The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government was yesterday urged to divulge “the full cost to the Bahamian people” of its Baha Mar agreement, after evidence emerged to show its construction completion is totally ‘VAT free’.

K P Turnquest, the FNM’s deputy leader, said the Government could be foregoing up to $60 million in Value-Added Tax (VAT) revenues, after an e-mail from the project’s general contractor suggested the ‘tax break’ had been extended to all companies and suppliers working on the completion.

A China Construction America (CCA) e-mail, headlined ‘Exemption of VAT’ and issued yesterday morning, said all companies working on Baha Mar’s completion had been granted “a full” waiver from payment of the 7.5 per cent levy.

The e-mail, sent by Siyao Shen of CCA (Bahamas) commercial department, said: “It’s agreed with the Government that the sub-contractors and suppliers of CCA Bahamas (CCA) shall be entitled to have the benefit of a full exemption from the payment of Value-Added Tax for works carried out on the Baha Mar project.”

Having effectively confirmed that the VAT waiver covers all Baha Mar-related construction activity, and includes all its sub-contractors and suppliers - Bahamian and foreign - the CCA e-mail suggests that they can also recover the taxes paid on bills submitted by their own service providers and suppliers.

“You are required not to charge the Value-Added Tax on your invoices for goods and/or services to CCA,” the e-mail told sub-contractors and suppliers.

“If you have paid VAT to the Government or your own sub-contractors and/or suppliers, please record these invoices as listed in the attached summary form and submit to CCA for the review and process of the Bahamas authority.”

The CCA e-mail’s content effectively suggests that all sub-contractors, suppliers and service providers working on Baha Mar will receive ‘zero-rated’ treatment on all their costs and invoices.

This means they, together with CCA, will be able to reclaim or not pay all ‘input’ VAT, while also avoiding the 7.5 per cent levy on their ‘outputs’.

“While the Prime Minister brags about concluding a deal, the real question is what is the cost to the Bahamian people today and in the future,” Mr Turnquest told Tribune Business of the CCA e-mail’s implications.

“This is at what cost to the long-term welfare of the economy and the Bahamian people?”

Questioning whether the 10 per cent ‘transfer tax’ had been paid on the two sales of Baha Mar’s assets, he added: “Now we are getting this information that we’re going to be losing VAT on the completion work which, by the Prime Minister’s calculation, is upwards of $600 million.

“You’re talking at least $60 million or so [foregone]. Who’s paying? The Bahamian people are paying. They are invested in this project, not indirectly but directly, through the incentives and tax breaks granted.

“Yet the Government has the gall to say they’re transparent and acting in the best interests of the Bahamian people.”

Tribune Business was sent the CCA e-mail by a well-known source, who had obtained the document from one of the Bahamian contractors who received it.

Its contents were last night said to be provoking outrage among Bahamians, upset that tax breaks are being granted to the Chinese when the same are not being made available to local businesses and consumers, after the e-mail was widely circulated on social media.

However, a Government source intimately familiar with the Baha Mar agreement said it was “not unusual” for sub-contractors working on major foreign direct investment (FDI) projects to enjoy the same tax incentives as the main contractor.

Speaking on condition of anonymity, they added that this had been a standard practice under numerous ‘Heads of Agreement’ for resort and real estate-based developments, as sub-contractors were “legally” treated as the general contractor.

“It’s not unusual to have a situation in Heads of Agreement where general contractors and all contractors underneath are able to benefit from exemptions,” the well-placed source told Tribune Business.

“It’s not unusual for sub-contractors to have the same benefits granted to the general contractor, as they are legally the general contractor.”

Implying that too much was being read into the CCA e-mail’s contents, the Government source said some of the concerns and confusion were arising because the Baha Mar agreement was the first major investment deal to take effect since VAT’s implementation on January 1, 2015.

Previous Heads of Agreement have not had to account for the tax, with the source suggesting that the investment incentives granted to facilitate Baha Mar’s agreement were no different from the typical package provided under the Hotels Encouragement Act.

When Tribune Business pointed out that the CCA e-mail had likely provided the Opposition parties with ammunition to attack the Government, the source replied: “It’s unfortunate, but that’s the world we live in” with a general election coming up.

At the very least, the CCA e-mail is likely to re-intensify pressure and calls for the Government to reveal all details surrounding Baha Mar’s impending completion and opening, especially the construction deal.

“It’s long past time that they unsealed that deal,” Mr Turnquest said yesterday. “There’s no commercial reason why it shouldn’t be unsealed.

“I think this is exactly why the Bahamian people have been asking for this deal to be unsealed, and details of the agreement to be made public.”

The CCA e-mail will also heighten concern about the nature and amount of investment incentives granted over the Baha Mar project, although its original developer, Sarkis Izmirlian, was said to have been handed $1.2 billion worth of ‘tax breaks’ over the 20-year period to 2032.

The Government source, though, said Prime Minister Perry Christie had made it clear that the Heads of Agreement with Baha Mar’s purchaser, Chow Tai Fook Enterprises (CTFE), and all other agreements would be publicly disclosed at the appropriate time.

“The Prime Minister has indicated that once the court Order is lifted, the Heads of Agreement and all of that will be revealed; that there will be full disclosure and that it will all come out, and the Government will have no objection to it,” they added.

Other Tribune Business contacts were reluctant to talk, pointing out that the ‘VAT issues’ raised by CCA’s e-mail were dealt with in the Heads of Terms agreed between the Christie administration and Baha Mar’s secured creditor, the China Export-Import Bank.

That agreement is still ‘sealed’ by the Supreme Court, meaning its details cannot be made public. However, when pressed on the contents of CCA’s e-mail regarding the “full VAT exemption”, one source familiar with the negotiations said: “It’s more nuanced than that.”

The Government source, meanwhile, acknowledged that it was the China Export-Import Bank - rather than the Christie administration - that had requested the construction agreement’s ‘sealing’ by the Supreme Court. This raises questions over whether the Government has the power to request its ‘un-sealing’.

The Baha Mar agreement, though, appears to deviate little from the ‘investment model’ followed by successive Bahamian governments, which is to trade-off investment incentives (tax breaks and concessions) and land for the creation of jobs and GDP growth.

In Baha Mar’s case, the trade-off is likely to have required a higher price, given the China Export-Import Bank’s initial reluctance to finance the construction completion, and the fact it made $100 million available to pay all Bahamian creditors what they were owed - liabilities that were not its own.

And, in granting investment incentives, the Government is typically betting that the wider impact from the increased economic activity and employment generated by Baha Mar will produce revenue flows that outweigh the initial taxes foregone.

Mr Turnquest, though, suggested that CCA’s ‘VAT e-mail’ showed that Bahamian taxpayers were, in effect, financing the ‘creditor payout’ to ex-Baha Mar employees and Bahamian firms via the ‘tax breaks’ granted to complete construction.

“The end result is that the Government of the Bahamas is making these ex-gratia payments to employees and creditors because the tax concessions are what is paying for it,” he told Tribune Business.

“This is not a cute deal by any stretch of the information. The fact is that the Government of the Bahamas has wiped the slate clean for the China Export-Import Bank and CTFE so the only thing they’re really responsible for is the cost of finishing the building.”