The Tribune

• Realtors dispute near-40% gross profit margins

• Say green paper’s data is ‘skewed very far off’

• ‘Shocking’ business ease may create fall-out

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian realtors yesterday said data showing they enjoy near-40 percent gross profit margins is “skewed very far off” as they urged the Government “to be careful we don’t price ourselves out of the market” over corporate income tax.

David Morley, who co-chaired the Bahamas Real Estate Association’s (BREA) committee examining the proposed introduction of corporate income tax, told Tribune Business that hardly any realtors reported gross profit margins close to the 38 percent identified in the Government’s corporate income tax ‘green paper’.

Disclosing that he had “never done so much research in my life”, he added that comparisons of other Caribbean jurisdictions of similar size and with matching gross domestic product (GDP) indicators revealed that The Bahamas has “one of the highest overall rates” of real estate taxation when the likes of VAT on conveyances, real property taxes and other levies are combined.

This, Mr Morley argued, means The Bahamas must be wary if it ultimately chooses to impose a corporate income tax on net profits as an alternative to the turnover-based Business Licence fee. While corporate income tax’s implementation may “level the playing field” between countries, he added that his “biggest concern” is this could ultimately result in companies existing The Bahamas due to the high cost of doing business and “shocking” ease of doing business.

Confirming that BREA submitted its ‘green paper’ feedback to the Government ten days ago, and in advance of the end-August deadline, Mr Morley said the committee had sought to benchmark its analysis against the likes of Antigua & Barbuda, Barbados, Aruba and St Lucia. These represent the closest comparisons in terms of GDP and population size, with per capita income also employed for the assessment.

When taxes on mortgages, short-term rentals, real estate sales and real property taxes were combined, he added: “It shows The Bahamas has one of the highest overall rates of those countries... We have some of the highest duties paid on conveyancing in terms of our VAT.

“One of the comments we made to them [the Government] is that if you’re going to introduce corporate income tax at a competitive rate of 15 percent, you have to be careful that we don’t price ourselves out of the market in terms of the real estate sector.”

The Government’s corporate income tax ‘green paper’, released in May this year, forecast that real estate firms will experience the highest increase in their tax burden for each of the four tax options that the Government is proposing as replacements for the turnover-based Business Licence fees.

Bahamian realtors are projected to see an increase of between 2.2 percent and 3.7 percent in their tax burden, as a proportion of gross turnover, compared to what they pay now under the present Business Licence fee. Mr Morley, who said he had also “done a deep dive” into the tax deductions and incentive credits available to real estate in the 160 countries that presently have corporate income tax, said the BREA committee had also suggested the Government use fresh numbers.

“Our biggest recommendation to them is they should re-run all the numbers in the ‘green paper’ based on activity from 2018 and 2019 being the highest years pre-pandemic,” he said. “What they have done is run a lot of stuff from 2021, which was during a real estate boom.”

Mr Morley told Tribune Business that the findings of a BREA membership survey also dispute the ‘green paper’s assertion that real estate enjoys some of the higher gross profit margins in The Bahamas at close to 40 percent. He added that, in conversation with the principals at other major firms, only one said they had come close to a 30 percent margin - and that was only for one year.

“I think there were only two companies that had gross profit margins in excess of that 38 percent,” he added. “We also suspect those companies are small ‘Mom and Pop’ shops with one or two people doing real estate on the side, and not having the staffing and infrastructure.

“Most real estate companies share their commissions 50/50 [with staff], so straight right off the bat your profit margin is at 50 percent. We don’t know where they got that data from.” Once salaries, utility bills and other costs started accumulating, Mr Morley said realtors’ gross profit margins quickly slid far below the 38 percent outlined in the ‘green paper’.

“We need to sit down [with government] and look at this together, because the picture they’ve made with real estate is skewed very far off,” he continued. The Government’s ‘green paper’ showed that real estate and recreational activities both enjoyed earnings margins of close to 40 percent based on EBITDA (earnings before interest, taxation, depreciation and amortisation), but paid the same Business Licence fees - as a proportion of turnover - as retailers and wholesalers with a 5 percent margin.

A corporate income tax will be the first such income-based levy in the country’s history, apart from the National Insurance Board’s (NIB) payroll-based contributions, and is intended to ensure The Bahamas complies and fulfills its obligations as one of 140 countries that have signed on to the G-20/Organisation for Economic Co-Operation and Development (OECD) drive for a minimum 15 percent global corporate tax.

In the first instance, this initiative applies only to corporate groups and their subsidiaries that have a minimum annual turnover in excess of 750m euros. The Government’s ‘green paper’, which is dated May 17, 2023, sets out the first option as merely introducing a 15 percent corporate income tax for all Bahamas-based entities that fall into that 750m-plus turnover category, while maintaining the Business Licence status quo for all entities which are not affected.

Mr Morley yesterday suggested that the Government will likely have to implement a corporate income tax, should The Bahamas ultimately decide to go that route, via a two-step process. The first stage would be the 15 percent for all Bahamas-based entities that are members of multinational groups with turnovers that exceed the G-20/OECD threshold, with the next phase involving a decision as to whether to extend the tax to the rest of the economy.

Agreeing with Simon Wilson, the Ministry of Finance’s financial secretary, that implementation of a corporate income tax economy-wide is some four years away at least, Mr Morley nevertheless warned: “I told a government official the other day that my biggest concern for The Bahamas is that you put a 15 percent corporate income tax in.

“That might be competitive, but the cost of business in this country is higher than the rest of the region and the ease of doing business is shocking. A company may say, fine, you’ve levelled the playing field, but do we need to be in The Bahamas? My concern is what the fall-out might well be when this is put through for multinational corporations.”

The second and third corporate income tax options, described as “more nuanced” because of the better balance they strike between tax revenue and economic impact, are those the Government indicates it is giving more serious consideration to. The second, labelled as “a soft introduction”, would introduce the same 15 percent rate for all those caught in the G-20/OECD net and also levy a 10 percent corporate income tax on all other businesses “to maintain regional tax competitiveness”.

This option, the ‘green paper’ adds, would have minor negative impacts on GDP, foreign and domestic investment, and unemployment. The latter would rise by 0.1 percent, while GDP growth would contract by 0.3 percent and foreign and domestic investment fall by 1.5 percent and 0.3 percent, respectively.

The third option, branded as “simplicity driven”, would exempt or carve-out small businesses earning less than a $500,000 annual turnover to leave them still paying the existing Business Licence fee. Bahamas-based entities in groups that meet the G-20/OECD threshold would pay a 15 percent corporate income tax, and all other companies generating more than $500,000 would pay a 12 percent rate.

The third option, though, would result in greater negative economic impacts although generating more revenue for the Government. Under this scenario, the ‘green paper’ said GDP growth was estimated to contract by 0.9 percent with unemployment increasing by 0.5 percent. Foreign and domestic investment will fall by sums equivalent to 5.1 percent and 1 percent, respectively.

The final option, which will generate the greatest revenue increase for the Government but also inflict the harshest economic impact, is to simply impose the 15 percent corporate income tax rate on all businesses with a turnover greater than $500,000 per annum and a 10 percent on small and medium-sized enterprises earning less than that.

This would result in an economic contraction of 1.7 percent, or around $200m, the ‘green paper’ projected, with the unemployment rate rising by 0.9 percent. FDI would fall by 10.2 percent, and its domestic investment counterpart by 2 percent. However, government revenues under this scenario are forecast to rise by 96 percent compared to the $140m collected from Business Licence fees in 2019 (see other article on Page 24B).

The more favoured options, according to the ‘green paper’, would see government revenues rise by 36 percent and 62 percent from implementing the second and third scenarios, respectively, compared to those same 2019 Business Licence revenues. Just levying 15 percent corporate income tax on those groups targeted by the G-20/OECD, though, would only produce a 4 percent revenue rise from business community taxation.