Property Tax Increase: Up for Debate
A Q&A with JOMA’s Colin O’Neal
Since news of Cabinet approval of the Department of Inland Revenue’s request for a property tax increase was revealed earlier this year, the matter has been under debate in the House of Assembly and the court of public opinion. According to recent news reports, Premier and Finance Minister Dr Orlando Smith affirmed the measure was approved by the Cabinet of the former government prior to this government taking office in November 2011. The measure was debated in Standing Finance Committee among current legislators.
Currently on the table is a proposal to increase property tax to 1.5% of market value, per year. With many properties in the BVI appraised at a market value in the million-dollar range, this could equate to a large dollar amount. It is expected that government would approve a more modest increase, but to the best of this property lawyer’s knowledge, to date this has not been settled. Premier Smith is recorded as stating that the current government will look at how raising property taxes in a recession will affect the population, and seek public consultation prior to the measure being taken to the House of Assembly for final approval.
To be fair, property taxes in the BVI are unusually low. Property tax has two components—house tax and land tax. House tax is 1.5% of the assessed annual rental value of the property. Land tax for properties owned by BVIslanders/Belongers is $10.00 for the first acre or part thereof and $3.00 per additional acre. For all other persons land tax is $50.00 for land up to a half-acre or $150.00 for land greater than a half-acre up to one acre, then $50.00 per additional acre or part thereof.
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Colin O’Neal, CEO of JOMA Properties, a real estate management and development company in the BVI, thinks raising taxes in a recession is a bad idea and has been leading a discussion around that theme in the LinkedIn group he spearheads, BVI Business Roundtable. I sat down with Colin to hear his views on the issue.
Willa Tavernier: What’s your involvement in the property tax debate?
Colin O’Neal: As CEO of JOMA, up to this point property tax has not been a factor which occupies too much attention in terms of how we run our business. Current property tax is nominal, and most of our leases are triple net leases, meaning that the tenant is responsible for insurance, common service charges and property tax.
The commercial relationships between landlord and tenant would need to be adjusted. While it doesn’t impact the legal relationship, if the regime were to change substantially, the commercial impact for tenants would be significant, and in an unplanned way, with an adverse impact on the tenant’s part not having known beforehand that such a substantial impost would be introduced. The long-term knock on effect could be less tenants willing to enter into leases or tenants seeking some other arrangements other than triple net leases which we’ve made our practice.
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It would also affect the cost of commercial space. Those taxes have to be paid somehow, and it becomes a matter of who is going to pay. There are developers who have not protected themselves by having triple net leases, which means that tax is going to come straight off of their bottom line. In this tight real estate market, that slice off the bottom line might be what makes the difference between profit and breaking even, or between breaking even and a negative cash flow situation.
WT: On the BVI Business Roundtable discussion board, the proposal’s potential effect on villa rentals was raised. Owners already pay Hotel Accommodation Tax, and, if there are employees, Social Security Contributions and Payroll Tax. Could this adversely affect that sector?
CO: It certainly will affect them, except at the very high end for which there will always be some sort of demand (or where owners are not dependent on rental income). Vacancies are higher than 3-4 years ago, and an additional tax burden must have a deleterious effect in an already depressed market. I think the truism that you should not raise taxes in a depressed market will be borne out. It will put the BVI at a competitive disadvantage.
Government also has to be mindful of the fact that property development is one of the few areas in which BVIslanders retain a strong role in the economy, and property still remains largely in local hands. This has the potential to be very disruptive in terms of long term property ownership by BVIslanders, many of whom are land rich, but not very liquid.
WT: Could an increase in property tax be threatening on the societal level?
CO: I don’t think you have to go very far for the answer to that. If you look at the USVI, landowning families had to either sell property or lost property because of inability to pay the tax on it. Social dislocation resulted from that—with the land passing from local hands into, in their case, the hands of what they call continentals. The same thing will happen here. The land will pass into the hands of those with the ability to pay the taxes, whether BVIslanders or outsiders.
It will signal the end to a unique pattern of landownership. In the BVI, as distinct from most of our West Indian neighbours, the vast majority of land is owned by private individuals rather than government. Government here has relatively small landholdings outside of Wickham’s Cay. There’s a very
essential—almost primal—connection of a BVIslander to his land. For many people it defines their very identity.
WT: Can reform be achieved without causing inequity and hardship?
CO: I don’t pretend to be an expert in taxation, property or otherwise, but one starting point is that it should not in any way be tied to the market value of the property, however that is defined. Were that to happen, property in the BVI changes character completely from an identity—defining resource, to something more along the lines of a commodity. If property tax is assessed on market value, the strongest financial players eventually come to dominate any market, and I think that ought to be avoided.
Property tax should remain nominal but at a higher level. It could be doubled or tripled without causing hardship. There are many other areas of revenue enhancement that a government can look at. Consumption tax, road tax for use of vehicles, and improved collection of customs duties among others. At the risk of sounding like a republican, I don’t think we have a revenue problem in the BVI, we have a spending problem. Not that we spend too much, but we don’t always get the value for money for what we spend—and you can quote me on that.
