The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Deputy Prime Minister yesterday warned that “all” International Business Companies may have to submit annual accounts if the Bahamas is to escape Europe’s “blacklist”.

K P Turnquest’s statement, in response to Tribune Business questions, raised immediate fears among financial services practitioners that the “beauty” of IBCs may be lost, given that such reporting requirements would eliminate the advantages associated with using them.

One executive, speaking on condition of anonymity, said such a move risked a repeat of the post-2000 ‘blacklisting’ by the Financial Action Task Force (FATF), when the Bahamas went further than other international financial centres (IFCs) by eliminating “bearer shares”.That resulted insignificant IBC-related business moving from the Bahamas to the British Virgin Islands (BVI), which ‘immobilised’ such shares, and the executive said he would hurriedly check with his BVI and Cayman Islands contacts to determine if this nation’s key IFC rivals were implementing similar requirements to meet the European Union’s (EU) demands.

Concerns over whether the Bahamas’ response could undermine its competitiveness were sparked after Mr Turnquest confirmed that new financial reporting requirements are necessary to address the EU’s rationale for ‘blacklisting’ this nation as non-cooperative in the fight against tax avoidance.

Referring to planned legislation, the Deputy Prime Minister told Tribune Business: “The proposed Bill outlines the requirements, but generally it may require all IBC-type entities to submit statutory financial accounts.”

He added that while the EU had not pushed the Bahamas to introduce new taxes, it had pointed to the “challenges” the absence of a corporate income tax structure creates for this nation in complying with its demands.

“I can’t say at this point that they have suggested introduction of taxes,” Mr Turnquest told Tribune Business. “However, they have noted the absence of such a structure and the challenges that places on our ability to meet transparency and reporting requirements, particularly in respect to enforcing economic substance requirements, physical presence requirement, etc.

“We continue to review and investigate these issues as we develop the strategy for the industry going forward.”

Brent Symonette, minister of financial services, yesterday identified the ‘proposed’ Bill as The Multinational Non-Resident Entities Financial Reporting Bill when addressing the House of Assembly during the mid-year Budget debate.

He, too, warned that “additional accounting and reporting requirements”, as well as changes to the Bahamas’ legal and regulatory regime, will be required to escape the EU’s ‘blacklist’. But Mr Symonette, as with Mr Turnquest, declined to go into detail as efforts to ensure this nation’s delisting were “a sensitive issue” that is still ongoing.

But, based on its name, the Multinational Non-Resident Entities Financial Reporting Bill appears to be the legislation referred to by Carl Bethel QC, the Attorney General, in an interview with Tribune Business the weekend before last.

Mr Bethel revealed his ministry had just completed drafting a Bill that would impose “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.

This financial information would then be passed to the Bahamas’ “Competent Authority”, the Ministry of Finance, which would then share it with tax authorities in the relevant countries where these multinationals have physical operations. The ultimate goal is to ensure such corporations pay due taxes in the countries where they are generated.

Mr Bethel’s comments suggest that only IBCs that are part of multinational corporate structures, rather than “all” Bahamas-domiciled IBCs, will be subjected to such reporting requirements in a bid to address the EU’s concerns.

The 28-nation EU justified “blacklisting” of the Bahamas on the basis that it had not done enough to prevent corporate structures and entities, such as IBCs, from being used by multinationals to move, and book, profits and losses if they have no physical presence - or conduct no substantial activities - within that jurisdiction.

This potentially means an end to IBCs, one of the Bahamas’ most popular products, being used as passive or “fronting” vehicles in investment structures. There is nothing wrong with such uses in and of themselves, but there have been warnings ever since the 2000 ‘‘blacklisting’’ that IBCs needed to conduct “real business”.

The details of the Government’s planned legislation are currently unknown, beyond the Attorney General’s Office and Cabinet ministers, but Mr Turnquest’s warning yesterday rang immediate “alarm bells” among some in the Bahamian financial services industry.

One executive, speaking on condition of anonymity, said the proposed legislation threatened to eliminate the main advantages associated with using IBCs, namely their minimal reporting requirements.

Currently, Bahamas-domiciled IBCs only have to file registers of their officers and directors; give the name and address of their registered agent; and give notice of any mortgages and other charges over their assets. The financial accounting/reporting demanded by the EU will thus dramatically increase their regulatory burden.

“Minimal reporting was the whole beauty of using IBCs,” the executive told Tribune Business. “That’s what separated IBCs from domestic companies. With all this bureaucracy about filing accounts and the rest of it, there’s no big distinction any more.

“That will kill the IBC business. You’ll have to file public accounts. You know what that will do; the business will go to the BVI and Cayman, where they don’t have to do that. That’s where it’s going to go.”

The executive said he would quickly check with BVI and Cayman contacts to see if those IFCs were implementing similar measures to satisfy the EU, but warned that maintenance of a regulatory “level playing field” may not be enough to maintain the Bahamas’ competitiveness versus its Caribbean rivals.

“The principal attraction of the Bahamas was based on tax avoidance and confidentiality/secrecy in the old days,” they recalled. “It was never on efficiency. It was more efficient to use the BVI and Cayman because all the UK accountants and law firms all had offices out there, and they went to work around the clock. They were able to turn out product much cheaper and efficiently than we could do.

“If there is no longer a regulatory level playing field, we have a major problem. [Our advantage] was based on secrecy and minimal reporting requirements. If the latter is now gone, there’s no advantage to being here. I think we’re in for a tough ride. This is very concerning. I’m very concerned. This is a big problem.”

Tanya McCartney, the Bahamas Financial Services Board’s (BFSB) chief executive, yesterday pledged that the industry would inform the Government if its proposed law reforms “go beyond what is required” once it has a chance to review the legislation (see other article on Page 1B).

Mr Turnquest, meanwhile, said the Government would seek to minimise the extra costs associated with the EU-related financial reporting in a bid to maintain the financial services industry’s competitiveness.

“We are very concerned over any increase in the cost or ease of doing business in the Bahamas,” he told Tribune Business. “We will seek to utilise technology and streamline compliance obligations.”

Mr Turnquest said the Government expected to begin consultation with the financial services industry “this week” over the Bahamas’ ‘blacklist’ response, and anticipated “minimal fallout” from the EU’s action due to the belief this nation will swiftly be delisted.

He added that the Minnis administration planned to “invest in a PR campaign to let the world know what the Bahamas is and what it is not”, in a further attempt to mitigate any adverse consequences for the industry and wider economy.

The Deputy Prime Minister also accused the EU of being “contradictory” in its explanation for why letters signed by himself, confirming the Bahamas’ commitment to meeting all its demands by year-end 2018, and other submissions were not taken into account before the final ‘blacklisting’ decision was made.

“In e-mails they said they forwarded [these] to [EU] ministers, but in the meeting they said the ministers did not have time to review our submissions,” he added.