The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A well-known QC yesterday urged the Bahamas to implement a 17-19 per cent income tax on persons earning over $50,000-$75,000 annually, arguing that fears of widespread evasion were overblown.

Fred Smith, the Callenders & Co attorney and partner, told Tribune Business that apart from being more equitable, an income tax system could create a new Bahamian industry involving philanthropic donations.

And he dismissed suggestions that an income tax would scare away foreign investors and financial services clients, due to the Bahamas’ relatively low rate and the benefits such persons would gain from ‘double taxation’ treaties with their home countries.

Mr Smith added that exchange controls, and modifications to the Bahamas’ existing Tax Information Exchange Agreement (TIEA) network to allow it to pursue offenders overseas, would also combat tax evasion under an income tax system.

Backing assertions by Franklyn Wilson, the Arawak Homes chairman, that an income tax was the most equitable solution for the Bahamas, Mr Smith disagreed with him over the notion that such a system would take 10 years to implement.

“The Bahamas already has an effective and efficient income tax system in the form of National Insurance,” Mr Smith told Tribune Business.

“All that needs to be done is to convert that into a National Insurance Tax on income. It is very simple, is already in place, and the bureaucracy is already exists.

“It’s easy to collect, and everyone has an NIB number - Bahamian or foreign. It would be the most equitable form of taxation.”

Explaining how his proposal would work, Mr Smith said: “I suggest that Parliament exempt up to, say, $50,000-$75,000 income earners who already contribute to NIB, contribute to an income tax base.

“Anybody over $50,000-$75,000 would pay a percentage of 17-19 per cent, which is generally accepted in other jurisdictions as an acceptable level of income tax.”

Mr Smith gave no projections as to how much revenue his proposal might raise for the Government, and exempting middle class income earners - such as those in the $30,000-$75,000 range - from an income tax would likely be controversial.

The Government, moreover, has already clearly committed to Value-Added Tax (VAT) as its preferred tax reform option, with both it and its consultants dismissing any notion of a Bahamian income tax.

However, many observers have pointed out that VAT remains a regressive tax that imposes a disproportionate burden on lower income and poor Bahamians, who will see a greater percentage of their income eaten up by taxes.

Mr Smith echoed this theme, telling Tribune Business: “It is unfair for my receptionist to be paying more tax proportionately than I do.

“A VAT is simply punishing the poor and less affluent by imposing an additional tax on them, while keeping those who are rich and more affluent paying proportionately less tax.”

Turning to an income tax’s potential benefits, Mr Smith said it could create “an entire industry” in charitable and philanthropic donations facilitated by tax credits and write-offs available under this system. Charities and civic organisations would also have an opportunity to be properly funded.

As for fears that an income tax would damage foreign direct investment (FDI) and financial services, Mr Smith said these investors would still be attracted by the Bahamas having a relatively lower rate than their home countries.

They could also exploit ‘double taxation’ agreements with their home countries to avoid being taxed twice, and at a higher rate, while the Bahamas would benefit from being seen as a tax compliant jurisdiction.

“I don’t think it would turn investors away from the Bahamas,” Mr Smith told Tribune Business of an income tax.

“If there was such a tax, it would be imposed at a percentage lower than what they are paying in their home countries, there will be no double tax and the Bahamas will become a tax compliant jurisdiction, attracting foreigners and investors.”

The Bahamas could also ‘ring fence’ its offshore financial services industry from an income tax, ensuring its clients did not have to pay it. This is possible, given that the Organisation for Economic Co-Operation and Development (OECD) dropped ‘ring fencing’ as a benchmark for determining whether a country is a ‘tax haven’.

The Government, and its advisers, have shied away from income tax on the grounds that it would require a major cultural change among resident taxpayers.

They also see the required bureaucracy and complexity associated with collection as being too costly, while business owners and other high earners would be able to avoid the net by taking their remuneration via dividends and other means. Tax evasion was also seen as a greater problem with income tax.

Mr Smith, though, dismissed such fears, arguing that exchange control would prevent Bahamians and residents moving monies offshore. And, using the existing TIEA network, the Bahamas “can ensure that tax dodgers are prosecuted”.

“Just like America and Canada pursue tax evaders in the Bahamas through their domestic laws, the Bahamas would simply have to become a sophisticated and modern jurisdiction to collect taxes from our own residents and businesses,” Mr Smith told Tribune Business.

“We are no longer a tax haven. That was destroyed decades ago.”

Looking ahead, Mr Smith added: “The Bahamas cannot continue to grow and provide education at primary, secondary and tertiary levels, or provide decent healthcare and a social safety net programme, unless we have an equitable form of taxation.

“Rich people, be they foreign or Bahamian, cannot expect to live here for free. They must be required to contribute to the social good. Anyone who philosophically promotes otherwise is just being a scrooge.

“The poor in this country are heavily taxed, and we have a huge deficit which needs to be funded for this country to be developed. We are a rich little nation, but we cannot keep punishing the poor to survive.”