The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government has been urged to “swiftly address the cries of our domestic economy” and its inefficient processes otherwise the financial services industry’s adjustment will be undermined.

Michael Maura, pictured, the Chamber of Commerce’s chairman, told Tribune Business that compliance with anti-tax evasion demands from the European Union (EU) and Organisation for Economic Co-Operation and Development (OECD) meant The Bahamas must develop “new domestic value” for its International Business Companies (IBCs).

He added, though, that it was currently difficult to see where this “value” will come from given the Bahamian economy’s challenges with bureaucratic approval processes, high energy costs and ever-increasing taxation - all of which threaten to erode this nation’s competitiveness.

Mr Maura warned that these negatives could thwart hopes that The Bahamas can encourage financial services clients impacted by the EU/OECD-related reforms to establish a physical presence in The Bahamas and conduct real business operations from here - something that would lead to increased employment and job opportunities for Bahamians.

“The new IBC regime, which satisfies a residency test and mitigates the BEPS (OECD’s Base Erosion and Profit Shifting initiative), it would seem will require some new domestic value to replace the advantages offered under the old IBC regime,” the chamber’s chairman told this newspaper.

“Where is this value going to come from? Notwithstanding the recent but few positive steps to remove Government business licence bureaucracy, we remain a jurisdiction challenged by inefficient Government processes, high energy costs with no clear path to greater reliability and lower costs, and on a path toward higher taxes which makes us an expensive jurisdiction.”

Mr Maura continued: “One wonders if our strategy considers our existing reality of relative inefficiency compared to the larger, more efficient jurisdictions which provide business with an efficient operating platform while complying with potentially onerous requirements.

“While we understand the pressure brought by the likes of the OECD and others to eliminate ‘ring fencing’ and other preferential practices, we are concerned that our domestic inefficiency will result in a continued loss of foreign direct investment (FDI) that includes the financial services, and IBCs which initially make the effort to comply with the residency requirement only to eventually follow their predecessors and close shop.”

IBCs, and other non-resident entities, will lose all preferential tax advantages such as the existing 20-year Stamp Duty exemption by end-2021 to enable The Bahamas to meet EU demands for an end to so-called ‘ring fencing’ - the practice of giving foreign investors preferential tax breaks that are not available to Bahamians and the domestic economy.

The Bahamas has also passed legislation to meet the EU’s “substance” demands, which require these corporate vehicles - if they are part of a multinational company’s network - to have a physical presence doing real business in this jurisdiction or be subject to tax reporting requirements in the nation where their revenues/profits are generated.

Many in the financial services industry are hoping The Bahamas can turn the “substance” legislation to its advantage and entice specific industries, such as shipping and company headquarters, to domicile in this nation and exploit its tax neutral platform to their advantage.

Mr Maura, though, warned that such optimism may not materialise unless the Government becomes more aware of the consequences of its tax and economic policy actions.

He added that The Bahamas had to avoid reacting to every external pressure, pointing out that it “seems to be very eager” to comply with the likes of the EU while neglecting the needs of its domestic economy and business community.

“We ask that the Government continue to carefully consider the alternatives and consequences to its various plans,” Mr Maura told Tribune Business. “When we consider our very real challenges and costs to doing business in The Bahamas; the global slowdown; the efficient jurisdictions of many of our competitors; that any new or increased tax will have negative growth consequences; and that The Bahamas is a brand and has a reputation, we need to tread carefully and be certain of the consequence of our new policies and legislation.

“These decisions must be rooted in what is in the best interest of our Bahamas. We should not react to foreign policy and pressure that does not lead to a stronger Bahamas. We have no control over, and nor can we seemingly influence, the next wave of demands that the OECD or ABCD may come up with. We seem to be very eager to comply with these foreign demands while not hearing or swiftly addressing the cries of our domestic economy.

“The potential for further tax increases and/or the introduction of new taxes will negatively affect growth prospects,” the Chamber chief continued. “Many businesses engaged in the domestic economy - that is, not selling to a tourist - have shared that their businesses have not recovered from the introduction of the 4.5 percentage point VAT increase in July 2018.

“The prospect of a National Health Insurance (NHI) which leads to additional or new costs to both the employer and employee may negatively impact employment expansion and business investment. There is also a concern that NIB costs will be increasing.”

Mr Maura added that the banking industry’s conservative lending stance “continues to curb economic growth” and, despite the Small Business Development Centre’s (SBDC) launch, The Bahamas had “not made enough progress in creating opportunity for young Bahamians. It is too difficult for entrepreneurs with solid business plans to get into business”.

Still, Mr Maura praised the Government’s fiscal reform measures for protecting The Bahamas from a further sovereign credit rating downgrade. Speaking in the wake of Standard & Poor’s (S&P) recent decision to maintain the country’s present rating, he described the economic growth outlook - and the forces driving it - as mixed.

With air arrivals up 16.5 percent for the year to end-September 2018, Mr Maura said the “very positive” tourism performance - aided by Baha Mar’s full opening and addition of over 2,000 extra rooms - was directly impacting other sectors of the economy.

With The Pointe project continuing to progress, and Baha Mar planning to begin construction of a water park at the old Crystal Palace site in 2019, the Chamber chairman said the tourism-related FDI pipeline appeared promising. He revealed that Bahamas Food Services will this year “initiate expansion plans in preparation for Baha Mar’s increase in occupancy in the coming years”.

And, with the Government set to select a private operator for Nassau’s cruise port in early 2019, Mr Maura said: “If this selected project contemplates Bay Street and waterfront redevelopments, we can expect other development projects in and around Bay Street to materialise using the substantial Prince George Wharf project as justification. This has the potential to have an unprecedented impact on downtown commerce.”

He warned, though, that Nassau’s cruise port faced a significant competitive threat. “The cruise industry is investing close to $1bn in the private islands they operate,” Mr Maura said. “These projects likely benefit from various concessions and will not generate any material tax benefit to the Public Treasury.

“There is real concern that these cruise-controlled exclusive facilities will create additional competition to the domestic Bahamian economy.”

Despite the seemingly positive domestic outlook, Mr Maura said The Bahamas faced potential headwinds from global economic developments. He warned that the US-China trade war, and ‘tit-for-tat’ imposition of tariffs on each country’s exports, would increase the cost of Bahamian imports given this nation’s reliance on sourcing products from both nations.

Warning of the potential inflationary impact for The Bahamas, the Chamber chief said: “The tariff increases at the US border will result in the cost of many imports increasing and, with approximately 64 percent of US imports being components and parts, we can expect to see the cost of US goods increasing.

“Over 50 percent of imports to the Bahamas come from US businesses, which will result in the costs of goods in the Bahamas increasing. The CPI (consumer price index) table anticipates US goods becoming more expensive compared to years prior to 2017. The table also describes similar trends in Canada and Europe, where close to 25 percent of Bahamas imports originate from.”

With US stock markets beset by volatility as 2018 draws to a close, due to concerns over perceived presidential interference with the Federal Reserve’s independence and the ongoing government shutdown, Mr Maura acknowledged rising concerns over the US economy’s growth momentum.

“The US appears to be approaching a slowdown and, while it presently enjoys full employment in many areas, we will likely see some affect here in The Bahamas,” he said. “That said, Baha Mar will likely insulate Nassau to some degree from a reduction in total overnight volumes while seeing occupancy volumes underperforming against plan that did not anticipate a US slowdown.”