The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Attorney General yesterday accused the former Minnis administration of endangering The Bahamas’ International Business Company (IBC) sector through ill thought-out changes to tax laws.

Ryan Pinder, addressing the Senate on reforms to various financial services laws, said the previous government had passed changes to the VAT Act which “threatened the IBC incorporation business” because it subjected these corporate vehicles to a 6 percent levy on the sale of their shares regardless of whether they conducted any business activities in The Bahamas.

Asserting that VAT is supposed to be based on domestic consumption activity only, he argued that the 2020 VAT reforms had “caused considerable anxiety within the financial services industry” because the tax seemingly applied to all Bahamas-domiciled IBCs - even those conducting all their business outside this nation.

Amid fears this is making The Bahamas uncompetitive, especially since IBCs are a key vehicle employed in many wealth management and other corporate financing structures, Mr Pinder said the industry was proposing an amendment clarifying that only companies holding a Bahamian business licence - and conducting real activities here - be subject to 6 percent VAT when their shares are sold.

“The industry is rather sensitive to abrupt and unannounced changes, especially when there is no consultation,” the attorney general alleged. “Unfortunately this is exactly what we saw in the prior administration, tax changes without consultation, announcement or warning that was contrary to the long-standing operation of the financial services industry, and has caused considerable anxiety within the industry.”

The VAT Amendment Act 2020’s section 2 (c) imposes the levy on “the transfer of shares in a company” when it is being sold, and Mr Pinder argued: “The consequence of this amendment was that IBCs that have no nexus with The Bahamas, no business interest, no real estate and no other connection with The Bahamas other than incorporation, could be subject to a 6 percent VAT on the sale of shares.

“This has never been the case in The Bahamas and should not be the case. VAT is a tax that is a domestic consumption tax and should not be extended to activities wholly outside The Bahamas. This has threatened the IBC incorporation business in The Bahamas and must be remedied consistent with current law.

“What the industry is proposing, which I would agree with, is that if the company holds a business license, or a subsidiary of the holding company has a business license, the transfer of shares is subject to VAT. If not then it is not subject to VAT. A simple fix that is consistent with the philosophy of VAT and consistent with domestic law.”

Mr Pinder said similar issues were being experienced when it came to pledging shares in IBCs as collateral or other forms of loan security. “We have a situation with the pledge of shares of an IBC and the Stamp Tax that is payable because there was never any clarification after the former administration passed the Removal of Preferential Exemptions Act. This has likewise caused much anxiety in the industry and has caused us to lose IBC business,” he added.

“The IBC is deemed non-resident for exchange control purposes. All of its activities are conducted exclusively outside The Bahamas, and it owns no real estate or any interest in real estate or a business in The Bahamas. Under the law the pledge of these shares are subject to Stamp tax, when they never before were.

“The former administration issued a poorly drafted tax ruling to try to get around the issue. However, a tax ruling does not have the same authority as statute and there remains ambiguous. Tax reform and amendments are by their nature disruptive if there is not proper consultation, and especially in industries where capital is mobile and there is significant competition among jurisdictions,” Mr Pinder continued.

“The prior administration modified tax laws without consultation, discussion and, in some cases, without logic. This cannot be the proper approach and will not during this administration.” Opposition senators challenged Mr Pinder that any changes could run afoul of the European Union’s (EU) demand for the elimination of ‘ring fencing’, which previously saw The Bahamas give preferential tax treatment to foreign investors that was not available in the domestic economy.

This, they said, was why the Removal of Preferential Exemptions Act was passed to prevent The Bahamas from being placed on the EU’s tax blacklist. Mr Pinder, though, argued that this reasoning did not apply as the decision on whether to tax or not is based on “jurisdiction”, and whether activities are taking place in the domestic economy regardless of nationality.

He added that non-resident activities were to be taxed one way, and non-resident activities another. “You tax based on connection to the jurisdiction, not on ownership,” Mr Pinder said. “I’m in the chair and going to fix it.”