The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government's corporate income tax proposal is "driven" by the need to increase revenues and could "be a gateway" to further progressive reforms that ultimately include a personal income tax, a governance reformer said yesterday.

Hubert Edwards, the Organisation for Responsible Governance's (ORG) economic development committee head, told Tribune Business that the Government is "strategically leveraging" the need for The Bahamas to comply with the G-20/OECD's 15 percent minimum global corporate tax rate to "inject greater equity" and fairness into the taxation system.

While the first of four options would only levy 15 percent corporate income tax on Bahamas-based entities that are part of multinational groups generating annual turnovers of 750m or more, and are thus caught by the G-20/OECD initiative, the other three propose different treatments for other firms. These range from corporate income tax rates of between 10 percent and 12 percent, plus an option for small businesses earning under $500,000 to still pay Business Licence fees.

Describing the Government's argument for the introduction of corporate income tax as "very impressive", Mr Edwards said the move was largely being pushed by the need to increase tax revenues as the Davis administration seeks to hit a 25 percent revenue-to-GDP target by 2025-2026, and a Budget surplus a year earlier. Revenues, according to the latest Fiscal Strategy Report, are projected to grow by $1.3bn-$1.4bn over a four-year period.

"We must appreciate that this is largely a domestic matter driven by the need to increase the revenue space of the country. The contemplation of a wider implementation of corporate income tax (CIT) is strategically leveraging the need to comply with the OECD," Mr Edwards told this newspaper.

"Without doubt this presents a significant window of opportunity to inject greater equity and fairness in the taxation regime while seeking to achieve revenue goals. Looked at differently, if the Government was to ultimately fail in implementing a corporate income tax beyond its proposed first option, it will still be forced to eventually raise taxes under the existing regressive regime.

"The 'green paper effectively identifies and underlines revenue needs, which have been discussed and projected over the last year, and crystallised in the 2022 Fiscal Strategy Report. On the domestic side of the equation it is imperative to raise additional revenue."

Mr Edwards acknowledged that corporate income tax's potential arrival goes against The Bahamas' long-standing business model as a 'no' or 'low tax' jurisdiction, and conceded that it "will represent a wrinkle in the fabric of its existing value proposition".

However, he added: "Such a conclusion requires balance. To reiterate, a very clear case has been made [that] there is a need for new or additional taxes. Corporate income tax is, however, not sales tax and fees and will present certain complexities, administratively and regulatory, which calls for very careful implementation so as not to damage the country's attractiveness.

"There must be careful thought given to legislation and tax regulation. At the heart of any taxation system there must be equity and efficiency. Regulatory burden should be avoided, but government through their advisors would have already been fully aware that corporate income tax in the hands of experienced tax planners can be vicious, and the certainty created by the current system can’t be guaranteed.

"The need for a robust approach to enforcement must be anticipated, and the requisite steps taken to ensure a comprehensive but balanced system is in place to facilitate this," Mr Edwards added. "One of the main challenges faced by government is the need for its policy choice to be revenue positive....

"The likely impact is that this will cause a major cultural shift for the domestic sector and taxation going forward will look markedly different. The country, too, could be seen much differently as a strategic location. It is, however, too early to draw a hard conclusion in that regard. It is likely that over the course of the consultation period a greater sense of what the potential impact might be will emerge."

Arguing that corporate income tax must be seen as part of wider tax reform, Mr Edwards said: "In all likelihood this implementation would be a gateway change for a later adoption of a more progressive taxation system to include income tax at some level. Government should therefore appreciate the vagaries of income tax regimes, and make changes to government and governance which will facilitate its effectiveness and efficiency.

"The 'green paper' encapsulates the intent to take more from the economy and, consequently, the country must be shown and assured how the takings will be more effectively managed vis-à-vis historical performance and track record. There are lingering reforms which must necessarily precede or be implemented alongside any corporate income tax.

"Fiscal responsibility must take on a more heightened sense of awareness. The Government must review and rethink its current approach to concessions with a view of synchronising disparate negotiated allowances under the corporate income tax system. As part of the way forward, taxation must be seen and used as a more potent fiscal tool designed to drive development across the archipelago."