expiration of the current agreement,” they argued.
Many Bahamas-based resorts are exempt from paying real property tax for up to 20 years under their Hotels Encouragement Act agreements, thus ensuring they enjoy a substantial concession, while the Government suffers “quite large” revenue losses.
“The property tax exemption for hotels, rental pooling, and time shares should be reviewed and reduced,” the report recommended.
“Although perhaps well intentioned, the generous property tax exemption on hotels and other tourist-related investments may be extravagant and unwarranted, potentially allowing hotel investments to be property tax exempt for up to 20 years.
“This exemption provides a major subsidy to the hotel investors, and to users of those hotels who receive government services without paying the property tax and the true costs of government-funded services.”
Calling for the Government to conduct cost/benefit analysis of all its tax exemptions, the report said: “Countries do provide a number of tax exemptions to stimulate economic development.
“These tax exemptions should be costed and monitored to evaluate the impact from the exemption, and to ensure that the property is brought on to the tax roll at the conclusion of the exemption. In accordance with international best practice, all property tax exemptions should be included in the property tax act to encourage greater transparency.”
Messrs Kelly, Glenday and Forde concluded: “To mobilise increased property taxes in an equitable and efficient manner, the Government must review existing tax base exemptions, potentially leading to a broadening of the tax base.
“As identified above, the tax base currently has very generous and perhaps unnecessarily generous exemptions, which dramatically reduces the potential property tax revenues and introduces possible, un-intentional impacts on the equity and efficiency of the tax system.”