The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Baha Mar’s new owner will likely have “inherited” its Value-Added Tax (VAT) exemptions from Sarkis Izmirlian, a former finance minister saying “any developer worth his salt” would have sought protection from new taxes.

James Smith, also an ex-Central Bank governor, told Tribune it was impossible to determine whether the Government’s deal with Chow Tai Fook Enterprises (CTFE) was a bad one without seeing all other related agreements.

He argued that too many persons were focusing on the various VAT exemptions granted to Baha Mar’s new owner, adding that tax breaks - and other incentives and concessions - were “only one part of the equation”.

Suggesting that Baha Mar was a unique case, given that the Bahamas could not afford for an incomplete mega resort to sit at Cable Beach without being used, Mr Smith said the deal’s quality ultimately depended on whether CTFE was successful.

Pointing to the hotel industry’s history in the Bahamas, the former minister of state for finance said 15 and 10-year tax holidays for resort developments was a trend that - under the Hotels Encouragement Act - went back to the 1950s, and properties such as the Royal Victoria and British Colonial.

“There’s a standard clause any hotelier insists on, which is that if you give me tax breaks, don’t then introduce a new tax on me,” Mr Smith told Tribune Business in relation to Baha Mar’s VAT breaks.

“Mr Izmirlian would not have gone into a development like that without asking for cover for another tax. That had to have been. Not VAT exclusively, but any new tax would not be levied on this development.

“Any developer worth his salt would do that. These new people [CTFE] would inherit that; something already given. That has been a standard taxation clause.”

Many Bahamians have branded the Government’s Heads of Agreement with CTFE as a great tax ‘giveaway’, as the deal ensures the two ‘asset transfers’ necessary to effect Baha Mar’s sale were “exempt from all relevant taxes”, including VAT and Stamp Duty, with the $4.2 billion project’s completion also escaping the 7.5 per cent levy until end-2019.

“VAT (when applicable) would have been paid on all materials and services necessary for construction and equipping of the project,” the Heads of Agreement’s ‘clause 8.1’ states.

“In order to complete and open the project, the project company shall be eligible for exemption through December 31, 2019, from Value-Added Tax and all exemptions granted under the Hotels Encouragement Act and other legislation, including but not limited to, exemption from Customs duty in respect of all materials and equipment used in the construction, equipping, furnishing, completing and opening of the project.”

And no VAT or Stamp Duty, representing the 10 per cent real estate ‘transfer tax’, will be paid on the two ‘sales’ of Baha Mar’s assets.

The first sale was from Baha Mar’s Deloitte & Touche receivers to the China Export-Import Bank’s Perfect Luck vehicle, taking Baha Mar’s assets out of receivership. The second involves the mega resort’s sale, once its construction is completed, from Perfect Luck to CTFE’s CTF BM Operations vehicle.

The Heads of Agreement confirms: “It is understood and agreed that pursuant to the Heads of Terms, the transfer of assets in connection with the project from Baha Mar to Perfect Luck or its affiliate, and subsequently the transfers of assets or shares from Perfect Luck to [CTF BM Operations] would be exempt from all relevant taxes related thereto.”

Mr Smith, though, was backed by Grant Lyon, the Government’s claims adviser in the Baha Mar restructuring and liquidation process.

Mr Lyon pointed out what Tribune Business already has, namely that “the concessions are almost identical to what the previous FNM government gave Mr Izmirlian when he was the owner of Baha Mar”, except for VAT which did not exist in 2011.

The casino tax, real property tax and marketing support rates, structure and amounts are identical, with Mr Lyon arguing that the VAT waived on Baha Mar’s construction completion “amounts to no more than $7.5 million”.

Backing previous Tribune Business articles, he added: “The VAT associated with the sale of Baha Mar was not waived. It was deferred and will be collected as customers stay at the resort.

“Those who say that the agreement resulted in a waiver of hundreds of millions of VAT are incorrect – only up to $7.5 million of VAT was waived.

“In my expert opinion, this is a small price to get the resort out of bankruptcy, to get the more than $100 million in claims paid to creditors, contractors and employees, and to get the resort open and offer Bahamians badly needed jobs.”

Mr Smith, too, said the collection of VAT was a “timing” issue, as payment had been deferred until Baha Mar became operational and started receiving guests.

Explaining why the Government had opted not to receive due tax revenues upfront, the former minister said: “You cannot impair the viability of a project that large by squeezing its cash flow upfront.

“People are only looking at one part of the equation: concessions. Concessions are given to provide impetus for economic growth, job creation and GDP.

“In Baha Mar’s case it is more peculiar, because if you don’t give the same level of concessions that the former guy received, would the new owner come in? Could you afford to have the project sitting there for years? I don’t think anyone would want that.”