The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government has stripped corporate taxation from its anti-blacklisting response, as a top attorney yesterday warned: "Time is not our friend."

Michael Paton, who co-heads the financial sector working group dealing with the European Union (EU) concerns, told Tribune Business it will be "a long summer" as the Bahamas seeks to meet demands for 'economic substance' and to eliminate preferential tax regimes for foreign investors.

He warned that this nation "now has to deliver on the hard work", with the Bahamas' likely imminent removal from the EU's 'blacklist' by May 25 merely set to return this nation to the position it was in at year-end 2017.

The Lennox Paton partner said the Bahamas now has seven-and-a-half months to implement measures that will address the 28-nation EU's core concerns, which is "not a lot of time to get it right".

He explained that to eliminate 'ring fencing'/harmful preferential tax regimes, the Bahamas will have to determine how it "equalises" the benefits provided to domestic and non-resident businesses/investors without causing any negative impact to the financial services industry and its clients.

As for the EU's other major demand, that companies conduct 'real business' and have a physical presence in the Bahamas, Mr Paton said this nation will have to "flesh out" 'minimum economic substance' requirements for all industries it is targeting.

The Government, though, appears to have taken on board advice to split its response to the EU's demands from legislation to comply with the country-by-country reporting requirements of the Organisation for Economic Co-Operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) initiative.

The EU and OECD initiatives, while linked and attempting to combat tax avoidance, are dealing with separate issues, and the financial services industry had urged the Government to deal with them via standalone legislation.

The Multinational Entities Financial Reporting Bill's initial draft sought to tackle BEPS and the EU's 'ring fencing' mandate in the law, but the latest version - which has been seen by Tribune Business - now completely removes the section that dealt with the latter.

Apart from stripping out the clause that eliminated 'ring fencing', the adjustments also dump the 'schedule' that allowed the Minister of Finance the ability to impose corporate taxation on a wide variety of financial services products - ranging from International Business Companies (IBCs) to foundations, Executive Entities and Investment Condominiums (ICONs).

The changes further confirm that the Government will not meet the EU's demands through the rushed implementation of corporate taxation by year-end December 2018, which was merely one option for addressing its concerns.

"Recommendations went into the Government on the Multinational Entities Financial Reporting Bill to split it. The latest draft Bill does that," Mr Paton confirmed to Tribune Business. "It takes out Schedule Two, 'ring fencing' and the taxation.

"What we'll be seeing going to Parliament will be that standalone Bill for country-by-country reporting. The next piece of work will be on 'ring fencing' and the preferences regime."

Many financial services industry executives and clients will likely be relieved that corporate taxation has been dumped, at least for the moment, given that its potential introduction had caused tremendous uncertainty - especially given that it seemingly provided for implementation 'at the stroke of a pen', although this was later refuted by the Deputy Prime Minister.

Mr Paton, meanwhile, said focusing the Multinational Entities Financial Reporting Bill on one issue brought it into line with the OECD model for addressing country-by-country reporting - something that would work to the Bahamas' benefits.

"It makes sense for us to implement that on a standalone basis so it clearly shows we're dealing with the issue in a way that makes sense; as designed," he added. "There will be a whole monitoring and reporting regime around that legislation, so it doesn't make sense to go into other areas."

With the Multinational Entities Financial Reporting Bill likely to be presented to Parliament imminently, Mr Paton said the Government and private sector can now focus on "moving forward" rapidly to deal with the EU.

He told Tribune Business that the Bahamas will have to carefully "examine how we approach" the elimination of 'ring fencing', or preferential tax regimes for non-resident entities and foreign investors, given the loss of business that could result if it got this wrong.

Non-resident, or 'offshore', entities currently enjoy Stamp Tax exemptions, lower Business Licence fees and other tax breaks not granted to domestic companies. These now have to be "equalised" to meet the EU's demands.

"Do you approach it by equalising the treatment between resident and non-resident entities, or domestic businesses or foreign businesses," Mr Paton said of the question facing the Bahamas.

"Do you equalise treatment? That's one way of doing it. Or do you close off those benefits to non-resident entities and have a phase-out period? While you do that phase-out period, you have to figure out how to equalise the benefits on both sides. You can't have a difference between non-resident and resident entities."

Mr Paton told Tribune Business that the Bahamas had to carefully weigh "the consequential impact on the offshore sector" whichever method it chose, saying his personal preference was for the 'phase-out' period and setting of a date when 'ring fencing' would be eliminated.

"You could equalise now or close off and provide some time to come up with equal treatment," he added. "That's probably the preferred way to do it. You have clear 'run off' period, grandfather and close off the existing, so you know the regime is closing on a certain date.

"That gives you enough time time to figure out how to change the exemptions; how you approach it for everybody going forward on Stamp Tax, Business Licence fees... That would be the preferred way to approach it."

As for the EU's demand that companies do 'real business', and have a physical presence in this jurisdiction, Mr Paton said 'Action Five' of the OECD's BEPS initiative provided the Bahamas with a 'road map' for addressing this.

He pointed out that 'Action Five' set out 'minimum presence' requirements for a variety of industries and business structures, such as headquarters; logistics and distribution centres; and withholding regimes that the Bahamas can use as a guide.

"You can design a regime for each type of business sector you're going after," Mr Paton told Tribune Business. "That's what we're going to have to be going after and flesh out. At least there's guidance; you're not working completely in the dark."

And, critically for the Bahamas' private wealth management industry, the OECD's guidelines only require that "passive holding companies" in typical trust and client investment structures be subject to an automatic tax information exchange regime. Mr Paton said the Bahamas, through its OECD commitments, already has this - meaning the private banking/estate planning sector will not be impacted.

While the Bahamas now appears to be set for removal from the EU's 'blacklist', it has much work to do over the remainder of 2018 to devise a suitable regime to meet the 28-nation bloc's demands and not be put back on it.

"I'm confident we'll be able to deal with it," Mr Paton told Tribune Business, "but my concern is that time is short, and we have to start on this sooner rather than later. We have to build in consultation with industry, and consultation with the EU so that we meet their criteria. Time is not a friend.

"We have to have something bedded down by the time they [the EU] review it, which I take to be December 31, the end of the year. We've essentially got seven-and-a-half months to get this thing done, and that's not a lot of time to get it right. I expect it to be a busy summer for many people."

Mr Paton said the Bahamas would have to check its reforms satisfied the EU's demands prior to year-end, emphasising that it now needed to "follow through" on its commitments.

While "grateful" that the Bahamas is being delisted "as quickly as the [EU] bureaucracy will allow", he said the 'blacklisting' had "created some degree of uncertainty and frustration among clients" - especially since many had been advised this nation would avoid such a fate based on the Government's advice and optimism.

Mr Paton said Deloitte & Touche (UK) study of the Bahamas' tax regime, and reform options, would continue in "parallel" to efforts to address the EU's demands. "If there's a tax change that flows from the analysis, and the Government makes a decision, that certainly will not be for the benefit of December 31," he added.