The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister yesterday said the Government is engaged in “a cat and mouse game” with wealthy tax evaders as it races to plug loopholes and secure the Bahamian people’s money.

Michael Halkitis, minister of economic affairs, speaking after the Prime Minister revealed the Government had collected just 8 percent of its $190m full-year target for VAT on high-end real estate sales in the first nine months to end-March 2024, voiced suspicions that foreign buyers are employing complex corporate structures to evade paying what is due to the Public Treasury.

While providing no examples during the Prime Minister’s Office’s weekly press briefing, he suggested that that purchasers of Bahamian real estate worth $1m and above are using offshore companies to hold these assets beyond the Department of Inland Revenue’s reach.

“We think it’s structures,” Mr Halkitis said. “We think people are organising or have been creating companies, possibly in other jurisdictions, to hold these things [real estate]. We think it’s the way transactions are being structured to avoid the payment.

“That is why the Prime Minister said we’ve taken some steps in this Budget to change that and the way we administer to try and plug that loophole. You can imagine that is a cat and mouse game almost when it comes to tax enforcement because people will find ways.

“When you’re talking about people with means, they’ll engage advice and professional advisers to assist with this. It’s up to us to introduce and to close the loopholes. I think it’s trusts, and companies and structures in various jurisdictions and various layers people use to disguise this.”

Prime Minister Philip Davis KC on Wednesday said the Government plans to eliminate “inter vivos transfers” of property to “non-natural” persons as part of its bid to crack down on tax avoidance related to high-end real estate purchases.

“Another measure to address the issue of revenue underperformance for VAT on real estate will be the elimination of inter vivos transfers to non-natural persons. All inter vivos transfers after July 1 would have to be to a natural person,” he revealed.

Inter vivos is a Latin term for a gift or transfer of property that is made when the grantor is still alive. This can be done for a variety of legitimate reasons, such as parent or grandparent wishing to leave their home or real estate to their children/grandchildren as part of their estate planning before they die. However, the Government is suspicious such transfers, which attract no VAT, are being exploited for tax avoidance.

Andrew O’Brien, the Glinton, Sweeting & O’Brien law firm partner, voiced concerns to Tribune Business that the Government’s move will “eliminate a very useful estate planning tool” and provide less flexibility for grantors to gift property to their dependents.

“That’s very disappointing,” he explained, “because the whole purpose for inter vivos transfers is people setting up doing their estate planning, which often involves a company or trust. To take that away will eliminate a very useful tool in estate planning.

“That will also lead to reduced revenues for The Bahamas because people have less incentive to form a company to handle property. It’s just for transfers. It will be all the more important to have your pre-planning done because, if life circumstances change you will not have flexibility to change the structure, which can still come about because there is no change in beneficial ownership. I don’t understand that.

“Why should it matter if there is no change in beneficial ownership?” Mr O’Brien asked. “Inter vivos allows transfers to children, grand children or spouses. That’s where 90 percent of transfers go to... The company structure can be a better way to transfer property owned by multiple people.

“It’s just reducing the flexibility, and I don’t see the reason given for it. It’s just that people will not turn to that means of structuring.” Mr Davis, in his Budget communication, revealed that the Government had at end-March 2024 received just $15.1m of its $190.3m full-year target for VAT levied on real estate deals worth $1m and over.

He told the House of Assembly that VAT collected on high-end property sales was nowhere to reflecting real estate market activity based on the number of economic permanent residency and international persons landholding permits being issued by the Government.

“The area of revenue under-performance which became apparent during these nine months is the VAT on real estate transactions. For example, if we look at the budget forecast for VAT on realty transactions over $1m, it is $190.3m,” Mr Davis said.

“At the end of March 2024, we have only collected $15.1m or 7.9 percent of this total. It has also been observed that the certificate of residency and international holding permits issuances are consistent with balance of payments data that shows strong inflows of funds for property purchases.

“Last year’s revenue intake of this item was $121.1m. These are the reasons why it is necessary for this government to take a deeper dive into the under-performance of this category of revenue.” This is set to be tackled by “implementing legal and administrative measures to improve compliance” through legislation and regulation accompanying the 2024-2025 Budget.

To close potential tax avoidance loopholes, Mr Davis said economic permanent residency applicants must now produced a stamped conveyance - proving they have paid the due 10 percent VAT on their purchase - to the Department of Immigration before they can obtain their permit.

Further cracking down, economic permanent residency applicants seeking to qualify by purchasing real estate must also provide an appraisal report no more than a year old to prevent tax avoidance through the submission of a contrived, lower price than was actually paid. A real property tax assessment number must also be provided to the Immigration Department.

“This administrative step will help streamline the process and ensure that the real property tax number is carried throughout all processes across all government agencies, which would allow for auditing to ensure that the correct tax amount is being paid,” Mr Davis said.

“We have discovered that information provided by the local real estate sector about the buoyancy of the high-end real estate market is not reflected in the Government’s receipts.

“We have witnessed a sizable drop in revenue this year for this category. This is the primary underperforming revenue item that we have identified, and we have included a number of administrative measures to address the underreporting of real estate transactions.”

In a bid to further plug loopholes, the Government tabled changes to the International Persons Landholding Act that - if passed - will see permits expire if VAT or real property tax is not paid within 90 days of the tax assessment or “requisite return” deadline.

However, the Budget book, which sets out all the Government’s revenue and spending figures for the present 2023-2024 fiscal year to-date and upcoming 2024-2025 period, provides a much different figure than that given by Mr Davis for VAT collected on $1m-plus real estate sales during the nine months to end-March 2024.

The Budget book gave $81.454m as the figure for how much had been generated from this revenue line item during that period - a sum more than five times’ greater than that cited by the Prime Minister. No explanation has yet been provided for the discrepancy.