The Tribune

In the final part of a three-article series, Hubert Edwards warns that profound taxation reforms may be forced upon The Bahamas if it fails to remain alert

There is an important wrinkle that The Bahamas must contend with. It could render moot everything that has been discussed to this point on whether to change or stick with the current tax system. The European Union (EU), and especially members of its parliament, recently lamented the fact that countries such as The Bahamas were removed from the continent's tax blacklist after making what was described as only ‘minor tweaks'. The EU has emphatically stated that by the end of 2021, it will review the criteria for inclusion/removal from this list, and the expectation is that the changes will strike at the heart of The Bahamas' financial services industry.

Based on the EU’s standards, The Bahamas is directly in its crosshairs over the ongoing campaign against so-called "harmful taxation". The criteria for identifying a jurisdiction with potentially harmful measures include an effective level of taxation that is significantly lower than the general level of taxation in the country concerned; tax benefits reserved for non-residents; and tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base. All these conditions exist in The Bahamas and play out in the international financial services industry. At the core of most decisions is the benefit to be derived because of no existing corporation or other forms of income taxation.

The EU has concluded that its process of blacklisting and removing jurisdictions requires greater transparency. This call is certainly not in response to The Bahamas' arguments, but rather a self-serving effort to help address what the EU considers an ineffective process for the blacklisting of jurisdictions. The EU has initiated reform of the overall blacklisting process, together with refining the definition of harmful tax practices and the criteria for determining whether a nation is non-cooperative. Various groups have offered recommendations as to where they think this should head. Oxfam International, for example, recommends “blacklisting zero and low corporate tax jurisdictions. Make zero and low corporate tax rates a standalone criterion of the EU tax haven list. Include economic analysis to identify harmful regimes. Use levels of foreign direct investment and passive income as red flags for the identification of tax havens. Properly screen EU countries: EU countries must be held to the same if not higher standards than non-EU countries''. The arguments offered by the EU, as it seeks to give greater potency to its efforts, parallel these suggestions. It states: “Criterion to judge if a country’s tax system is fair or not needs to be widened. Countries should not be removed from the blacklist if they only make symbolic tweaks. Additionally, a zero percent tax rate policy should automatically lead to being placed on the blacklist.”

If the above becomes reality by year-end 20201, then certainly the Bahamian financial services sector will see some level of disruption. It therefore begs the question: ‘What exactly are we doing at this time?’ Beyond concerns about the usefulness, suitability, equity and regressive nature of our current tax regime, there lies a potential external threat that has the ability to impose on us what we seem fully committed to avoiding. The new pronouncement by the EU on the blacklisting criteria (no country with zero corporation tax should be left off) could add greater potency to their campaigns against jurisdictions such as The Bahamas. The proposed criteria for a 12.5 percent minimum effective tax rate, together with "zero rate and you are on the listing" is certainly designed to be a major game changer in their effort.

The EU previously indicated it had its "foot on the neck of The Bahamas"; a foot it will not move until it gets its way. This, together with the idea that small tweaks will not get a jurisdiction off its blacklist, hold important implications for The Bahamas. Will we be forced to implement corporate income tax to accommodate the survival of the financial services industry? While there are great arguments to be made for reclassification of current taxes and charges such that the financial impact of any tax burden remains relatively unchanged, it is my view that any introduction of corporation tax - and in any amount - fundamentally shifts the value proposition of the financial services industry. This is why, in my opinion, the current public discussions on taxation is inadequate. Forced into implementing this form of income tax, the country will have to face the consequences without having the chance for careful, deliberate analysis and full comprehensive assessments. The urgency that may result from being back on a blacklist creates the possibilities for mistakes, overreach and missteps.

I believe the time is right to start having a national discussion that confronts these issues head-on. Any potential changes would be so radical and culture-shifting that early, clear and open discussion, leading to a sound understanding and support for acceptance or rejection, is definitely needed. Again, the scope for the long-term rejection of corporation tax, a form of income tax, is very limited and could quickly become non-existent should the EU follow through on its “threats”. We understand and appreciate the unease and hesitancy involved. However, given the timeline proposed by the EU, I would recommend the following:

• Initiate a clear and focused conversation, especially within the financial services industry, on what the issues are and the options facing The Bahamas. The reality is that just as the EU may apply pressure to its business model, the sector, too, will become a source of immense pressure for the policymakers. The possibility of a retrenchment in business and economic activity in this area should not be ignored. In the first instance, discussions focused on bringing clarity and, more importantly, greater certainty to the sector is a strategic imperative for the country. Outside that narrow sector, selling the idea of any form of tax directly affecting income will be an uphill climb, and therefore the conversations with - and messaging to - citizens will require careful attention.

• Create a full study of the tax system with a clear focus on alternatives and the need to address inequities. Accepting that there will be no levying of income or corporation tax prior to the election, constitutionally due by May 2022, it would be reasonable for all political parties to share the burden by having bi-partisan buy-in for such a study. This approach capitalises on time and seeks to hedge against any drastic action that may be taken by the EU towards the end of 2021 or early 2022. A “national” commitment to a study itself will hold important messaging for external parties. Ultimately, the main objective is to be strategic so as not to be caught flat-footed at a time of great urgency.

• Make taxation systems, tax revenue and space a critical and intricate part of the economic recovery discussion. Conversations to-date have adopted a rather abstract and disjointed approach. As an example, the ability of the Government to meet its interest payments on its debt is directly influenced, at some level, by what taxes are collected. Depending on the economic climate, the sufficiency of said taxes comes under pressure. Therefore, as we look to secure a more resilient economy, The Bahamas must come to grips with the need for greater funding, at least from time to time. COVID-19 has caused dramatic spending to shore up society. Make the issue of equity and sufficiency more than rhetoric.

• There are potential risks to the certainty of government revenue, having regard for the potential impact of tax planning in an income tax system, especially with corporate tax. The ability to use group losses as tax credits, for example, could result in revenue volatility. The Bahamas must therefore actively start looking for potential gains from any changes, voluntary or forced. Benefiting in a fundamental way from double taxation treaties, and the opportunity to expand into the headquartering segment of the financial services sector, are just two examples. The country must also assess opportunities to gain strategic advantages over regional competitors with “settled” income tax systems. If there is ever such a change, the best approach is to squeeze out every possible advantage, which positions the country to earn more.

• Fundamentally rethink tax administration, understanding that it gets much more complex with income taxes. The general regressive nature of the current tax system has the advantage of checking itself. You cannot clear a piece of heavy-duty equipment, for example, unless VAT is paid as part of the Customs process. How that equipment is treated for tax purposes, though, could have a fundamental bearing on how much tax is ultimately paid to the Government. The tax administration infrastructure and enforcement will need to be ready to address new and unfamiliar complexities.

Conclusion

In this piece we sought to show how the state of The Bahamas' economy has implications for its tax system, while also addressing EU pronouncements that could push the country towards introducing corporate income tax in some form well before it may feel comfortable doing so. The very nature of the subject matter demanded some level of speculation. and consequently we share the view that, eventually, income tax will not just be left on the table but will be front and centre as “the discussion” to be had. The country is reeling from the effects of the COVID-19 pandemic, and the main task is to strategise a path to recovery and resilience. We make the argument that given important shifts in the economy, and potential lingering effects from this crisis, an unfortunate build-up of debt, and the performance of government revenue, the time may be approaching when a shift to a more progressive taxation system will serve the country better. This is not without its fair share of challenges. It is an important matter. A matter demanding the attention of every business, citizen and resident. It is a matter of sufficient national strategic importance that it argues for the suspension of the usual adversarial debates, and calls for a sober, practical and collective discourse for the benefit of The Bahamas. Ultimately, the whole premise of this piece may fall flat, and be of no value. In such a case, we would gladly acknowledge how wrong we were in our assessment. What, though, if it holds true and we fail as a country to ready ourselves to at least have the conversations necessary to advance the national cause. What if?