The Tribune

• Two-month pushback for deals ‘in pipeline’

• Attorney: We can ‘put our best foot forward’

• Minister argues rise ‘won’t dampen market’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government was yesterday urged to postpone implementation of the 12 percent VAT rate on high-end real estate deals for two months so as not to derail transactions “already in the pipeline”.

Andrew O’Brien, attorney and partner with the Glinton, Sweeting & O’Brien law firm, told Tribune Business that The Bahamas “doesn’t put its best foot forward” with international investors when it suddenly raises transaction costs and forces the parties involved to find extra funds.

Pointing out that The Bahamas is in fierce competition with foreign rivals to attract high-end real estate purchasers, he urged the government to delay applying the 12 percent VAT rate to the portion of real estate deals worth $2m and above until September 1, 2021, as opposed to bringing it in at the fiscal year’s July 1 start.

This, he argued, will give existing transactions above that price point - and for which sales agreements were signed before Wednesday’s budget communication - sufficient time to clear and complete all documents and payments necessary given that most deals permit a 90-day closing window.

Arguing that such precedent has been established by the Stamp (Surcharge Amnesty) Acts of 2016 and 2017, which allowed a similar 90-day grace period, Mr O’Brien told this newspaper: “We would like to urge the government to postpone the effective date of this provision to allow existing transactions to clear through the pipeline.

“We suggest a start date of September 1, 2021, which would give approximately 90 days notice from the passage of the Act [budget announcement]. Providing such notice is simply a better way to do business, as it gives time for the market participants to plan and react, and it increases predictability in a transaction, which promotes the ease of doing business that The Bahamas is seeking to improve.”

However, the reforms to the VAT Act, which will introduce the 12 percent rate on the portion of a real estate transaction worth more than $2m, are due to take effect from July 1, 2021, to coincide with the start of the new fiscal year.

And, given that the government expects to raise just an additional $4m from the increase, many observers will likely argue that the wealthy participants in such transactions will not be deterred by such a relatively modest increase especially since buyer and seller are likely to split it 50/50 - meaning they each pay the equivalent of just an extra 1 percent of the purchase price.

However, Mr O’Brien argued: “We don’t put our best foot forward when we make changes like this that catch people by surprise, and so to the extent we can resolve such surprises we improve our own image and the way we do business.”

While parties to real estate transactions typically insert provisions into sales agreements to guard against situations such as unexpected tax hikes, and detail whether both or just one side assumes the associated risk, he added that few actually set money aside “ahead of time because it is not something they expect”.

“Any surprises in a commercial environment just create uncertainty,” Mr O’Brien warned. “It detracts from our attractiveness as a place to do business, and in going to buy property we are competing against the Caribbean region.”

However, Kwasi Thompson, minister of state for finance, yesterday voiced optimism that the two percentage point VAT rate hike “will not dampen the market” for high-end Bahamas properties as he reiterated that the Budget’s focused tax enhancement measures were specifically targeted at individuals and businesses that have the ability to pay more.

“The whole purpose was not to focus on the average every day Bahamian, but to provide some equity to how tax.. is done,” he added. “It’s really focused on persons who can afford to pay more, and those persons buying high-end properties in excess of $2m.

“The Government believes they can pay an additional amount. Moving it from 10 percent to 12 percent, we don’t think it’s going to dampen the the market any. We think persons in that price range, this will not stop them at all from continuing to purchase property.”

Mr Thompson referred to Christine Wallace-Whitfield, the Bahamas Real Estate Association’s (BREA) president, for backing the tax hike provided that there were significant ease of doing business improvements to facilitate the faster closing of property deals - something the minister says he “completely agrees with”.

He added that the Government had also targeted the vacation rental market in the belief that its consumers can “afford to pay a bit more”, moving to clarify in the VAT Act that the 12 percent levy is to be imposed on the full rental rate as well as commissions.

“We have to have a balancing act with this,” Mr Thompson said. “We’re in the middle of a world economic crisis, and have a situation with a downturn that we’ve never seen before in The Bahamas, but we have to pay out more because people are in need because of the crisis.

“We have to balance the fact revenues are down, and we have an economic downturn, but we don’t want to increase taxes on people who cannot afford it. How do we strike a balance with people that can afford to pay it? We believe we have struck a balance in this Budget. We believe the Government has struck a balance between significant concessions and those that can afford it to pay a bit more.”

Realtors, though, were unconvinced. Mike Lightbourn, Coldwell Banker Lightbourn Realty’s president, told Tribune Business of the 12 percent VAT hike: “That could kill sales. The problem with these things is that they pop up at awkward times. We don’t want to do anything that slows down the momentum, and that will.

“If you have a big sale of between $10m to $15m, that could kill it. It takes so long to get sales agreements completed and transactions approved. I’m sure it will kill some sales. We need the revenues. I’m hoping it has a short-term dampening effect on big sales. On big transactions it could do some damage. It could be a deal breaker.

“The ease of doing business is the biggest issue with real estate. That’s our greatest problem. It takes forever to close a transaction. To me, that’s the key.”