The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s “inconsistent” Value-Added Tax (VAT) positions are threatening to undermine core financial services policy objectives, a top QC warned yesterday, threatening a loss of competitiveness and high-value business.

Brian Moree QC, senior partner at McKinney, Bancroft & Hughes, said differences between the VAT and regulations, and the guidance notes, could have “unintended consequences” for the financial services industry and required “urgent clarification”.

He pointed in particular to International Business Companies (IBCs), a key component in the investment structures used by most of the Bahamas’ clients, as one product being impacted by the confusion/uncertainty caused by the Government’s VAT guidance notes.

Mr Moree said their criteria for whether an IBC would be subject to 7.5 per cent VAT, or treated as ‘zero rated’ or ‘exempt’, included whether they had local/resident directors and if Board meetings were held in the Bahamas.

IBCs with a physical presence in the Bahamas, creating economic activity and jobs for Bahamians, would also be subject to VAT at the standard rate, as they would be deemed resident for exchange control purposes.

Mr Moree, though, said this appeared to conflict with the Government’s key financial services policy objective, which was to encourage IBCs to switch from being “brass plates” to real Bahamas-based businesses.

Now, the guidance notes were saying that, in the case of VAT, the latter will be subject to higher taxation - thereby creating an incentive for IBCs to remain as ‘brass plates’.

And levying VAT on IBCs who held directors meetings in the Bahamas, or appointed local directors, threatened to drive this business away, negatively impacting the wider economy.

“Unfortunately, there are too many instances where the guidance notes have contributed to the confusion as opposed to providing illumination,” Mr Moree told Tribune Business.

“There seem to be inconsistencies between the guidance notes and legislation, specifically with regard to which services are VAT-able at 7.5 per cent and which are zero-rated, and more specifically with regard to IBCs.”

The Bahamas could ill-afford the resulting uncertainty, Mr Moree added, given a rapidly-evolving international financial services industry that continued to be hit by regulatory changes.

“The financial services sector is an intensely competitive one, and given the present climate we have to be extremely careful in the Bahamas that VAT does not produce unintended consequences in the financial services sector, which compromise our competitiveness,” Mr Moree told Tribune Business.

“I am absolutely sure that if it is not handled properly, it could act as a disincentive if we are not careful.”

Mr Moree backed the “main thrust” of the Government’s financial services policy, which has been to encourage high net worth individuals and their companies/investment structures to base themselves in the Bahamas, establishing real businesses “as opposed to brass plate operations”.

This, he suggested, was being undermined by the lack of VAT clarity, and the ‘criteria’ contained in the guidance notes for whether IBCs were ‘VAT-able’.

“When you say whether part of the criteria for determining if you’re taxable at 7.5 per cent, exempt or zero-rated is based on whether you are doing business in the Bahamas, or have local/resident directors, or have directors meetings in the Bahamas, then clearly you’re sending a message,” Mr Moree told Tribune Business.

“You are saying to someone that, if you come to my country, set up a real business, actually employ Bahamians, invite residents to be on your Board and have Board meetings in the country, help the economy and do all these things, we will tax you at 7.5 per cent.

“If you have a brass plate here, just incorporate a company here, and have no Bahamian directors and Board meetings in the Bahamas, you are going to be exempt or zero-rated. What message are you sending to the market? It defeats our whole objective.”

Mr Moree added that this threatened to send financial services business to rival jurisdictions, or at the very least discourage IBC beneficial owners from having Bahamian directors or holding Board meetings in this nation.

“That is an unintended consequence. You are creating a disincentive,” he said.

Describing this as a “dangerous position”, given the fragile global financial services industry environment and the challenges facing the Bahamas, Mr Moree added: “You don’t even want to create confusion about this.

“Unfortunately, the guidance notes for the financial services sector have caused a great deal of confusion in the marketplace, and definitive clarification is required on an urgent basis

“We should not be disincentivising IBCs for having local and resident directors, and having meetings in the Bahamas. Why are you going to disincentivise them from doing that?”

Mr Moree said IBC Board meetings attracted “very high level tourists” to the Bahamas, in the form of their beneficial owners and professional advisors, who spent significant sums of money in hotels, restaurants and other amenities.

Mr Moree said that an entity’s exchange control designation, as given by the Central Bank, should be the “foundation” for determining VAT treatment, with the details woven around this.

He added that the Government had agreed, in discussions with the financial services industry, that the guidance note discrepancies needed to be addressed, and that they had no basis in the Act and regulations.

“The fact of the matter is that uncertainty continues to prevail,” Mr Moree told Tribune Business.