The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Bahamas will be unable to satisfy the European Union's (EU) demands by merely promising to implement corporate taxation, a prominent attorney has warned.

Michael Paton, who co-heads the financial services industry working group assessing the Government's 'blacklisting' response, told Tribune Business in a recent interview that time and the EU's appetite for "concrete" progress means corporate taxation will not be the Bahamas' short-term salvation. With the Bahamas anxiously waiting to see whether it will be removed from the EU's 'blacklist' tomorrow, Mr Paton said the introduction of economic substance/physical presence requirements was likely to be the route chosen for meeting the 28-nation bloc's demands by its December 31, 2018, deadline.

A former Bahamas Financial Services Board (BFSB) chairman, Mr Paton added that the Bahamas' removal from the 'non-cooperative jurisdictions' list would provide reassurance that the EU is "acting in good faith".

He confirmed that the working group was likely to recommend splitting the Multinational Financial Entities Reporting Bill, the Government's key response to the EU, into two separate pieces of legislation to reduce the complexity caused by attempting to deal with two separate - but related - anti-tax avoidance initiatives.

And Mr Paton also sought to calm fears that the Bill, as currently proposed, will effectively wipe out the attractions of using Bahamian International Business Companies (IBCs) through potentially eliminating their 20-year 'tax holiday' and Stamp Duty exemptions.

Many observers have argued that this essentially removes the distinction between IBCs and domestic companies, but the Lennox Paton attorney and partner pointed out that the EU and Organisation for Economic Co-Operation and Development (OECD) were only interested in corporate vehicles that are part of multinational company structures. As a result, Mr Paton said there "should be no concern" that IBCs will be "rendered irrelevant or impossible to use" as a product in private wealth management and trust structures.

K P Turnquest, Deputy Prime Minister, revealed to Tribune Business yesterday that the EU may delist the Bahamas tomorrow which, if it occurs, will provide a much-needed boost to both the Government and the financial services industry.

"Hopefully we can come off the list on April 12," Mr Paton told this newspaper. "That will give me some reassurance that we're dealing with the EU on a 'good faith' basis.

"What we were told by the Minister of Finance was that there was an expectation we'd be on the agenda for that meeting, but we've not heard confirmation that's the case."

The EU formally 'blacklisted' the Bahamas on March 13, having 'leaked' its intentions the previous week, for allegedly being non-cooperative in the fight against large-scale tax avoidance by multinational companies.

The 28-nation bloc complained that it did not receive the 'high level political commitment' it had been seeking from the Bahamas to address its concerns, which largely related to 'ring fencing' and the absence of 'economic substance' requirements for corporate vehicles operating in this jurisdiction.

Yet even if the Bahamas escapes tomorrow it may only be a short-term reprieve, given that the EU has given all countries until year-end 2018 to actually implement measures that will counter its tax avoidance concerns.

Acknowledging that the Bahamas does not need to introduce corporate taxation to escape the EU's 'blacklist', Mr Paton said this country had two options to meet the latter's demands - implement such taxation or bring in economic substance/physical presence requirements.

"You have this December 31 deadline to deal with the EU," he explained. "The fundamental issue is: Can you satisfy the EU if you indicate the Government is going to implement corporate tax reform without having anything actually in place?

"I don't think a commitment will be enough. I think they'll want something concrete. There's clear ways to meet the 'ring fencing', substantive economic presence requirement, without having taxation. The question is that we have to deal with this by the end of the year, and if a commitment to taxation does not get you a 'pass', then you need economic substance."

Mr Paton said the EU's 'ring fencing' concerns, which deal with the existence of 'preferential tax regimes' for non-resident entities and foreigners, would "fall away" should the Bahamas introduce corporate taxation - provided it was not a 'single digit' or nominal rate.

But he acknowledged that the Bahamas could not afford to rush tax reform merely to satisfy the EU, given the wider economic implications of any sudden shift and the need to link this to World Trade Organisation (WTO) accession.

"I don't see how we can move on a corporate tax position by year-end," Mr Paton told Tribune Business. "We don't want to approach tax reform in an ad-hoc way. You look at things like WTO and recognise it takes time."

The ex-BFSB chairman said the Bahamas should not be seen to introduce corporate taxation solely for the EU's benefit, adding that many in the financial services industry had suggested taking that approach since at least 2016 as a means to reposition the sector.

In the absence of a corporate taxation regime acceptable to the EU, he reaffirmed that the Bahamas would have to meet the 28-nation bloc's demands by introducing economic substance requirements.

The EU's concerns in this regard relate to the possibility that multinational companies can exploit loopholes, and differences in tax regimes and rates between countries, to artificially shift profits, revenues and assets to low-tax jurisdictions such as the Bahamas despite having no physical presence - and conducting no real business - in this jurisdiction.

Imposing such 'physical presence' requirements would eliminate these loopholes, and Mr Paton said: "I think we'll be looking at substantive economic presence in great detail between now and year-end to have something in place by December 31.

"I think that clearly, on a technical level, I fully expect over the summer and going into the fall we'll be looking very closely at substantive economic presence requirements, and I expect to see changes that satisfy the EU at a technical level."

And, addressing concerns over how legislative reforms will impact IBCs, Mr Paton said those employed in private wealth management and estate planning structures should not be impacted by any changes.

He explained that as "private holdings companies", concerns relating to these IBCs 'economic substance' have already been addressed by the Bahamas signing on to the OECD's automatic tax information exchange initiative.

"They're not looking for private banking or trust company IBCs," Mr Paton told Tribune Business of the EU. "What they're looking for in the private client space is automatic information exchange.

"There should not be a concern that IBCs for private wealth, private banking business will be rendered irrelevant and impossible to use. That doesn't need to be the case, and isn't the case."

Mr Paton said "the way forward has to be agreed" on IBCs in relation to 'ring fencing', but he emphasised that the private sector is "pushing" for the section in the Multinational Financial Entities Reporting Bill that deals with this - and allows the Minister of Finance to impose corporate taxation by regulation - to be "stripped out".

He confirmed that the industry views the Bill as too complex because it attempts to address the EU's concerns and the OECD's Base Erosion and Profit Shifting (BEPS) initiative in one piece of legislation.

As a result it is calling for the EU's 'ring fencing' fears, and the BEPS country-by-country financial reporting requirements, to be dealt with in two separate Bills.

"That's the theme we're trying to push forward at the private sector level," Mr Paton confirmed. "Hopefully our input is put in and we'll prevail. You won't have the two issues being dealt with in the same piece of legislation. That seems to be the path we're going down.

"It's going through the technical review and coming out the other side with something that has clarity and makes sense going forward."