The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas “may devastate the economy” if it surrenders too easily to demands from high-tax European nations for a corporate income tax, a former finance minister warned yesterday.

James Smith, who held the post during the first Christie administration, told Tribune Business that the continued pressure from the Organisation for Economic Co-Operation and Development (OECD) and its members was threatening to “drive us right into the ground as a sovereign nation”.

He argued that The Bahamas’ compliance with past OECD and European Union (EU) initiatives meant it was likely to “resist” the former’s latest thrust, which is calling for all nations to impose some form of “minimum level of” taxation on the activities of multinational entities.

The OECD initiative, whose headline objective is to prevent tax evasion by multinationals who shift profits earned in higher-tax jurisdictions to those with lower tax rates, is calling for the introduction of a corporate income tax in all but name. OECD literature says its proposal would reduce the incentive for such profit-shifting by “reducing the tax rate differentials” between countries.

Mr Smith, though, urged The Bahamas not to “capitulate” to these demands without a thorough analysis of such a significant change to its taxation regime. He blasted the OECD’s European members for seemingly seeking to “recast our economy in their own image”, adding that this nation’s economic model had worked well for 50 years without income and other direct forms of taxation.

Also an ex-Central Bank governor, Mr Smith warned that adopting a corporate income tax could have repercussions for both this nation’s fixed exchange rate regime, and one:one peg with the Bahamian dollar, and its investment incentives framework.

He acknowledged that the OECD may be drawing closer to the ultimate objective it had in mind when it launched its so-called “harmful tax competition” initiative some 24 years ago, which is to create a uniform, one-size-fits all global taxation system that eliminates the competitive advantage enjoyed by The Bahamas and other international financial centres (IFCs) with zero or ‘low tax’ regimes.

“My own point of view is that The Bahamas elected its own economic model more than 50 years ago, and that did not include income tax,” Mr Smith told Tribune Business. “It seems the Europeans want to remodel our economy in their own image.

“It takes away from any form of sovereignty of any country or group of countries are imposing their system or an approach that threatens to deny you access to financial services. On principle we ought to look at it [income tax] very carefully. If a country can survive on taxation without taking directly from its citizens or corporate entities, so be it.

“To pattern our tax system after theirs [the OECD states] needs a lot of thought rather than capitulation. If we thought it was the best alternative, yes, but it should not be imposed on us from outside to satisfy the demand for things such as double taxation treaties. Things are going too far, and they ought to be resisted.”

Describing the OECD and EU pressures as a form of “neo-colonialism”, Mr Smith said The Bahamas shared few economic characteristics with their members. He pointed out that this nation was suffering from high unemployment and “low wages for the majority” of Bahamians.

“Conceptually the take from an income tax may devastate the economy,” he told Tribune Business, “because we will be unable to capture the taxes we need to run the country through a direct form of taxation. They [the OECD] end up being appeased while we disrupt our own economy. We must change to meet their needs and our economy gets disrupted at what gain?

“Another vulnerability we have is we may have to look at the fixed exchange rate regime. If the Government goes ahead without subjecting this to a rigorous analysis we may really end up in more trouble. We’ve not recovered from the VAT rate increase yet.”

Mr Smith’s comments highlight the different views and opinions on how The Bahamas should respond by potentially reforming its tax system amid growing external pressures. There is an increasing call for the country to take a serious look at a low-rate corporate income tax as a means to reposition the financial services industry and shed the “tax haven” label.

Such pressures will only increase after the Netherlands yesterday revealed that The Bahamas will not escape its national tax “blacklist” unless it implements a corporate income tax of at least 9 percent. And there are suggestions that switching to an income tax regime will be more fair, equitable and progressive - especially for lower income Bahamians.

Persons would pay tax based on their ability to pay, whereas the existing VAT and import duties-dominated system is a a regressive tax on the cost of living that forces lower income classes to pay disproportionately more of their income in taxes.

However, acknowledging that he initiated the studies that led to VAT’s introduction while minister of finance, Mr Smith questioned whether income taxes would generate sufficient revenues to meet the Government’s needs given the relatively small 400,000 population size.

“I called for the studies, analysis that looked at a whole range of taxes, and we decided that income tax wasn’t the best fit for a number of reasons, including the historical aversion to paying income tax and the fact the base was not large enough,” he recalled.

The second Christie administration also rejected income tax on the basis that it would be difficult to administer and involve high collection costs, while also being tough to enforce when it came to preventing tax evasion.

Mr Smith, though, agreed that the OECD and its members may be nearing their “end game all along, the idea of a uniform corporate tax”. He added: “We seem to be in the mood to capitulate and take everything they say, and only find out later how disruptive a move that will be. These things are driving us right into the ground as a sovereign nation.”