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By D. Michael Fox, CPA, CFE, FCPA, CBMIf you own a condominium, co-operative, or private home being managed by a management company for rental on an overnight basis to tourists, THIS AFFECTS YOU BEGINNING JANUARY 1, 2009.
When the current Business Tax law came into effect in 1998, whereby the taxation system changed to a tax on revenue instead of a tax on profit, several categories of revenue source were identified, each with its specific tax rate. The most widely applicable category is “trade or business” which applies to most business activity. This category has a current tax rate of 1.75%.
Another category is “rental revenue”, for which the current tax rate is 3%. The Tax Department had defined this category as including rents from all commercial rentals as well as rents from all residential rentals, whether from long-term leases, short-term occupancies, or overnight rental to tourists as an accommodation (e.g., a hotel room).
Those who filed tax returns, followed the rules, and did their accounting properly (often not done properly here) filed monthly tax returns and paid the 3% tax. Absentee owners who knew nothing of the tax laws here, and management companies who did not handle tax responsibilities for their clients, did nothing. Tax Department representatives, when visiting companies auditing compliance, gave various directives on how to report and tax revenues in these situations, and some of those directives were outright wrong, ignorant of underlying business structures, and stupid.
Meanwhile more recently, managers of those privately owned condominiums being used for overnight rental to tourists, particularly in multi-unit complexes, argued that the activity taking place was no different from that in a privately-owned hotel, and therefore unit owners’ revenue should be taxed at the same 1.75% rate as applied to a hotel reporting in the “trade or business” category. This argument was logical and convincing to some Tax Department field representatives, and they began dispensing that taxation method as the method for reporting and taxing such rental revenues belonging to unit owners.
In fact, the distinction in support of this reversal of position, between revenues taxable at 1.75% and revenues taxable at 3%, was put into writing to the management company of a large, well known San Pedro multi-unit condominium complex being operated as a hotel. The result was that taxation advice dispensed by field representatives now directly contradicted taxation advice issued by the Tax Department’s senior personnel as to rental revenues of properties rented as overnight accommodations to tourists.
Over the past 18 months, because of this change of position based in the letter, many tax returns were changed, claims for refund were filed, Assessments were issued, letters rejecting the Assessments were sent, Demands for Payment were issued, more rejection letters were sent, and letters (3) were sent to the Income Tax Appeals Board requesting a hearing to resolve the conflict. In addition, my office sent letter after letter to the Tax Department explaining the situation, showing their contradictions, and demanding a resolution. Nothing happened and no Appeals Board hearing was ever scheduled.
The effect of this (contradictory) change in taxation category is not solely the rate decrease from 3% to 1.75%. It is that the 1.75% rate category carries an annual revenue exemption breakpoint of BZ$75,000, under which no tax is payable. Most condominium owners do not receive revenue over BZ$75,000 annually from rental of their unit to tourists, so most have no tax obligation when placed into this taxation category. (For true “rental revenue” taxable at 3%, the revenue exemption breakpoint is BZ$800 monthly, so most all rentals qualify for being taxable.)
Now, as of January 1, 2009, the Tax Department has settled that the 1.75% rate is appropriate for revenues from “accommodation” rentals, essentially meaning revenues derived from a rental activity based on a hotel license, where a hotel tax is being collected and remitted. And it has directed that all such revenues belonging to individual unit owners be aggregated and reported in the tax return of the management company.
The revenue exemption breakpoint will be exceeded once all revenues are combined and tax will be paid at the 1.75% rate, then that tax will be allocated back to the bookkeeping accounts of each applicable unit owner. So unit owners will now, in effect, pay tax on revenues that were previously exempt from taxation.
Many management companies will stumble over implementing this new procedure, and chaos, confusion, and improper applications will undoubtedly result for several months ahead.
Personally, I concur with the final settlement on use of the 1.75% rate and its basis as being for “accommodation” rentals. But I strongly believe it to be fundamentality wrong to take tax information applicable to one taxpayer (an individual rental unit owner) and report it in the tax return of another taxpayer (the management company), with a resulting tax payment that would not occur if the individual taxpayer is in compliance with existing tax law as to his own taxable position.
Perhaps only some enraged individual taxpayer bringing a legal action against the Government of Belize over this flawed taxation theory can correct this situation.
Further information about this subject can be obtained by contacting D. Michael Fox at 226-2622 or [email protected]
, or by visiting Fox Business Services, Island Plaza, Barrier Reef Drive.