The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A WELL-known QC has warned “it’s going to be very difficult to meet” the European Union (EU) and OECD’s demands unless the Bahamas implements a corporate income tax.

Brian Moree QC, senior partner at McKinney, Bancroft & Hughes, told Tribune Business that while the introduction of such a tax was “not inevitable”, the Government - following consultation with the financial services industry and wider private sector - is faced with “a big decision” before year-end 2018.

He said that should a corporate income tax become necessary, it needed to be offset by other reforms to ensure the already substantial tax burden facing Bahamian businesses is not unduly increased.

Warning the Government against “piling on” more taxes, regulations and ‘red tape’, given the private sector’s “limited capacity” to continue absorbing such hits, Mr Moree said the Bahamas must not focus on escaping the EU’s ‘blacklist’ in isolation from its other challenges.

He argued that this will be a “recipe for failure”, as the Bahamas needs to craft “a comprehensive plan” that reengineers its economy and financial services industry for future growth and stability, while also addressing international concerns over tax transparency, ‘economic substance’ and the World Trade Organisation (WTO) accession process. “It seems as if it’s going to be very difficult to meet the BEPS initiative and this issue of ‘economic substance’ without serious consideration of a corporate tax,” Mr Moree told Tribune Business.

“I don’t want to say at this point it is inevitable, but we have to accept the Government of the Bahamas has committed to the BEPS initiative. That’s a done deal. It’s difficult to see how we make that commitment without a corporate tax.

“I don’t think it’s inevitable, but it’s certainly possible, and I know options are currently being reviewed, but at this time it’s difficult to see how we meet our commitments on BEPS without a corporate income tax. This is one of the big decisions that have to be made between now and the end of the year.”

BEPS stands for the Base Erosion and Profit Shifting (BEPS) initiative that is being driven by the Organisation for Economic Co-Operation and Development (OECD), in a bid to crack down on tax avoidance by multinational corporations.

The Bahamas has already agreed to sign on to the BEPS Inclusive Framework, and meet the ‘minimum standard’, as part of the OECD’s drive to ensure the profits of such companies are taxed in the country where they are generated.

Multinational companies often use legitimate tax avoidance strategies to “exploit 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. This enables them to minimise their tax exposure by paying a lower rate than they otherwise would in countries where they do conduct business.

The significance of BEPS is that it is one of three criteria being employed by the EU to judge whether a country is deserving of being ‘blacklisted’. And one of the BEPS ‘minimum standards’ that the Bahamas has chosen to comply with, as noted by Mr Moree, seemingly requires this nation to impose a low rate corporate income tax of 10 per cent or more.

One of those standards is ‘Countering Harmful Tax Practices’, and the OECD considers a corporate tax rate of 10 per cent or less to be a ‘harmful tax practice’. Yet the Bahamas - with no income taxes of any kind - has an effective corporate tax rate of ‘zero’ because it simply does not have this system.

Therein lies the problem for the Bahamas in complying with OECD and EU demands, and removing itself from the latter’s ‘blacklist’. The 28-nation EU also justified its designation of the Bahamas as ‘non-cooperative’ in the fight against tax avoidance on the basis that this nation had not done enough to prevent its corporate vehicles and structures from being used for such purposes.

It is demanding that the Bahamas implement anti-tax avoidance measures against 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.

Significantly, perhaps, the EU’s January 26, 2018, letter to the Bahamas did not openly demand the imposition of a corporate income tax. It even suggested a compliance ‘road map’ involving the creation of accounting and reporting mechanisms that would allow this nation to collect tax-related information on locally-domiciled multinational entities, then report it to their home countries.

However, K P Turnquest, Deputy Prime Minister and minister of finance, last week told Tribune Business that the Bahamas will have to assess its tax structure, and whether certain uses of International Business Companies (IBCs) and other structures are compatible with this nation’s international obligations following the EU ‘blacklisting’.

Mr Moree’s comments will likely further harden the view that ‘the writing is on the wall’ when it comes to corporate income tax - something many in the financial industry have argued the Bahamas should have implemented already, rather than wait for foreign actors to force its hand.

Paul Moss, Dominion Management Services’ president, has consistently argued that a low-rate corporate income tax will enable the Bahamas to shed its ‘tax haven’ label and re-position its business model to one focused on ‘double tax’ and investment treaty.

And Tanya McCartney, the Bahamas Financial Services Board’s (BFSB) chief executive, has also conceded that a corporate income tax merits serious consideration.

Mr Moree, though, told Tribune Business that any imposition of such a tax - and the Bahamas’ efforts to escape the EU ‘blacklist’ - must not be done “in isolation”.

He argued that both issues need to be tackled in a far broader economic plan that addresses “the bigger picture”, dealing with tax transparency/information exchange, BEPS, economic substance and all other issues raised by the likes of the OECD and EU.

This plan, Mr Moree said, needed to pull off ‘the trick’ of making the Bahamas fully compliant while, at the same time, repositioning the financial services industry and wider economy for sustainable, long-term growth.

The well-known QC also backed the further diversification of the Bahamian economy away from its current reliance on tourism and financial services, reiterating that this cannot be done “in isolation of the bigger picture of sustaining the financial services industry and viability of the wider economy”.

“We cannot be tackling this issue [the EU ‘blacklisting’] in isolation from a broad, comprehensive plan,” Mr Moree said. “We have to deal with these issues in the context of the broader picture that addresses the sustainability of the financial services industry and broader economy.”

He warned that the Bahamas would follow “a recipe for failure” if it tackles these external threats one-by-one, and added: “There has to be a comprehensive plan which addresses all these concerns the international community is going to require us to address, and it has to be done in a coherent way that takes us to a certain destination as opposed to dealing with crisis management and deadlines on each one.

“We have to put out fires, but in addition to putting out fires, there’s got to be some overall plan for the neighbourhood. All this is going to require very thoughtful, deliberate consideration, and the next 18 months are going to be very important.”

Mr Moree pointed out that tax reform, and the possibility of a corporate income tax, was inextricably linked to the Bahamas’ planned full WTO membership accession by end-2019. With many import tariff lines set to be eliminated or substantially reduced in a phased process, the Government will be looking for sources with which to replace that revenue.

However, he warned that any tax reforms - whether they involved a corporate income tax or not - must not increase the already-substantial burden faced by existing Bahamian businesses.

Recalling how a presenter from Deloitte & Touche recently told a financial conference that corporate Bahamas’ average tax burden was around 35 per cent, due to significant indirect taxation, Mr Moree said: “There is a limited capacity to absorb more cost, more tax, more regulation, more bureaucracy, more red tape and more difficulty.

“You can’t just add on another tax, another revenue source, add an another regulation and then another. You have to rationalise the entire regime. If it is deemed to be necessary that we have to introduce some sort of corporate tax, that can only be done in a sustainable way by eliminating government fees, taxes, licences and user fees elsewhere.

“We can’t just add on to what we have; adding on and adding on, and piling on and piling on. You’re reengineering where you eliminate some and replace them with new ones, so the overall burden you’re placing on the business and investor community isn’t getting larger and larger.”

One possible reform would be to convert the existing Business Licence regime, increasingly detested by many in the private sector, into a corporate income tax - switching the basis of taxation from gross turnover to profits. Any revenues lost could be made up by eliminating ‘ring fencing’, and applying the same tax rate to non-resident entities in the international sector.