The Tribune

• Eyeing rate rise to 12% in next week’s budget

• Plans to create permanent residency ‘fund’

• Investors to finance social, infrastructure outlay

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government is mulling whether to increase the VAT rate to 12 percent on all property sales worth $1m and above as part of next week’s budget measures to plug a multi-million dollar revenue gap.

Multiple government officials, speaking on condition of anonymity, told Tribune Business there was a strong belief within the Minnis administration that “the very hot market” for high-end Bahamian properties will be able to easily withstand this two percentage point increase.

The present structure levies VAT at just 2.5 percent on real estate sales transactions worth up to $100,000, with ten percent applied to all other deals, thereby giving the Ministry of Finance scope to target deep-pocketed buyers with higher tax rates to help pay for the debt and deficit blow-outs caused by COVID-19 and Hurricane Dorian.

This newspaper understands that increasing the VAT rate to 12 percent for all property sales worth $1m or more, which would bring it into line with the rate Bahamians pay on every day items, is just one of multiple revenue-raising measures being considered as part of a package intended to help ease the fiscal woe for the cash-strapped Public Treasury.

It is thought that these proposals are being largely targeted at those most able to pay, such as wealthy foreign real real estate owners, as opposed to middle and lower income Bahamians who have born the brunt of COVID-19, in a bid to ensure they do not inflict further social hardship or undermine the economy’s post-COVID rebound.

Any new and increased levies are also being accompanied by measures designed to boost foreign direct investment (FDI) and external currency inflows. Tribune Business was informed that the Government is also considering whether to establish a fund to receive investments by wealthy foreigners seeking economic permanent residency in The Bahamas.

This fund, established as an alternative to qualifying for permanent residency by acquiring property worth $750,000 or more, would pool monies received from overseas investors and use these funds to invest in a variety of infrastructure and social projects across The Bahamas.

Realtors yesterday gave a mixed reaction to plans to increase the VAT rate on high-end real estate transactions to 12 percent. While acknowledging that this segment of the market is booming, with one suggesting price in Lyford Cay have jumped by 15-30 percent in the last few weeks, they suggested that increases should be implemented on properties worth $5m and above rather than $1m.

And, while many observers will agree that the Government should hit this segment and better link tax increases to ability to pay, some realtors argued that it would do better to leave the segment alone rather than undermine its international competitiveness.

“When it comes to real estate I think they should keep everything exactly as it is because we’re doing well,” John Christie, HG Christie’s president and managing broker, told Tribune Business. “That 10 percent Stamp Tax, now VAT, has been tried and proven and any adjustment to it will slow things down.

“I don’t think it will do us any good. Turks & Caicos reduced their stamp tax by cutting it in half to try and boost sales. We definitely don’t need to do that. Putting it up to 12 percent could slow a strong market. Hopefully they will keep it going as is without raising taxes too much.

“They need to get The Bahamas as open as much as possible, get the tourists coming back in, and not over-tax the country. We’ve got to get back open as best we can. We need to try and get people back to work, and more taxes means less possibility of people being re-employed. We have to get out of this pandemic before we start jacking taxes up.”

Mike Lightbourn, Coldwell Banker Lightbourn Realty’s president, voiced concern that real estate deals presently under contract will attract a possible 12 percent rate if they fail to close before July 1, which is when the new Budget year starts.

While the VAT is typically split 50/50 between buyer and seller, he explained that any increase will force them to find extra funds they may not have budgeted for. “We all know they need more revenues, and that is one of the simplest ways of getting it, like increasing the VAT rate itself,” Mr Lightbourn added.

“I just hope they continue to encourage investment by Bahamians and non-Bahamians. Investment in real estate leads to other things, such as economic activity and income for the Government.”

However, Mario Carey, the Better Homes and Gardens Real Estate MCR Group principal, responded by saying “what a mistake” when informed of plans to increase the VAT rate to 12 percent on all transactions worth $1m or more.

He argued that the rate increase should only apply to deals worth $5m or more because these were “more geared to the international buyer” and so “it does not interfere with the upward mobility of Bahamians enjoying some success, and employing people.

“Why persecute a Bahamian so overburdened, and can’t invest overseas, doesn’t have access to US currency. Why hold them down again?” asked Mr Carey.

Advocating that permanent residency’s real estate investment threshold should be increased from $750,000 to $1.5m, he nevertheless backed the Government’s plan to create a fund for overseas investors to contribute to as an alternative to acquiring property.

Mr Carey said The Bahamas could develop a competitive advantage, as well as boost social and infrastructure spending, if contributions to such a fund could be linked to tax deductions or write-offs for investors as occurs in the US via the so-called 501 (c) (3) exemption.

“Anyone who buys a $5m property, out of that a certain percentage goes to social development and gets a tax write-off,” he added. “If you buy real estate worth $1.5m for permanent residency, you have to donate a percentage or fixed fee of $250,000 to the social development fund.

“You cannot buy property in this country for permanent residency unless you contribute to the social development fund. That’s the baseline. Maybe increase VAT on transactions $5m or above and say permanent residency is at $1.5m. Any purchase of permanent residency, 1 percent goes into the social development fund.” 

Mr Carey also acknowledged: “We’re in a real estate boom. The Bahamas is a very attractive alternative. We are giving away our real estate, and we need to change that model and make it happen very quickly in this Budget.

“With COVID-18 and this real estate boom, prices in Lyford Cay have jumped by anywhere from 15-30 percent in the last few weeks. The Government needs to benefit from this boom, but not through taxes. It does not need to be taxing common Bahamians.”

Peter Dupuch, ERA Dupuch’s founder and president, also argued that a VAT rate increase to 12 percent should apply only to real estate sales worth $5m or over as this would ensure only persons that could afford it - those with second and third homes - were impacted.

He added that realtors were “running out of inventory almost” at the high-end, and said: “I’ve never really seen it so busy, and people have been buying homes sight unseen. They’re the group they should look at increasing taxes on a bit, although we’re trying to encourage people to come here.”