By NEIL HARTNELL
Tribune Business Editor
A prominent Bahamian developer yesterday warned "millions of dollars are on the line" through budget tax changes that make it "impossible" for real estate projects to claim back VAT.
Jason Kinsale, president of Aristo Development, told Tribune Business there was "no way" he and other property developers can absorb 12 percent VAT on their development's costs after the government reverted to the old "transfer tax" structure.
The former Christie administration changed the ten percent Stamp Duty levied on real estate sales to accommodate the current VAT rate, splitting this 7.5 percent/2.5 percent between VAT and Stamp Duty.
But the 2018-2019 budget goes back to the ten percent stamp duty on all real estate purchases over $100,000. KP Turnquest, deputy prime minister, said this was intended to "create a simpler formula" for real estate transactions by eliminating the VAT component.
Mr Kinsale, though, warned that the Government's move will have the likely-unintended consequence of increasing real estate costs for both Bahamian and international buyers as developers can no longer offset their 'input' VAT.
He explained that developers currently 'net off' the VAT they pay on construction materials, and the likes of contractor, engineer and architect bills, against the 'output' tax whenever a property is sold.
The Aristo chief said the Budget's altered tax structure, by eliminating VAT, robs developers of the ability to claim back already-paid input tax, thus saddling them with a multi-million dollar increase in development costs that will likely be passed on to buyers.
"The VAT is supposed to be a pass through," said Mr Kinsale, who has spearheaded the development of projects such as the Balmoral Club, ONE Cable Beach and THIRTY-SIX on Paradise Island. "Our concern is that they're going back to the old Stamp Tax regime they had prior to the 7.5 per cent VAT in 2015, and there's no ability to claim the VAT back.
"The issue we have is that we don't have the ability to make the claim. If you put 12 per cent VAT on a $50 million project, you have to spend $6 million in VAT. When you convey and sell is when you submit the receipt to the VAT Department to claim back the VAT, but now there's no way to claim the VAT back.
"I don't know if this is an oversight or they didn't pick it up with regards to the development industry. But there's no possible way we can absorb 12 per cent and not be able to claim it back. It's impossible. It's a difficult enough business as it is."
Mr Kinsale warned that the increased VAT exposure, coupled with the unease caused by the 60 per cent hike in its rate, could deter himself and other developers from undertaking further projects given the increased costs they will have to bear.
Obtaining the necessary financing would also be more difficult and costly, the Aristo chief explained, thus creating a further obstacle to real estate development at a time when the Bahamas needs fresh inventory to meet growing demand from both the local and international markets.
Urging the Government to provide "some clear answers" to address developer concerns, Mr Kinsale also expressed concern about the frequent annual Budget tax changes that impacted market certainty and predictability.
He told Tribune Business: "I'd like to give them the benefit of the doubt, but we have major projects ongoing. We've got exposure, and every single time we're in the middle of a project something changes."
Mr Kinsale pointed to previous 'transfer tax' changes, and the impending increase in the permanent residency qualification threshold to $750,000, as examples of government tax/fee policy changes that have impacted the real estate industry.
"That can't keep continuing on every project," he said. "We're in a fragile economy as you know. I feel the Bahamian market is improving a bit, and we don't need any more shockwaves. The developers need to feel confident, and if they don't feel confident there's nothing for the realtors to sell.
"We need nice new product to attract permanent residents to come here. I don't see any way to claim [VAT back]. That's our concern. Until we see that it's extremely difficult to finance, justify any project. It doesn't make sense.
"It's very concerning; extremely concerning. It's top of mind right now. We need some clear answers on how it's going to be resolved. This isn't something we can transition to. It doesn't make sense."
Mr Kinsale urged the Government to leave the real estate 'transfer tax' "the way it is", adding: "I don't understand why it has to be changed." Failing that, he suggested that real estate either be treated as 'exempt' or zero-rated.
Warning that an immediate solution was required, the Aristo chief told Tribune Business: "It's critical. There has to be a solution. It has to happen now. We can't have any more uncertainty. We need to feel confident. Millions of dollars are on the line with these projects.
"We have to believe the rules will not change all the time. I give them the benefit of the doubt, and that this was an oversight, but we need this resolved now. Development is a pretty important component of the economy."
Mr Kinsale added that real estate developers were also being "penalised" by being forced to carry VAT costs for up to three years until they began to sell their projects.
"Right now we're being penalised and told we have to wait three years to get the VAT back," he told Tribune Business. "We're being penalised right away as we cannot claim for three years.
"Why should we be be able to do that when everyone else is able to claim monthly? It's really hindering us. Coming up with millions of dollars to carry VAT make no sense when no one else is doing it."