The Tribune

• Ex-minister: Can’t be ‘shoved down our throat’

• Warns any reforms must be proven ‘good fit’

• Fears tax burden falls on middle, lower class

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must not permit the likes of the International Monetary Fund (IMF) to “drag us” into imposing income taxes that “don’t make sense”, a former finance minister argued yesterday.

James Smith, now head of the Government’s Debt Advisory Committee, told Tribune Business that The Bahamas cannot afford for the G-20/OECD and multilateral agencies to “shove down our throats” potential tax reforms without first subjecting them to rigorous analysis to see if they are “a good fit”.

Warning that The Bahamas has “been down this road before”, he suggested that corporate and personal income taxes, or a combination of both, may not be the best model for this nation to adopt given that the tax burden would again likely fall on the middle and lower income classes.

Mr Smith, also an ex-Central Bank governor, suggested that The Bahamas’ population - and especially the 235,000-strong pre-COVID labour force that would be responsible for paying income taxes - may not provide a sufficiently large enough base to generate the revenues required by the Government.

Hinting that this was no time for The Bahamas to engage in tax experiments, he added that this base will presently be “substantially reduced” by COVID-19 related unemployment levels estimated by some to be as high as 20-30 percent still.

And, while The Bahamas is viewed by many as having relatively high per capita gross domestic product (GDP), this number is skewed by a relatively small proportion of extraordinarily high earners - many of whom generate the bulk of their earnings outside this nation, raising questions as to whether it would be captured by a local income tax.

Mr Smith, acknowledging the desire by many to move away from regressive consumption-based taxes, such as VAT and import tariffs, to more progressive income-based levies, nevertheless argued that the latter taxation forms could also become “regressive” in the Bahamian context.

This, he explained, was because companies and high income earners will more readily find loopholes and ways to legally minimise their income tax exposure, once again putting the taxation burden on the middle and lower income groups.

Responding to the IMF’s advice, revealed earlier this week by Tribune Business, that The Bahamas should get ahead of the global push for a 15 percent minimum global corporate tax by adopting this levy for its own benefit, Mr Smith told this newspaper: “Some may want to adopt it because the IMF says so, but we’ve been down this road before.

“Where we are now is very much like in 2000, with the exchange of tax information and the OECD’s then ‘harmful tax practices’. These Europeans, the developed countries, come up with these ideas to assist their economies, shove it down our throats and we go along with it.”

The Biden administration’s election for the first time installed in the White House a US government whose taxation views were broadly aligned with those of high-tax European welfare states, hence the convergence via the G-20/OECD towards the 15 percent minimum global corporate tax that they want to implement from 2023.

However, Mr Smith yesterday joined those arguing that The Bahamas will be little impacted by the G-20/OECD proposal at this point because the largest multinationals being targeted by the 15 percent minimum tax do not represent this nation’s financial services market or have a major physical presence here.

The Bahamas has traditionally focused on the private wealth management space, as opposed to the institutional business targeted by the likes of Bermuda and Cayman. The former finance minister said the G-20 wanted the likes of The Bahamas to sign up to the initiative merely so it could argue that the majority of countries are in agreement.

“A one-size-fits-all tax does not reflect the realities on the ground,” Mr Smith told Tribune Business. “I don’t see us dragging along with this unless it makes sense to us. We have to examine this closely, not follow the dance from the developed world on taxation.

“The Bahamas built its financial services sector on the basis of no direct taxes or income taxes, and bank secrecy. They are things of the past. Now we’re going to go down this line of adapting without any analysis as to whether it works for The Bahamas. I would not recommend going along with this just because this is what the US and OECD want us to do.

“I’m merely saying that, for the first time, let us do our own internal analysis to see if it’s a good fit for The Bahamas so, at the end of the day, we will be better off with it than without it. The international agencies have a tendency to come out with ideas that fit well for them, the bigger economies, and than drag us along to say they have a consensus on this.”

Should The Bahamas impose a personal income tax, Mr Smith argued that the base would be much-narrowed due to high unemployment levels. And an expensive, complex collection, enforcement and administrative machinery would be required to oversee such a taxation system, and crack down on evasion, fraud and other abuses.

Noting that The Bahamas has traditionally struggled with “large leakages” from its existing taxes, Mr Smith said failing to implement the proper administrative mechanisms will again result in “another burden on the working population without getting the receipts you expect”.

He added: “The argument against regressive taxation, I certainly understand that, but we have to recognise our history. We elected to have no direct taxes on income for many reasons, and following from that is this regressive system, but so is income tax.”

Explaining what he meant by that, Mr Smith said: “The high earners and companies can afford to hire lawyers to help them minimise their taxes. You end up again putting a heavy tax burden again on the lower income people who can’t afford it. That’s the potential repercussion.

“Your labour force is usually only 50 percent of the total population, and if there is 30 percent unemployment that substantially reduces the tax base. And you have another problem. The very wealthy business owner will likely switch to dividend payments and reduce their salary” to minimise their income tax payments.

Many in the Bahamian private sector, though, are likely to be open to a corporate income tax if it means replacing the disliked Business Licence fee regime. While corporate income tax is levied on profits, the latter is calculated as a percentage of revenue/turnover.

This has left some companies paying more in tax than they make in annual profits, while driving others into losses. The Business Licence fee also favours low revenue/high margin companies at the expense of high turnover/low margin ones, penalising the likes of food stores and gas stations, while creating further distortionary effects for price controlled firms.

Pledging that the 15 percent minimum global corporate tax deal, to which The Bahamas has signed up, “does not seek to eliminate tax competition, but puts multilaterally agreed limitations on it”, the OECD said the two-pronged agreement will see countries collectively gain around $150bn in new revenues annually from multinational enterprises.

The first pillar is billed by the OECD as ensuring “a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises”.

Some taxing rights over multinationals will be reallocated from these companies’ home countries to the markets where they have business activities and generate profits, regardless of whether they have a physical presence there.

The taxing rights reallocation only applies to multinationals with annual turnover greater than 20bn euros and profit margins greater than 10 percent, with a particular focus on those that have benefited so much from the digital economy - the likes of Facebook, Amazon, Apple and Google. Just 25 percent of profit above the 10 percent threshold is to be reallocated.

The OECD predicted that $125bn of multinational profits will be reallocated to small jurisdictions in this way. However, questions have been raised as to whether the likes of Amazon meet the 10 percent profit margin and thereby qualify.

And the 15 percent minimum global corporate tax, billed as generating an additional $150bn in annual global tax revenues, is only targeting companies with a yearly turnover of greater than 750m euros. The OECD/G-20 are hoping that all countries will formally commit to the initiative in 2022, with implementation targeted at 2023.