The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government's corporate income tax consultation will be "dead on arrival" if it does not involve a "holistic" approach to comprehensive Bahamian tax reform, a prominent banker warned yesterday.

Gowon Bowe, who headed the private sector's Coalition for Responsible Taxation when VAT was introduced in 2015, told Tribune Business he "doesn't believe there can be introduction of corporate income tax" in The Bahamas by itself without "wider discussion of tax reform".

Asserting out that changes to one component of the Bahamian taxation system will inevitably cause consequences for other components, the Fidelity Bank (Bahamas) chief executive pointed to the possibility of corporate income tax evasion by business owners who elect to pay themselves salaries as opposed to taking shareholder dividends from a company's profits.

Without a personal income tax other other measures to catch this, such avoidance could become increasingly widespread. The International Monetary Fund (IMF) had previously suggested The Bahamas combat such practices by introducing a personal income tax for high net worth individuals, so that corporate chieftains taking profits as salaries rather than dividends will still be caught in the tax net.

This was tacitly admitted by the Government's 'green paper' itself, which said: "Since no form of personal income tax exists in The Bahamas, there is a potential risk for some owner-managed businesses to minimise their corporate income tax liability by opting for increased salaries (which are not taxed and would potentially be a deductible expense for corporate income tax purposes) rather than receiving distributions from the post-corporate income tax earnings of the business.

"To circumvent this risk, there are certain anti-avoidance features a tax system can apply to combat non-commercial salaries to owners." These anti-avoidance measures were not disclosed, as Mr Bowe yesterday urged Bahamians, businesses and the Government to view the 'green paper' "as the beginning of the journey as opposed to a fait accompli and coming to the finish line".

Urging that the document on "corporate income strategies for The Bahamas" be the start of wider tax reform discussions, when asked by Tribune Business if such a levy can be introduced without reforms elsewhere, he replied: "I don't think you can.

"I think there are components of tax reform, and those can be started and you can have discussions around them, but in terms of any changes in the tax system as it currently stands at present, I don't believe there can be the introduction of corporate income tax without holistic discussion around tax reform and looking at the entire system," Mr Bowe added.

"When you look at what we consider to be bespoke parts of the system, you can fall victim to believing everything else remains equal. A tax system is a complex system, so just changing one component from a consumption base or turnover base to an income base is going to have other consequences so we need to look at it in a completely holistic manner."

While there was a tendency to focus on "low hanging fruit", the Fidelity Bank (Bahamas) chief said that often-times while "the tree limb may look a bit low those fruits are hard to detach." Calling for tax reform discussion, and consultation, to go beyond corporate income tax, he argued: "While I certainly welcome discussions on any income tax, be it corporate or personal, I would caution the Government not to be naive or ignorant such that it only focuses on one tax reform component.

"If this is the springboard into a wider discussion and analysis, it's welcome. If it's a bespoke initiative, it's dead on arrival." One consequence of a "bespoke initiative", he added, was the possible evasion/avoidance by business owners substituting salaries for profits and dividends.

"If the sole focus is on corporate taxation, there is an elevated risk and shareholders and owners become more creative about the declaration of profits of the business very personal emoluments," Mr Bowe explained. "From that perspective, it can't be a tax system that's ready unless there's a closing of loopholes allowing businesses to change the way businesses report in order to circumvent the tax structure."

While it was possible to combat such schemes with multiple laws and regulations, he added that this not only compromised taxation simplicity but also undermined a "principles-based system" that is the type widely soon as most palatable by taxpayers and easy to implement.

Mr Bowe spoke out as the opposition Free National Movement (FNM), in a statement, blasted the Government's corporate income tax 'green paper' as "half-baked" and said it "cannot fathom" how the Davis administration could be proposing four reform options that all lack any positive impact on economic growth, jobs and foreign and domestic investment.

Describing this as "a non-starter", Opposition leader Michael Pintard said: "This paper puts forward four proposals, all of which according to the paper will have a negative effect on economic growth, foreign and domestic investment, and unemployment.

"The Opposition cannot fathom how the Government would find it appropriate to enter into any set of tax reform measures that will have a negative effect on every single key metric related to economic performance. The Bahamian people cannot accept a proposal that does not support sustained economic growth and better employment opportunities.

"The only sensible approach for the Government is to consider a fuller fiscal reform plan that looks broadly at our tax system, our public sector expenditure and the bureaucracy and red tape that often stifles entrepreneurship and business opportunity. The country needs a green paper on fiscal reform, not just corporate income tax."

This would be the first such income-based levy in the country's history, and is intended to ensure The Bahamas complies and fulfills its obligations as one of 140 countries that have signed on to the G-20/Organisation for Economic Co-Operation and Development (OECD) drive for a minimum 15 percent global corporate tax. In the first instance, this applies only to corporate groups and their subsidiaries that have a minimum annual turnover in excess of 750m euros.

The Government's 'green paper', which is dated May 17, 2023, sets out the first option as merely introducing a 15 percent corporate income tax for all Bahamas-based entities that fall into that 750m-plus turnover category. While that would have zero impact on the country's economic growth and unemployment rate, the paper estimates it would cause foreign direct investment (FDI) and domestic investment to contract by 0.3 percent and 0.1 percent, respectively.

The second and third options, described as "more nuanced" because of the better balance they strike between tax revenue and economic impact, are those the Government indicates it is giving more serious consideration to. The second, labelled as "a soft introduction", would introduce the same 15 percent rate for all those caught in the G-20/OECD net and also levy a 10 percent corporate income tax on all other businesses "to maintain regional tax competitiveness".

This option, the 'green paper' adds, would have minor negative impacts on GDP, foreign and domestic investment, and unemployment. The latter would rise by 0.1 percent, while GDP growth would contract by 0.3 percent and foreign and domestic investment fall by 1.5 percent and 0.3 percent, respectively.

The third option, branded as "simplicity driven", would exempt or carve-out small businesses earning less than a $500,000 annual turnover to leave them still paying the existing Business Licence fee. Bahamas-based entities in groups that meet the G-20/OECD threshold would pay a 15 percent corporate income tax, and all other companies generating more than $500,000 would pay a 12 percent rate.

The third option, though, would result in greater negative economic impacts although generating more revenue for the Government. Under this scenario, the 'green paper' said GDP growth was estimated to contract by 0.9 percent with unemployment increasing by 0.5 percent. Foreign and domestic investment will fall by sums equivalent to 5.1 percent and 1 percent, respectively.

The final option, which will generate the greatest revenue increase for the Government but also inflict the harshest economic impact, is to simply impose the 15 percent corporate income tax rate on all businesses with a turnover greater than $500,000 per annum and a 10 percent on small and medium-sized enterprises earning less than that.

This would result in an economic contraction of 1.7 percent, or around $200m, the 'green paper' projected, with the unemployment rate rising by 0.9 percent. FDI would fall by 10.2 percent, and its domestic investment counterpart by 2 percent. However, government revenues under this scenario are forecast to rise by 96 percent compared to the $140m collected from Business Licence fees in 2019.