The Tribune

THE Bahamas was yesterday urged “not to squander the opportunity” presented by outside pressures to undertake comprehensive tax reform and reposition its economy.

Emmanuel Komolafe, the Bahamas Insurance Association’s (BIA) chairman, told Tribune Business that this nation should use the forces pushing it to introduce some form of corporate income tax for its own benefit.

Rather than simply seek to satisfy the European Union (EU) and Organisation for Economic Co-Operation and Development (OECD) demands, he argued that the Bahamas instead seize the moment to make “more progressive and equitable” reforms without increasing the overall tax burden.

Mr Komolafe said the imposition of a corporate income tax, should the Bahamas decide to move in this direction, would not be “a shock to the system” for most multinationals and international business entities because they expected to pay something in whichever nation they operated.

The BIA chair added that reforms must improve the competitiveness of the financial services industry and wider Bahamian economy, without undermining the ‘ease of doing business’, and help to “rebrand and reposition” this nation by shedding the ‘tax haven’ label.

“We have that opportunity,” Mr Komolafe told Tribune Business. “Here, people don’t like to talk about taxation as they think the Government is trying to take more money and increase government spending.

“It’s not so much to increase government revenue overall, although that may come with a more efficient and effective system, but to have a system that’s more progressive and equitable, and achieves the objectives we’re seeking from an international perspective.

“We started the discussion some years ago, and went with VAT then, but I don’t think the discussion on our approach to tax reform has been extended,” the BIA chair continued. “The thing about reform is it has to benefit us as a country, not just satisfy the EU and OECD. We must put ourselves in a position to compete.”

Personal and corporate income taxes are labelled ‘progressive’ because the amounts levied are directly tied to a person’s ability to pay, meaning that wealthier companies and persons pay more than those on lower incomes.

VAT, though, is viewed as a ‘regressive’ tax because its burden falls disproportionately on the poor, who spend more of their income on paying taxes than the wealthy.

The Bahamas, though, adopted a broad-based VAT with few exemptions because it was seen as a more efficient tax that was easier to enforce than an income-based tax. The latter was viewed as complex and expensive to administer, and also ‘alien’ to this nation’s culture because there is no history of income taxes.

Mr Komolafe, though, like others before him yesterday pointed out that compliance with the EU’s ‘blacklisting’ criteria and the OECD’s Base Erosion and Profit Shifting (BEPS) initiative seemed to be forcing the Bahamas to introduce a low-rate corporate income tax of at least 10 per cent.

The OECD’s BEPS initiative views any corporate tax of less than 10 per cent as a ‘harmful tax practice’, and the Bahamas’ ‘no tax’ platform - with no income-type taxes of any kind - leaves it potentially in violation.

Compliance with BEPS and its ‘fair taxation’ criteria are also being demanded by the EU in return for avoiding its ‘blacklist’, which Mr Komolafe said was adding to the pressure on the Bahamas to undertake more wide-ranging tax reform.

“We need to look at this as an opportunity for comprehensive tax reform,” he told Tribune Business, “with due regard for the introduction of a more equitable and progressive tax system.

“This exercise need not result in an increase in the overall tax burden for Bahamians, and could entail the reclassification or modification of existing taxes. The reality is that we already have several taxes or fees or levies on businesses, including Business Licence fees, real property tax, NIB, VAT etc.”

Mr Komolafe said Business License fees, in particular, were ripe for conversion into a corporate income tax levied on profits. This fee, which typically earns the Government around $120-$130 million annually, is currently applied to a company’s gross earnings, resulting in some businesses either being taxed into a loss or paying in more in taxes than they earn in profits.

The BIA chair added that tax reform needed to be combined with “fiscal prudence” and spending controls/reductions, so that any reforms were not geared simply to expanding the size of government.

“It’s an opportunity where we look at this holistically,” he explained, “so that every time we have the threat of a blacklist we don’t have a knee jerk reaction. We have seen where the goal posts have been changing, and these reactions don’t position ourselves to grow and maintain what we have.

“It doesn’t benefit us to react every single time. We must have a plan, and can’t be driven by avoiding blacklists and compliance. We have to think about the future. It’s not so much increasing the tax burden but having a more progressive and equitable system in place.”

Besides the EU and OECD, Mr Komolafe pointed out that the Bahamas’ proposed accession to full World Trade Organisation (WTO) membership by 2019 would add further tax reform pressure by demanding the reduction or elimination of many import tariffs.

“The international pressures present us with a rare opportunity to reform, rebrand and reposition the Bahamas as an international financial centre (IFC) of choice; we should not squander this opportunity,” he argued.

“External pressures have put us in a position in which we are being forced to address our system of taxation and chart the course for the financial services industry going forward.

“Based on global trends and increased international pressure on tax policies, as well as the exchange of information, our ability to remain competitive will depend on how much we align our practices with the changing landscape.”

Mr Komolafe said the Bahamas could also learn from the inclusion of Panama, Barbados and South Korea on the EU ‘blacklist’, as all three had been ‘named and shamed’ for having ‘ring fenced’ preferential tax regimes despite having complied with the OECD’s CRS and BEPS initiatives.