The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former financial services minister yesterday urged the Bahamas not to ‘throw the baby out with the bath water’ in addressing the European Union (EU) concerns that saw it ‘blacklisted’.

Ryan Pinder, now a Graham, Thompson & Company attorney and partner, warned that the Bahamas would “no longer be a viable financial centre” if it eliminated the ability for the industry and its clients to establish and domicile corporate structures here. Calling on the Government to be “careful” and measured in its response to the EU’s ‘economic substance’ concerns, Mr Pinder suggested that the Bahamas combine the reporting mechanisms required by 28-nation bloc and the Organisation for Economic Co-Operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS).

He argued that this would minimise costs for “a small country with limited experience” on the issue, and suggested the Bahamas address the EU’s ‘ring fencing’ concerns first.

Suggesting that a ‘preferential tax regime’ for non-resident entities was “no longer relevant”, Mr Pinder said eradicating ‘ring fencing’ was a relatively easy move that should be “done from the get-go” to show the EU the Bahamas is meeting its demands.

“It would seem we were ‘blacklisted’ because we provided an inadequate response with respect to the question posed on criterion 2.2; the use of structures without economic substance, which may be used to avoid or taxation, rather than anything that was transparency-related,” Mr Pinder told Tribune Business.

The EU justified its decision to ‘blacklist’ the Bahamas, and include it among nine jurisdictions considered non-cooperative in the fight against tax avoidance, on the grounds that it did not receive a ‘high political level’ commitment to prevent products and financial structures from being used for such purposes.

In particular, the EU flagged the failure to receive the necessary commitment on co-called criterion 2.2, which demands that countries not permit corporate structures that allow companies to move, and book, profits and losses if they have no physical presence - or conduct no substantial activities - within that jurisdiction.

Mr Pinder described this as “a perplexing issue” that had had also baffled colleagues in the Cayman Islands, the fellow Caribbean international financial centre (IFC) that has had to grapple with the same issue in its dealings with the EU.

“It’s a little bit perplexing and we have to approach it with some caution,” the former financial services minister told Tribune Business. He said the EU’s guidelines on ‘criterion 2.2’ suggested it was looking for countries to implement “certain reporting mechanisms” that would allow home country tax authorities to know the earnings of multinational corporations on a country-by-country basis.

Such information would have to be transmitted to these authorities, as the EU seeks to ensure multinational companies are taxed appropriately in the countries where their profits are generated.

Mr Pinder said this was similar to the Organisation for Economic Co-Operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS), which also aims to prevent multinational companies exploiting gaps and mismatches between different countries’ tax rates and rules, and artificially shift profits to low or ‘no tax’ jurisdictions despite conducting no or minimal business there.

The Bahamas has committed to meeting the ‘minimum standards’ on BEPS, one of which relates to ‘transfer pricing’ - the practice sometimes used to disguise the artificial movement of monies by multinationals through transactions between group affiliates based in countries with different tax laws and rates.

Mr Pinder suggested that the Bahamas “consolidate” the reporting mechanisms required by the EU and BEPS into one, so that it could minimise costs and ‘red tape’ and maintain its competitiveness.

“We are a small country, and we have limited capacity and limited experience in these reporting mechanisms,” he said. The EU itself appeared to offer a ‘road map’ for criterion 2.2 compliance, suggesting that the Bahamas either “impose substance requirements” or “introduce additional accounting and tax reporting obligations” on multinational affiliates.

The ‘road map’ laid out sounds similar to the legislative changes revealed to Tribune Business at the weekend by Carl Bethel QC, the Attorney General. He disclosed that his ministry had completed the draft of a Bill that will impose ‘country-by-country’ reporting of profits and losses on Bahamian entities that are part of a multinational company’s corporate network, once the latter’s consolidated annual revenues are above a certain threshold.

Mr Pinder, though, urged care in the Bahamas’ response to the EU’s concerns, warning that escaping the ‘blacklist’ needed to be balanced with maintaining the financial services industry’s competitiveness.

“We want to be careful that we don’t got too far in the legislation in that it really restricts the ability for the jurisdiction to have structuring and entities as viable components of financial services,” he told Tribune Business.

“If we eliminate structuring in the jurisdiction, and we are already feeling attrition on the banking side, we will no longer be a viable financial centre. How do we comply without completely eliminating the ability to structure?”

“Speaking to businesses and institutions, we mustn’t isolate the business opportunities away so we effectively have nothing. We have to be very cautious in how we approach this.”

Another attorney, speaking on condition of anonymity, yesterday suggested the Bahamas may have to prevent International Business Companies (IBCs) and other products from being used as ‘nominee’ entities or passive fronting vehicles.

IBCs have multiple uses, one of which is as a ‘nominee’ entity in corporate structures, and there is nothing wrong with this in and of itself. However, the EU justified its ‘blacklisting’ by saying the Bahamas had not done enough to prevent corporate structures and vehicles being used for tax avoidance purposes.

Mr Pinder, meanwhile, said the EU’s ‘ring fencing’ concerns were much easier for the Bahamas to address. He argued that the ‘preferential tax regime’ for non-resident entities should be eliminated, especially since Bahamians were increasingly using the same products and structures in the domestic economy.

“That has to go away,” he told Tribune Business of ‘ring fencing’. “Business Licences are ‘ring fenced’. Non-resident entities pay a flat fee of $300, resident entities pay on turnover. That needs to be equalised.

“Ring fencing is no longer relevant. That’s an easy fix. That should be done from the get-go, and done right away to demonstrate we’re moving in a spirit of compliance with the EU.”