The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas-domiciled International Business Companies (IBCs) will have to pay tax on their overseas earnings from New Year's Day 2024 in an historic first for this nation, a senior official confirming: "The world has changed."

Simon Wilson, the Ministry of Finance's financial secretary, told Tribune Business that IBCs will now have to pay a modest Business Licence fee on revenues/turnover earned outside The Bahamas as part of this nation's drive to eliminate so-called 'ring fencing' and meet its commitments to the European Union (EU) and Organisation for Economic Co-Operation and Development (OECD).

This newspaper was told that the financial services industry was briefed on the reforms, contained in the Business Licence Bill accompanying the 2023-2024 Budget, last week. A presentation by the Department of Inland Revenue (DIR) confirms that IBCs will have to pay a $2,500 fee on the first $1m of "revenue attributable to operations outside The Bahamas", with a 0.25 percent levy applied to turnover exceeding $1m. However, that levy is capped at a $100,000 ceiling.

John Williams, the Department of Inland Revenue's spokesperson, confirmed this fee structure and the implementation timeline were correct when contacted by this newspaper. This marks a historic first for The Bahamas, where IBCs are to be taxed on their foreign revenues/turnover, but Mr Wilson said simply: "The world has changed.

"Our international obligations require us to implement some fee on their activities," he explained. "A low rate provision. They have to be taxed because there is to be no 'ring fencing'. When we had the removal of preferential treatment in the legislation, that legislation foreshadowed the taxation on IBCs. That was passed on 2019."

The Bahamas agreed to eliminate so-called 'ring fencing', or the provision of preferential tax regimes for foreign investors over domestic ones, as part of a reform package to address the EU's concerns and avoid being placed on the 27-nation bloc's blacklist or list of countries deemed non-cooperative on tax matters.

Mr Wilson said it was this, rather than the possibility of corporate income tax, that was behind the IBC-related reforms contained in the Business Licence Bill. "A corporate income tax is still a ways off," he added, while asserting that the changes will not cost The Bahamas' its competitiveness as an IBC domicile.

"St Lucia, for example, is one of our competitors, and they've imposed a corporate income tax of 15 percent or 30 percent on IBCs," the financial secretary asserted, "which is much more than us. Our rate is still very low and very competitive. We expect some push back, as some people expect just to pay $300 for a Business Licence fee.

"Three hundred dollars is zero, nothing. Some entities generate $200m a year and are paying zero. This is why we're being hammered by the OECD and EU. We have these businesses using The Bahamas to shield income from taxes, and we're not collecting taxes from them."

Financial services reaction was mixed. Paul Moss, president of Bahamas-based Dominion Management Services, told Tribune Business that the distinction between a domestic company and an IBC will almost be completely wiped-out by the tax-related reforms.

While "clarity" on the changes, and their impact, is key so that providers can properly advise their international clients, he argued that the impact was likely not large enough to undermine The Bahamas' competitiveness or attraction as an international financial centre (IFC).

Confirming he was present at last week's industry briefing, Mr Moss said: "That's what they're proposing and that's what the legislation is saying. I think they're looking to get their hands on more taxes, and also as a way to ease into the corporate income tax which will be implemented in a few years' time.

"I think the industry doesn't want to have that confusion; we want clarity in all we do. I'm not sure this is going to clear. In my mind, there's no distinction between a domestic company and an IBC. There's going to be an increased cost of doing business in and from The Bahamas."

Mr Moss, though, said the six months' warning before the new IBC taxation is implemented should be sufficient to advise clients before it takes effect on January 1, 2024. "To be honest with you, I believe that the industry is so immune to shocks right now that this is not going to be shocking for the industry," he added. "I just think the industry will pull up its pants and pay the fees required. Most people will pay the $2,500, and I don't think that will be something to put them off."

He added that the Business Licence fee regime should not apply to IBCs that serve as static, or passive holding companies, and added of taxation on overseas revenue: "It's a big change, but one could over the years see this coming through. I believe that six months' notice may be sufficient, but I don't think it's going to have an impact as such. I really don't see it that way. Businesses conducting business abroad, and not paying any tax, now have to capture all those things."

However, another financial services industry source, speaking on condition of anonymity, said clients are already assessing where to shift their IBC business away from The Bahamas to countries that impose no such taxation. "I don't know what they're trying to do to the offshore sector," they said. "Not everyone is in the EU. It seems like we're shooting ourselves in the foot. Not everyone is a huge multinational corporation from Europe.

"We have some IBCs out there doing corporate planning, intellectual property, and now we're adding additional reporting for those companies. Do we have the infrastructure and staffing to manage even what we do now, or is this simply to pacify the EU? It's like putting all these blocks on top of each other to fix the issue and they are all going to come tumbling down.

"What happens if an IBC doesn't report? How are they going to enforce it? What are you going to do? Does it have any teeth? I don't know."