Bahamas Real Estate | THE FINANCIAL IMPACT OF V.A.T – By Raymond Antonio

Since the announcement by the Prime Minister of the implementation of Value Added Tax (VAT) in the budget year beginning July 2014, the Ministry of Finance has embarked on a public relations tour, spreading the news around New Providence and several Family Islands.  One would have expected, with the roll-out of this new tax within the next nine months that specific details would have, by this time, been provided to the business community.

Although VAT is a tax ultimately burdened upon the consumer, it is the business community which will be saddled with the enormous burden of collection and remitting taxes.  In his latest public appearance at the Bahamas Chamber of Commerce and Employers’ Confederation luncheon last week, Financial Secretary, Mr. John Rolle, the leader of this revenue thrust, provided pretty much the same information that was parlayed at various venues over the past few months, much to the disappointment of those present.  What was noticeably missing, much to the chagrin of business owners and representatives present, was the nuts and bolts, the “how”, and most important, the “what services will be included”.

The financial services and legal sectors are probably the largest providers of services, who may find these services subject to VAT.  With the rate of 15% announced by the government, the imposition of this tax on these sectors will not be without noted effect.

The real estate sector plays an important role as a driver of the Bahamian economy.  Based on data provided by the National Association of Realtors, every real estate sale results in the creation of at least six jobs.  Each real estate sale potentially involves lawyers, bankers and accountants, and creates jobs for construction workers and domestic staff.

With a lack of specifics as to which transactions will or won’t attract VAT, we are left to ponder “what if” scenarios:

–        What if real estate sales attract VAT?  Buyers and sellers are already required to pay stamp tax up to 10% of the consideration.  The imposition of VAT on top of that will increase the cost of property ownership.  For buyers already struggling to cover closing costs, this would certainly lead to a reduction of eligible property owners.

–        What if sales and rental commissions attract VAT?  Real estate brokers would have to bear the cost of upgrading its accounting software in order to properly account for VAT.  Additionally, the collection of VAT would reduce the net sales consideration/rental income that homeowners receive, reducing the input of the real estate sector on the country’s GDP.

–        What if appraisal fees attract VAT?  In addition to appraisal reports being requested to support real estate sales, they are also required for every residential and commercial mortgage, as well as all real estate secured loan advanced by the banking sector.  Again, this increases the cost of the purchaser/borrower.

–        What if legal fees attract VAT?  Every real estate purchase and mortgage transaction involves the legal profession.  With legal fees calculated at up to 2½% for each transaction, the imposition of VAT would add another 15% to the cost for the consumer or business.

–        What if construction fees attract VAT?  With the lowest construction cost now pegged around $90 per square foot, a modest 1,000 square foot house would cost $90,000.  VAT would add an additional $13,500 onto that construction cost, potentially increasing the homeowners’ monthly mortgage payment by $100 per month.  While this amount may seem modest, it could be a significant factor in whether that homeowner qualifies for a mortgage.

Although the Financial Secretary refused to accept this conclusion, it literally doesn’t take a rocket scientist or economist to realize that the cost of real estate and related transactions will increase for homeowners and businesses.  Not only will VAT increase the cost of living, but it will likely result in decreased real estate transactions, hindering positive growth in the economy.

The Ministry of Finance forecasts a net increase in government revenue of some $300million through the implementation of VAT.  It sees this as a necessary step towards reducing and ultimately eliminating budgetary deficits while simultaneously getting a handle on the almost $5billion national debt.  However, it has been silent on any reduction in expenditure.  What if…..?

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