The Tribune

• Bahamas promised to act three times’ in six weeks

• OECD refused to change non-compliant tax finding

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Prime Minister signed three letters promising the European Union (EU) that The Bahamas would address - within the required deadline - the very concerns that have resulted in the country’s imminent ‘blacklisting’.

Tribune Business can reveal that Philip Davis KC signed three separate letters over a six-week period between December 15, 2021, and January 26, 2022, pledging that The Bahamas will resolve the 27-nation bloc’s issues over “economic substance” and tax reporting. This comes amid accusations yesterday by the Opposition and others that the Government “dropped the ball” over a ‘blacklisting’ that was both avoidable and foreseeable.

The Davis administration’s promises are detailed in a February 2, 2022, report by the Code of Conduct Group - which oversees the bloc’s so-called “international tax co-operation” initiative - to the EU Council’s general secretariat. It discloses that it warned The Bahamas on December 13, 2021, about its concerns with several aspects of this country’s tax-related regulatory regime and called on the country to make “a political commitment” to resolve them to its satisfaction.

The Bahamas responded, according to the EU report, within 48 hours by pledging to make good any deficiencies within the required timeline. The EU appeared to take its cue from the Organisation for Economic Co-Operation and Development (OECD), and the latter’s “harmful tax practices forum”, given that both bodies’ tax initiatives overlap to some extent.

The EU report focused on the implementation of so-called “economic substance” laws and regulations, which require companies to show they are doing real, legitimate business in a jurisdiction and are not merely brass plate, letterbox fronting companies acting to shield taxable assets and wealth from their home country authorities.

It thus wrote to “no or only nominal tax jurisdictions”, such as The Bahamas, which “failed to meet one or more of the requisite standards” in an assessment by the OECD’s forum. The standard in question was not specified, but the OECD had “urged” all countries with weaknesses to take action to address them.

“On December 13, 2021, the Group sent a letter on [these] issues to The Bahamas, requesting a commitment to address the issues identified in the assessment in due time so that the Forum on Harmful Tax Practices can conclude at its next meeting in 2022 that the recommendations have been addressed,” the EU report said. 

“The Bahamas’ Prime Minister sent a number of letters where The Bahamas strongly commits to addressing the recommendations received within the set deadline.” Meanwhile, a second issue that the EU also raised with The Bahamas was the implementation of country-by-country reporting under the OECD’s Base Erosion and Profit Shifting (BEPS) initiative.

This is an effort to prevent multinational groups with annual turnovers of $850m or greater from avoiding/evading taxes in the jurisdiction in which these monies are earned by shifting them, via transfer pricing or some artificially contrived transaction, to countries where they will be taxed at a lower rate.

“The Bahamas received a letter on December 13, 2021...... inviting it to make a formal political commitment to address one recommendation issued to it by the IF (inclusive framework) in October 2021 with regard to the BEPS minimum standard on country-by-country reporting,” the EU report.

“The Bahamas’ authorities sent reply letters dated December 15, 2021, January 6, 2022, and January 26, 2022, committing to the effective implementation of the BEPS minimum standard on country-by-country reporting within the set deadline.” Based on the footnotes to the EU report, the three letters referred to are the same ones that were signed by the Prime Minister.

These signed commitments by Mr Davis were deemed strong enough to merit The Bahamas avoiding the EU’s tax ‘blacklist’ when its Council met in late February 2022, with this nation placed on its so-called ‘grey list’ of countries that warranted further monitoring to see if they lived up to their pledges to address these deficiencies.

Branding the February ‘grey listing’ as “a shot across the bows”, one government insider, speaking on condition of anonymity, said this combined with the EU’s letter of nine months ago and the Prime Minister’s responses sheds new light on events leading up to the 27-nation bloc’s imminent action and raises questions on whether the Government simply failed to live up to its commitments.

“This is us dropping the ball, plain and simple,” the source said. “We’ve had almost a year, 10 months’ notice and timeframe, and a ‘grey listing’. They sent a shot across the bows with the ‘grey listing’. The Government signed up to a commitment, and now it’s the end of September and we haven’t got it done. What happened?

“These aren’t surprising. These are things we knew, things we recognised had to be done. Something slipped up and fell through the cracks... We are signatories to things we signed with our eyes wide open. We signed on to these commitments.”

This newspaper yesterday sent a list of detailed questions to Clint Watson, the Prime Minister’s press secretary, on the ‘blacklisting’. One question, referring to the Prime Minister’s three signed letters to the EU, asked what had happened since and if the failure to follow through and execute on The Bahamas’ commitments to address the alleged deficiencies had led to the EU action. No response was received before press deadline last night.

The Government’s Friday release only came out after an online Internet news source, Orbitax.com, reported last Thursday that The Bahamas was set to join. It also responded after Tribune Business started asking questions about the Orbitax.com article late on Thursday night and early Friday morning last week. Ryan Pinder KC, the attorney general, had declined to comment to this newspaper prior to the release’s issuance.

The EU has form for leaking out upcoming tax ‘blacklistings’ to select financial media and websites, and the Orbitax report appears to be no different. The Government’s statement, though, effectively confirmed that The Bahamas’ “economic substance reporting” - or lack of it - is what will see the country likely reinstated on the EU’s tax ‘blacklist’ when the 27-nation bloc unveils its formal decision next month.

Referring to the Commercial Entities (Substance Requirements) Act 2018, which requires all companies conducting “relevant activities” to confirm they are carrying out real business in The Bahamas via annual electronic filings, the Government said: “Shortly after the general election, the Government received notice of certain deficiencies related to the implementation of [the Act] and the economic substance reporting that were found in the annual monitoring for 2019 and 2020.

“Our administration has worked diligently to satisfy the concerns of the European Union. However, not all deficiencies could be addressed before the determination of our review in April 2022. As of now, it is anticipated that the European Union will add The Bahamas to its list of non-cooperative jurisdictions. We are committed to closing all remaining gaps expeditiously and to seeking a re-determination of our status in the shortest possible time.”

The same statement also revealed that the OECD has concerns with The Bahamas’ implementation of the Common Reporting Standard (CRS) and automatic exchange of tax information. The Government said it was notified shortly after the September 2021 general election about the results of the OECD’s Global Forum peer review of The Bahamas, which gave the country a clean bill of health when it came to “exchanging information in an effective and timely manner”.

However, the Bahamas fared less well - and failed to meet the OECD’s requirements - when it came to its financial institutions and providers “correctly conducting the due diligence and reporting procedures”. The Government added: “Despite meeting the standard required in one of the two areas reviewed, the overall rating of the technical effectiveness of the implementation of the automatic exchange of information standards is anticipated to be rated as non-compliant.

“Earlier this month, a delegation from the Government of The Bahamas, inclusive of the minister for economic affairs [Michael Halkitis] and the attorney general [Mr Pinder], and technical officers from both ministries attended the OECD peer review report presentation in Paris to advocate on behalf of The Bahamas for a reconsideration of the report.

“While the OECD peer review group did not change the overall finding on the effectiveness of the implementation of the automatic exchange of information standards in practice as non-compliant, there was agreement on a strategy to remedy all deficiencies identified in the peer review report in the shortest period. We will then seek to be re-assessed in early 2023.” The OECD report has yet to be publicly released.

The previously-undisclosed dispatch of Messrs Halkitis and Pinder to Paris indicates the Government was sufficiently alarmed that The Bahamas might be rated non-compliant, or ‘blacklisted’, to try and mount a major effort to head this off.

The Prime Minister himself, in a videotaped address from New York, where he was attending the United Nations (UN) general assembly, described the imminent EU ‘blacklisting’ as “another disappointment and a premature action on their part.

“Since we we took office we have been in dialogue with the powers that be in relation to some long outstanding issues. We thought we would have addressed them all,” Mr Davis said, confirming that Mr Halkitis and Mr Pinder had been sent “to Brussels to ensure they understand the regime we have, and the dialogue was continuing”.

It is unclear whether the two ministers met with both the OECD and EU, or just one, because while the latter is located in the Belgian capital, the OECD - to whom the press release referred to the duo as meeting - is in Paris. The OECD and EU appear to have been referred to interchangeably, because the Prime Minister in his subsequent UN address referred to an OECD ‘blacklist’ when it is, in fact, the EU taking that action.

Nevertheless, Mr Davis said in his video message: “The challenges have always been whenever we address one issue, there seems to be something else that comes up. The goal posts are never set, they’re always moving, moving, moving. We cannot seem to get it right unless and until the decision-makers understand the regime that we have set up here.”

Describing the actions of the EU, OECD and G-20 nations as an “assault” on The Bahamas, Mr Davis added: “It’s not been fair.... We are the most regulated, perhaps over-regulated, regime in respect to our financial industry.”

The Prime Minister returned to this theme before the UN, saying: “When we look at the countries that are flagged as high-risk and blacklisted, several startling commonalities emerge. Why is it that European states that operate frameworks akin to that of high-risk or blacklisted countries are not even eligible for inclusion on these lists? Why are all the countries targeted – all of them – small and vulnerable, and former colonies of European states?

“We find it astounding that the $2-$3trn which is estimated to be laundered each year through the developed countries are never flagged as causes for concern. And yet my country, which is widely recognised as one of the best-regulated countries in the world, and other countries like The Bahamas, are singled-out for such reputational attacks?

“The robust regulatory regimes of our Central Bank, Securities Commission and Insurance Commission are chastised on minor details of technical process, while much bigger transgressions in the developed world are ignored. The evidence is mounting that the considerations behind these decisions have less to do with compliance, and more to do with darker issues of pre-judged, discriminatory perceptions. Black-governed countries also matter.”

Few would argue with Mr Davis characterising the EU’s actions as “premature” and “unfair”. Or that the bloc, and the likes of the OECD, G-20 and others, are employing double standards and engaged in discriminatory behaviour where ‘might is right’, using the bullying tactics of ‘naming and shaming’ and blacklisting to get their way. Many believe the ultimate goal is to force The Bahamas and others out of the financial services business.

Yet in the latest episode, it appears that The Bahamas may have failed to deliver on the implementation of commitments it has already signed up to.