By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas needs a repeat of last year's "resilient" $928m foreign direct investment (FDI) inflow more than ever, but real estate's new VAT treatment represents a potential obstacle.

While a United Nations (UN) agency said 2017's FDI flow dropped just 1.6 percent year-over-year, Tribune Business was yesterday told that at least one developer is "pausing" their planned multi-million dollar project until they receive more "clarity" over the new tax treatment.

Edison Sumner, the Bahamas Chamber of Commerce's chief executive, said this combined with the 60 percent VAT rate hike were already causing "a bit of anxiety" in the real estate development industry for both Bahamian and foreign players.

This is because the budget tax changes, as they currently stand, make it "impossible" for real estate projects to claim back VAT on their input 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.

But 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.

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 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.

Mr Sumner revealed that this problem was already impacting real estate development projects, especially those that did not involve major hotels and other facilities able to access significant tax breaks that include VAT.

He added that it could also cause a slowdown in segments of the FDI market at a time when The Bahamas needed such activity more than ever to offset the impact of a 12 percent VAT rate, plus other fiscal austerity measures, needed to eliminate the annual deficit and pay-off some $360m in unfunded arrears.

"The idea of increasing the VAT rate now, and talking about exempt treatment for those in the real estate industry, may cause a bit of anxiety for the FDI industry," Mr Sumner told Tribune Business.

"I got a phone call today from a developer exposed to a large capital project, and they were going to be 'exempt' as opposed to 'zero rated' for VAT. They're not going to be able to recover the input VAT. We've already raised that issue with the Government, and they've promised to get back with clarity. If there are adjustments to be made, we hope to get them considered before the Budget passes."

The Chamber chief continued: "We were advised by that developer or their representative that they are likely to pause plans for their development until they get clarity on zero-rated versus exempt, and costs related to VAT going up.

"That will have implications for FDI investment coming back. Over time the shock [of the rate increase] wears off, but everyone is looking at the impact on business and we have to be cognisant of the changes." Mr Sumner did not name the developer involved

Tribune Business sources yesterday revealed that several developers are planning to jointly submit a position paper to the Government and lobby for changes to the 2018-2019 Budget, given the negative impact it will have on their businesses and the overall sector.

The changes come after the Bahamas was again pegged as the FDI inflows leader in 2017 for small island states, beating Jamaica to top spot based on figures produced by the United Nations Conference on Trade and Development (UNCTAD).

Its annual World Investment Report 2018 said the Bahamas received $928 million in FDI inflows in 2018, down almost 2 per cent on the prior year, but still described this nation's performance as resilient.

"Despite the slowdown in the two largest FDI host SIDS in the region, the Bahamas and Jamaica, foreign investors remained active. In the Bahamas, where FDI dipped in 2017, after a 131 per cent rebound from 2015 to 2016, the opening of a mega resort project, Baha Mar, created nearly 4,000 jobs," the UNCTAD report said.

Increased FDI inflows will be key if the Bahamas is to hit its projected 2.5 per cent GDP growth target for 2018, and 2.2 per cent in 2019. With the 12 per cent VAT rate hike predicted to suck $400 million out of the economy, the Government is relying on the traditional external drivers - Baha Mar's opening, improved tourism numbers and the FDI pipeline - to offset the negative impact and maintain the growth momentum.

"FDI investment and inflows are extremely important to the economy," Mr Sumner said. "We get a lot of capital inflows from FDI. It's important to not only continue building the economy but the foreign currency reserves."