The Tribune

By Neil Hartnell

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian Contractors Association’s (BCA) president yesterday voiced fears that businesses are “being taxed to the place where they stay stagnant” after it was revealed there is no escape from having to pay VAT on construction-related expansion projects.

Leonard Sands, speaking out after the Department of Inland Revenue (DIR) confirmed no business will receive an exemption from reforms that accompanied the 2025-2026 Budget, reaffirmed his view that it amounts to a direct 10 percent tax on investment since it will now cost a company an extra $1m to undertake a $10m expansion of its physical premises.

With the tax authorities adopting the stance that no Bahamian enterprise will be able to deduct, or reclaim, VAT paid on building materials used in expanding or constructing new facilities worth over $1m, he warned the Government that it “cannot collect tax if businesses don’t exist” amid its desire to obtain every cent and dollar possible to ease fiscal and cash flow woes.

Dionisio D’Aguilar, Superwash’s president, said on Monday he was sounding the alarm for all Bahamian businesses after the laundromat chain was told by the Department of Inland Revenue it had ““misinterpreted” the VAT Act reforms. While the language employed in the amendments gave him the impression that bona fide companies undertaking legitimate construction-related expansion would be granted an exemption if they applied, the tax authority said this is not so.

Kwasi Thompson, the Opposition’s finance spokesman, told this newspaper his party’s position is that the elimination of VAT deductions, or refunds, on construction materials used for business expansions should be reversed. While he stopped short of committing the Free National Movement (FNM) to doing so, should it be returned to government in the upcoming general election, he nevertheless branded it “bad policy” that it represents “a 10 percent tax on investment by Bahamian entrepreneurs.

“This reiterates the point we were making during the Budget communication that it’s a bad policy and it is a disincentive to investment,” the east Grand Bahama MP said yesterday. “This [Superwash’s situation] is a real life example of why we thought it was a bad policy. It really highlights the repeated remarks that the leader of the Opposition [Michael Pintard] and I made during the Budget debate.

“It is a bad policy. It stifles investment. I think this is going to be a disincentive for investors. I think that investors considering investing over $1m in their construction-related expansion projects will think twice because it means that, in proceeding with their plans, they - in effect - will have a 10 percent tax put on their investment. As we said in the Budget debate, it’s a bad policy and a disincentive for investment.”

Mr D’Aguilar confirmed that the VAT Act changes, coupled with the Department of Inland Revenue’s stance, means that Superwash will have to pay almost $400,000 in extra construction-related costs on its near-$4m East Street South new laundromat and retail complex. While he will absorb it, and proceed, he warned that other hard-pressed businesses facing small profit margins may elect not to proceed with projects that boost construction and full-time jobs and economic activity.

Tribune Business also reported that blocking businesses from reclaiming, or offsetting, the 10 percent tax paid on construction materials for $1m-plus expansions appears to contravene the very principles and structure on which VAT is founded. VAT registrant companies are supposed to be able to regain, or offset, the tax paid on their ‘inputs’ - such as building materials - against the ‘output’ VAT paid by end-user consumers. This is now being blocked in this specific circumstance.

Mr Thompson declined to into these technicalities, but reiterated: “From the investor point of view, it’s an additional 10 percent tax on their investment. Any investor looking at expanding their business, starting up their business, is going to think twice before doing so.”

Asked whether the FNM would eliminate or reverse this particular VAT Act amendment if it were elected to government at the next general election, the east Grand Bahama MP did not explicitly confirm ‘yes’ but added that the party’s position is that he treatment of construction-related business expansions should revert to the pre-Budget position.

“Most certainly it’s a policy that ought not to have been put in place,” the Opposition finance spokesman argued. “It was a benefit that investors were able to take advantage of previously, and was a benefit taken away from them. It is, in effect, a 10 percent additional tax on investment.

“We believe it’s a bad policy, we believe it must be addressed, we believe it must be changed and we believe it should go back to the position it was previously. I can state that the FNM’s position is that it should go back to the position it was previously. The reality is it’s a disincentive for investment. It’s in effect an additional 10 percent tax on investment, so it’s bad policy.”

Mr Thompson was backed by the BCA’s Mr Sands, who told Tribune Business the fall-out will likely “hit” all aspects of the Bahamian construction industry by slashing the amount of projects and work available. “I think what the Government should try to understand is what do they think is going to happen,” he said. “I don’t know why they think it will be a positive thing for the expansion of existing infrastructure.

“Clearly, it would retard any industry expansion if I knew I could previously reclaim the VAT on projects $1m and over. You’re now telling me I should go ahead and expand my business, expand my facilities, expand my plant but I have to pay an extra 10 percent. Why would I want to do that?”

Speaking to the implications for the construction industry, Mr Sands said: “It won’t shut down the industry, but it’s going to hit a lot of projects scheduled for expansion. The ownership may decide not to go ahead with it. If I’m doing a $10m expansion, and you’re telling me I’m going to have to pay $1m extra, why would I want to do this? I would keep my old plant. It is what it is,” the BCA president added.

“I hope the persons involved with it understand the possible impact. I know they [the Government] want to collect taxes, but they cannot collect taxes if businesses do not exist. There’s no win there. I’m hearing rumblings from many businesses which are very nervous about how they’re going to make it to the 2026 first quarter. You’re going to tax businesses to the place where they stay stagnant. That’s the fear. If they do that, that doesn’t help anyone.”

Superwash’s Mr D’Aguilar, the former minister of tourism and aviation, told this newspaper that he believed the VAT Act changes, which accompanied the 2025-2026 Budget passed by Parliament in late June, would allow Bahamian companies undertaking legitimate physical expansion of their premises to apply to the tax authorities for an exemption from the new requirements.

The reforms stipulate that tax deductions on VAT inputs “shall not be allowed in respect of any goods or services acquired for use in, or connection with” property construction, reconstruction or renovations deemed to be a “major” project - meaning the work is valued at $1m or more - “unless the comptroller otherwise prescribes”.

Mr D’Aguilar said he had taken the latter phrase to mean that companies could seek exemptions from having to pay VAT on building materials acquired for bona fide construction projects designed to expand their core activities. As a result, he applied to the Department of Inland Revenue for approval to reclaim, or deduct, the VAT paid on Superwash’s construction material inputs.

However, Shunda Strachan, the Department of Inland Revenue’s controller, quickly disabused him of this expectation, asserting that the amendments “explicitly prohibit” VAT deductions on construction projects that fall within the $1m-plus “major” category defined in the Act.

And she asserted that the “unless the comptroller otherwise prescribes” phrase is not providing a gateway for the Department of Inland Revenue to grant exemptions from this legal mandate but, instead, gives the tax authority the ability to issue rules and regulations identifying activities “that do not constitute major construction”.

Mrs Strachan, in her written letter to Mr D’Aguilar, asserted that the VAT Act reforms were designed to ensure that “major construction” projects worth more than $1m received the same VAT tax treatment as purchases of land and/or buildings - meaning that businesses are unable to treat either as a deductible business expense and offset them against the ‘output’ VAT collected from consumers.

“In respect of your request, it appears that the legislative amendment has been misinterpreted. The action you are seeking would, in effect, require the comptroller to act contrary to what is expressly required under the Value Added Tax Act,” she asserted.

The purpose of the “major construction project” amendments, Mrs Strachan added, was to ensure they and property transactions are subject to “the same treatment”. She added that the reforms “apply where a business premises is constructed, reconstructed or substantially renovated, and such activity constitutes major construction.

“The cost of the construction, reconstruction or substantial renovation - together with the VAT paid on those activities - form the capitalised cost of the business premises. Please note that under the VAT Act, the comptroller has no authority to override the legislation. The amendment explicitly prohibits the deduction of VAT paid on construction, reconstruction or substantial renovation of real property where such activity qualifies as major construction.”

As for the phrase “unless the comptroller otherwise prescribes”, Mrs Strachan argued this did not empower herself and the Department of Inland Revenue to grant exemptions to individual businesses that would allow them to reclaim the VAT paid on construction material inputs.

“The phrase ‘unless the comptroller otherwise prescribes’ refers specifically to the statutory process by which the comptroller may, through regulation or rule made under the authority of the VAT Act, define certain activities that do not constitute major construction. It does not empower the comptroller to make case-by-case determinations for individual registrants, which is the basis of your request,” Mrs Strachan told Mr D’Aguilar.

“The process of ‘prescribing’ involves the comptroller issuing a formal instrument - by regulation or rule - specifying categories of activities that are excluded from the meaning of major construction. Once such a list is lawfully prescribed, it applies uniformly to all registrants. To date, no activities have been prescribed as excluded from the definition of major construction.

“Having reviewed the details in your letter, the activities being undertaken clearly fall within the scope of major construction as defined under paragraphs 50 (1C) (i) and (ii). Accordingly, the comptroller would not have the legal authority to classify your project as otherwise, since doing so would create a precedent applicable to all registrants and thereby defeat the purpose of the amendment. We regret that our response cannot be more favourable to your request.”

One well-placed financial source, speaking on condition of anonymity, told Tribune Business that the Department of Inland Revenue position as outlined in Mrs Strachan’s letter is “absolutely incredible”. They added: It’s a tax on high-end investment. It’s a tax on capital formation and it’s going to put a brake on growth. This is the antithesis of what you do in order to spur development.

“We give tax breaks to hotels and small businesses to spur capital formation. You don’t want to add an additional burden because it makes it more expensive and shrinks the dollar value of the investment. This is not the last you will hear of this. It’s going to have severe implications for big projects. In no jurisdiction is this treated as non-refundable VAT because these are business expenses. These are supposed to be refundable.”