The Tribune

• Minister: First step towards ‘one tax rate for all’

• OECD’s initial move just ‘a crack in the door’

• But won’t cause financial services to ‘flee’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas could earn $140m in revenue from the global tax crackdown on major multinationals, a Cabinet minister disclosed yesterday, while suggesting the initiative is the first step towards “one tax rate for all”.

Michael Halkitis, minister of economic affairs, told a panel discussion at the annual RF Economic Outlook conference that the G-7/OECD-led push to levy a minimum 15 percent corporate income tax worldwide by 2024 was merely “a crack in the door” that is intended to ultimately lead to the harmonisation of tax systems and rates.

“The reality we face, beginning in 2024, is that multinational enterprises with revenue of 750m euros or higher will be subject to a minimum tax rate of 15 percent or higher in jurisdictions in which they operate,” he said, explaining that the initiative was designed to prevent “a race to the bottom” on global tax rates while also halting tax avoidance and evasion by corporate conglomerates.

The Bahamas, despite having no history of income or corporate taxes, is among 138 nations that in July 2021 signed on to the Organisation for Economic Co-Operation and Development (OECD) inclusive framework that underpins the minimum tax drive and commits signatories to implementing it.

“The potential uptick for The Bahamas could be $140m annually,” Mr Halkitis said of the impact from levying a 15 percent corporate tax on Bahamas-based subsidiaries of major multinational groups. “That could change as more analysis is undertaken.

“As we consider any changes we make, we remain satisfied that the 2024 deadline is not hard and fast, and as a country without corporate income tax there is a need to implement a legislative and administrative framework” to implement the 15 percent minimum rate.

The minister pledged that, despite the corporate income tax reform, the Government will seek to ensure that The Bahamas maintains its economic competitiveness through a tax system that stimulates both Bahamian and foreign direct investment (FDI).

But, warning that the 15 percent minimum tax likely represents only the start, not the end, of the OECD’ latest tax-related moves, Mr Halkitis said the 750m euro threshold will likely be progressively lowered to capture more and more companies in the net with the Paris-based forum’s final destination likely a one-size-fits all global system where taxes and rates are the same across all countries.

“I think we should recognise that this is not the final salvo so to speak,” the minister added. “In my view this is a crack to open the door..... This is not the last, I believe, we will hear from the OECD on global tax. I believe their objective is to have one international tax rate.”

He repeated this assessment later on, adding: “My personal opinion, I think the objective is to have one international tax rate for everybody. I think this is a crack in the door. I don’t see it ending here. I see eventually a lowering of the threshold to try and have everybody have one tax rate.’

The 750m euro turnover threshold means that, at present, only Bahamas-based entities that are part of multinational groups with revenue above this level will be subject to the 15 percent minimum corporate tax. However, if this is lowered, more and more companies across all sectors face being caught in the net.

Ryan Pinder KC, the attorney general, warned in a recent address: “A corporate income tax is clearly a novel approach in The Bahamas and will have significant regulatory reform for the country in tax administration, affecting almost every area of the cross-border economy.”

And the Ministry of Finance, in a paper on the issue released last year, said: “The imposition of a corporate income tax would necessitate a significant reform of Business Licence fees, very likely including the elimination of the turnover-based annual fee for the vast majority of Bahamian businesses. As such, the net annual revenue gain from a new corporate income tax would most certainly be significantly reduced.”

The Government is due to shortly launch a wide-ranging public consultation that, while addressing the 15 percent minimum tax issue, will also look at the options for a broader and more comprehensive overhaul of The Bahamas’ taxation system. Several observers have argued that moving to income-based taxes, and away from the current regressive consumption-based structure, will introduce greater equity and fairness as taxes are linked to ability to pay.

“We don’t have that tradition of net taxation. The taxation we have on the corporate sector is the Business Licence fee,” Mr Halkitis said. “There is no taking into consideration expenses etc. The recurring excuse used over the course of our history is we did not have the expertise or administrative capacity to do audits and verification.”

He added that implementing any income tax-based system, such as the 15 percent minimum corporate version, “won’t be easy” for The Bahamas to accomplish and will “require tremendous investment in capacity building and training of individuals” in taxation.

Kevin Moree, attorney and partner at McKinney, Bancroft & Hughes, told the panel discussion that implementation of the 15 percent minimum corporate tax at the current turnover threshold was unlikely to have a negative impact on the Bahamian financial services industry.

“I’m not sure there’s going to be a massive effect on the financial services industry here,” he said. “I don’t think we’ll see clients and financial services providers flee the jurisdiction because we’ve signed on to this.” He argued that more pertinent questions are whether the Bahamian government will get to collect this tax itself and how the proceeds will be spent.

Questioning whether the funds would be reinvested into boosting the financial services industry and ease of doing business, or be placed into the Consolidated Fund, Mr Moree also warned that if the Government sought to go beyond the G-7/OECD demands and conduct a “general overhaul” of the Bahamian taxation system then it would “require a ton of work, a ton of expertise and a ton of time”.

He added that the Department of Inland Revenue would also have to focus on becoming responsive in addressing taxpayer questions and concerns, given the complexity of calculating the amount of income tax owed, as opposed to just concentrating on revenue administration and collection.