The Tribune

• VAT rising to 10% on foreign buys below $1m

• Concern about 'optics' of two different tax rates

• Gov't targeting over $300m from property sales

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Realtors yesterday voiced concern over "the optics" and "inconsistency" of tax policy as the Government moves to adjust the VAT paid on real estate sales to ensure foreign buyers pay a 10 percent rate across-the-board.

The VAT (Amendment) Bill 2023, which accompanies the 2023-2024 Budget, contains another previously-undisclosed tweak that is consistent with the Davis administration's stated policy of placing the burden of increased taxes almost entirely on non-Bahamians via the likes of raised cruise passenger departure taxes and marina docking levies.

The legislation, which is due to be passed into law after the Budget debate ends and take effect from July 1, 2023, quietly amends the VAT Act's Third Schedule to ensure that "every deed of conveyance, assignment or transfer of real property to a foreign person" attracts a 10 percent VAT rate.

Given that all property purchases of $1m or more already attract 10 percent VAT on the acquisition price, only transactions involving foreign buyers for less than this amount will be impacted. The Davis administration, besides targeting a higher VAT rate on real estate purchases by foreigners worth less than $1m, has also hit the same segment with the 25 percent ($30,000) increase in the annual real property tax cap from $120,000 to $150,000.

However, the VAT adjustment, which the Bill's "objects and reasons" confirms was "inserted to provide a rate of 10 percent where there is a transfer of real property to a non-Bahamian", comes just a year after the Government changed the rates for all purchasers - Bahamian and foreign - for deals valued at less than $1m by inserting a so-called 'sliding scale'.

While all purchases worth $100,000 or less remained attracted 2.5 percent VAT on the purchase price, the Davis administration in the 2022-2023 Budget lowered the rate on transactions worth between $100,000 and $300,000 from 10 percent to just 4 percent. Similarly, for deals valued between $300,000 and $500,000, the rate was dropped to 6 percent; for purchases between $500,000 and $700,000 to 8 percent; and those between $700,000 and $1m have been taxed at 9 percent.

The latest reforms take the benefits of those lower VAT rates away from foreign buyers of Bahamian real estate including, it would appear, permanent residents. While realtors conceded that expatriate buyers are unlikely to be involved in real estate transactions worth less than $500,000, several suggested that the change - together with other Budget amendments - gives the impression of two tax systems or policies, namely one for Bahamians and the other for foreigners.

John Christie, HG Christie’s president and managing broker, told Tribune Business he was most concerned about the lack of consistency in the Government's tax policies as it relates to real estate given that these now seem to be adjusted every 12 months.

"The Government should be consistent. It's not good because things have been moving quite well," he said. "Stability is the most important thing, rather than bouncing around with constant changes in taxation. It's not a good look really. It's just the fact there's inconsistency.

"The Government is just inconsistent in what they're doing. I was surprised when the put it in in the first place [the sliding scale of VAT rates] and now they're pulling it back for foreigners. The market has been very good with the low rates as people are buying. It is what it is. I would have preferred it stay the way it was, as we were making quite a bit of money. Government policy has usually been consistent for many years, and now it's just bouncing around."

Mr Christie praised the Government for at least keeping the lower VAT rates and 'sliding scale' in place for Bahamian real estate purchasers. The Government has leaned heavily on the post-COVID surge in real estate sales to revive, and drive, its revenues with the some $153m collected from VAT levied on such transactions during the first nine months of the 2022-2023 fiscal year.

It is forecasting that VAT from real estate sales will increase further to $237m for the full 2023-2024 fiscal year, with Tribune Business calculations suggesting this sum translates into around $2.68bn in sales activity based on the various rates. Income from this source is forecast to increase further to more than $297m in the 2024-2025 fiscal year, before breaking through the $300m mark with $319m in revenue the following year.

David Morley, Morley Realty's principal, told Tribune Business that his main concern with the 10 percent VAT rate imposed on all foreign real estate purchases is "the optics" of seemingly creating two different tax systems - one for Bahamians, and the other for expatriates - given the economy's continued reliance on foreign direct investment (FDI).

"It would only affect non-Bahamians looking to acquire property under $1m," Mr Morley acknowledged. "It affects them on the VAT on the transfer. For those people buying properties valued at $500,000 or above, the rate will only be 2 percentage points higher. Financially I don't think it's a game changer, but where I have difficulty with it is the principal of it.

"All these changes on taxation as it relates to real estate are effectively slamming the foreign investor. You don't have new taxes for Bahamians; you only have new taxes for foreigners. I find that to be a little harsh personally, but I don't know what they do in other countries. Again: What is fair?

"I don't like it as a general principle that we'll slam it to international persons on all accounts. Is it going to have repercussions? I hope not. The perception of how it looks is that there's two tax systems - one for Bahamians, one for foreigners. I don't feel that's fair."

Noting that the Government was striving to generate increased tax revenue, Mr Morley said foreign real estate buyers and owners are being hit with increased VAT on purchases below $1m as well as a raised real property tax cap. He added that the message being sent by The Bahamas was that, while it wants foreign investors, those persons have to "pay a premium" for the privilege of coming here.

"If I was a foreigner I would turn around and say: 'Fine. You want me to pay a premium? What services are you going to guarantee me so I get them in a timely fashion?' If I'm going to pay a higher premium, I expect better service'. The ease of doing business has been an issue in this country for the last five to seven years. I don't particularly like the optics," he said.

Mike Lightbourn, Coldwell Banker Lightbourn Realty's president, warned that the change might "kill a few sales" and voiced hope that the Government will honour all sales in process involving foreign buyers and properties valued at less than $1m at the existing VAT rates.

"I'm hoping that any transactions presently under contract they'll honour and apply everything at the old rate," he added. "For sales over $1m, nothing has changed but not all are over $1m. There's a lot of issues. The transactions we have under way, I assume the Government will honour them at the present rate.

"We're going to have to decide how to list properties for sale because the VAT is different depending on whether you're selling to a Bahamian or a foreigner under $1m. It's going to be massive confusion. Again, whose going to pay at the end of the day? The buyer pays all the expenses, but what percentage of the transaction are they going to charge the Bahamian and the foreigner? If the VAT is split 50/50, the Bahamian will object because he has to pay a higher rate.

"It just causes more confusion and upsets a lot of people, which I think we're pretty good at doing. When we do an appraisal, we will need to know if the buyer is a foreigner and, if they are, they have to be told the rate is 10 percent. It's just something we have to decide internally."

Both Mr Lightbourn and Mr Morley conceded that two different rates - one for Bahamians, another for foreigners - was applied many decades ago under the Immovable Properties Act when the latter had to pay double the rate of local citizens.